Should Salespeople Have Pricing Authority?
“It is a commonplace observation that work expands so as to fill the time available for its completion … work (and especially paper work) is thus elastic in its demands on time.” Cyril Parkinson, a British Naval historian and writer penned these famous words in his tongue-in-cheek essay in a 1955 edition of The Economist. This principle became known as Parkinson’s Law.
Risking claims of arrogance, I offer a 2014 update, Reilly’s Law. Discounts are elastic in the authority conferred on salespeople by their management. Salespeople will generally choose the path of least resistance by offering the biggest discount allowed by management. If you allow salespeople 10% leeway in pricing, they will offer a 10% discount; a 20% leeway discount will result in 20% discounts, and so on. I do not make this claim lightly.
Having trained more than 100,000 salespeople in the past 32 years, I have witnessed this reality first-hand. Price-oriented salespeople rationalize by saying things like: “We can make it up in volume.” “Some money is better than no money.” “Three percent of something is better than 10% of nothing.” Or “Let’s just get the business, and we will figure out a way to make money on it internally.” That last attitude was probably implanted into their minds by management or operations.
There are several reasons why salespeople should not have pricing authority. First, pricing is a strategic decision, and salespeople live at the tactical level. For discounting to be effective, it must be strategic, not tactical or transactional. When discounts are offered tactically, they are meted out arbitrarily to salvage an order. There is no rhyme or reason, which is the definition of random. Because pricing is strategic, it affects image—both company and product. Thus, discounting re-positions a company or product. Positioning is the responsibility of marketing, not sales. This re-positioning invokes negative value attribution which lowers customers’ expectations and colors their perception of the product and the supplier.
Second, pricing affects profitability, which is a management responsibility. The selling price affects return on assets and return on equity. Both are measures of management efficiency. ROE is the primary metric used by investors like Warren Buffet to determine the financial viability of a company. Discounting to achieve volume may also affect your fixed-cost base. You may incur the cost of additional resources to support the volume generated by lower profitability business. When you are losing money on a piece of business, you do not make it up in volume. As Warren Buffet says, “When you’re in a hole, quit digging.”
Third, discounting may antagonize other customers that pay your full price for goods and services. These are your most profitable customers. Why would you antagonize them to entertain the business of others who do not appreciate the value in your proposition? All business is not good business. Discounting sets a precedent for future purchases. You have already signaled that you will cut price to get the business. Who, in their right mind, would ever accept your asking price for something in the future? The word on discounting spreads like wildfire, especially in the age of social media. It is no secret when one customer gets a lower price than another. Customers talk to each other.
Fourth, when salespeople discount, they demonstrate a lack of conviction in their brand’s value. They reduce price as they accept the other person’s opinion that they are not worth the difference in price. Accepting a prospect’s opinion that the price is out of line means that the salesperson believes the market more than his or her marketing department. If a salesperson will not fight for his price, why would he or she fight for a customer if there is a problem after the sale? This is the sub-text of caving in to price resistance. On the other hand, a salesperson convinced of his or her brand’s value and committed to protecting the company’s profitability sends a different message to the market. It says, “I will fight for my price because I believe in what we do.”
Fifth, arbitrary discounting may signal to the market that your first attempt at pricing was gouging. If you discount price under pressure, you were charging too much to begin with. Companies that employ integrity pricing or programmed pricing that is available to anyone who meets the criteria develop trust with customers. Customers rest assured that no one gets a better deal than they do. Those who make random decisions about pricing raise suspicion and cast doubt on a company’s integrity.
When management and marketing assign pricing authority to salespeople, whether they describe it as empowerment or negotiating leverage, they are delegating their fiduciary responsibilities to the organization. If salespeople are designing and executing strategy, there is no need for marketing or mid-level management.