A sales oriented pricing is a pricing objective that aims to facilitate sales and market share growth. The goal is to use pricing as a tool to help drive “smart growth”. Thus, companies using this pricing strategy will discount prices where it is likely to create growth. However, a sales orientation doesn’t necessarily mean sales driven: the company will likely stand firm on price elsewhere.
While margin improvement is a common pricing goal, there are certain situations where a sales oriented approach makes a lot of sense. We are going to explore a few of these.
Pending Merger or Acquisition
If the company is close to being sold or merged with another business, market share may be crucial. Sales growth looks good at the deal table. Along the same lines, management doesn’t want to annoy any customers at this crucial time. The pricing team is often told to take it easy, to match competitive pricing to maximize market share.
One thing to check closely if you are the acquiring company: terms and conditions of deals. The prior management team may have traded short term rebates and upfront payments (which affect the purchase price) for more lenient terms on the back end of the deal. These can be hard to analyze, such as price increase policies and contingent fees.
An Empty Factory / High Fixed Cost Business
As a marketing manager, I have been told to fill up a plant before. A large customer left the business and the fixed cost was slowly eating us alive. To fix this problem, we aggressively bid on new business.
While the price of this new business was not attractive, it stopped the bleeding. The trick, of course, is to keep looking for good long term business.
This is an example of where a sales oriented pricing strategy is essential to survival.
If you have the balance sheet to support it, an industry shakeout is a great time to play offense. Remember to value the customer based on who they could be – rather than who they are.
This is common in technology, during product cycle transitions. You want to grab and hold the installed base so you can have marketing sell them the new products when they are ready.
The same applied to new innovations. If you know there are a handful of key customers who will set the direction of the industry, you need to win those accounts at all costs. That’s a fair marketing strategy, since it positions you as the leader in meeting consumer needs.
You make your profit in the future, as your margins rise over time. As a market leader, you’ll have opportunities to set premium pricing.
Kingmaker Accounts / Customer Segments
If you know that a particular customer segment will set the standard for everyone else, they become a high priority target. A sales oriented pricing strategy would be appropriate.
You see this in technology and consumer goods. If you know that winning the teenagers will get you their families, you bid hard for that business. The same applies in certain distribution markets, where a key retailer or cash and carry sets the tone for the city.
Justifying Pricing Decisions
Believe it or not, this strategy can make sense at a mathematical level. It comes down to how you define profit maximization – and over what time period. In the three scenarios above, the value of the business exceeded it’s current gross margin. That made it worth matching competitor prices to win the additional business.
In the merger example, the exiting management team has incentive to push up revenue, especially if you can shunt the profit margin hit to future years. A strategic acquirer may be focused on share in the target market, which is part of the price. This raises the perceived value of the firm.
The same logic applies to an industry shakeout: the consumer demand remain intact, it is merely a matter of riding out the storm. If you stay in operation and can keep your target customers, you win in the recovery.
In the case of the empty factory, the price is justified by the impact of the marginal revenue on production cost. This pricing method gets your marginal cost down to a level where you can compete for other business, elevating your total revenue in the long run.
Finally, in the case of kingmaker accounts, your analysis of customer value needs to incorporate a broader view of the impact. Winning that key account creates additional demand in the market. The same logic can be applied to getting the correct product mix, advertising placements, or marketing mix at key retailers.
Beware of aggressive promotional pricing at kingmaker accounts, however…. The rest of the market is watching and will quickly ask for it… (Your salesperson may not appreciate this.) Prestige pricing strategies can actually work well in this situation, since other participants in the channel will take cues from the leader.
Creating Strategic Value
The fundamental question with this competitive pricing strategy is: “is the prize worth the pain?”
Or in the case of a merger, “are we able to grab the prize and let someone else bear the pain?”
Executed properly, this is an aggressive form of penetration pricing done in anticipation of a period of rapid growth or price skimming to earn back your investment. Just don’t pay a high price for this burst of aggression…