The Cultural Impact of Pricing Practices:
How poor pricing saps the energy of your people and what you can do about it

Let's begin with the most obvious. It's no fun to work for an unprofitable company. When earnings go negative and people fear for their jobs, unproductive behavior skyrockets. Personal survival objectives take precedence over business objectives and a united effort is much more difficult to achieve. Political infighting increases as the scramble for resources goes into high gear. Information hiding increases risk in decision-making. Since price is one of the most powerful drivers of profitability, it stands to reason that weak pricing damages profitability, and in turn, damages your people and their ability to get things done.

It's also no fun to work in a business where you don't believe in the product or service you are selling. Case in point. Recently I was leading a pricing workshop in Phoenix. Sometimes during workshops I simply ask a participant to answer a question. In this case I picked on a manager named Rich and asked: What is the average discount you give to your customers? He turned beet red, looked down at the table and mumbled 38%.I had to ask him to repeat it to be sure I heard it correctly: 38%!

Now, we don't know about Rich's specific market situation, but both the number itself and his body language tell me this is a firm that lacks confidence in the value of their offering. And if you don't have that confidence, what happens? You end up giving away your product or service.

And it gets worse. Lack of confidence in the value of your offering harms your best sales people the most. Why? Let's take another real life example. Over the years one major advanced technology manufacturer has made a practice of negotiating deals with individual customers. On the surface, you would think that this is the ultimate price segmentation. In fact it has had the exact opposite effect. Weaker sales people offer deeper discounts to make sales. Now, we as pricers can't collude on price. But our customers can. This manufacturer found that their customers' purchasing managers would get together either personally or via the web and discuss the "street price" for their products. Remember, you and I as pricers cannot collude. But customers can and do every day. In this case better sales people found themselves having to discount more because of the price expectations set by their weaker colleagues.

Another impact of weak pricing practice is that debates about price can waste a lot of executive and management time. Why? Because your point of view in the organization says a lot about what you think the role of price should be. In many organizations sales wants to use price to drive top line revenues. Finance wants to use price to reach some hurdle rate of return (note I did not say maximize contribution or earnings). Operations ties their beliefs about price to current capacity utilization. Product development thinks their new gizmo is the greatest thing since sliced bread and should be priced accordingly. And finally, marketing often just hopes that price debates inside the firm don't hurt them too badly in the marketplace. In many cases, the resulting compromise price has very little to do with positioning the brand well in the marketplace or optimizing the profitability of the firm.

By the way, this process has a technical name. It's called "price masterdebation." And though it feels good at the time, in the end it is a pointless exercise. Smart pricing is intelligence based not compromise based.

Finally there is one more category of cultural impact. It's the category called "dumb stuff" (another technical term - DS for short). It's the kind of stuff people do when they don't know any better. Recently the VP of Business Development for a technical services company came up to me after I talked through the financial consequences of discounting. "Is it really that bad," he asked. I simply told him to work through the arithmetic himself. He nodded. Then he began telling me about how the CEO of his firm just got together with the CEO of one of their major customers and agreed to a 10% price discount for no clear reason. Now the VP finds himself in the unenviable position of trying to repair the damage.

Smarter pricing practices can be the glue that binds the organization together in a profit orientation. Alternatively, poor pricing practices increase business risk and can grease the slide into unproductive and unprofitable behaviors.

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