I was taught at Harvard that if you are responsible and accountable for a leadership or business task, you must have the full authority to make decisions. Well, shouldn’t this be the same for sales people?
Sales people are responsible and accountable for hitting their numbers and maintaining client satisfaction. Yet research suggests that only 23% of sales strategies grant their sales force full pricing authority. In comparison, 29% of sales strategies give low pricing authority while 48% grant limited pricing authority to their people.
But how can sales people meet expectations if so few have full authority to make pricing decisions?
Arguments For Full Pricing Authority
Supporters of a sales strategy that delegates pricing authority argue that sales people are in a better position to negotiate prices than their superiors. This is because sales people have a superior knowledge of local market conditions, the client’s needs and desires, and the client’s willingness to pay.
Provided that incentives are properly aligned (i.e. commissions are based on gross profit margins and not sales), it is argued that delegating pricing authority should allow for the optimal customisation of price. In turn, granting pricing authority to the sales force should allow selling organisations to close more deals and realise greater profits.
Arguments Against Full Pricing Authority
Despite these claims, evidence suggests that firms with sales strategies that give the least pricing authority actually generate the highest profits.
Limiting pricing authority can increase profits because it provides the sales force with encouragement to target high value clients. Furthermore, it prevents risk-averse sales people from pricing their products or solutions at a suboptimal level.
Limiting price authority also tends to lead to a more optimal trade-off between price and effort. When granting a high level of pricing authority is part of a firm’s sales strategy, evidence suggests that sales people show less resistance to their customers’ price objections. Sales people with full pricing authority are therefore more likely to discount prices rather than put effort into achieving high-value sales.
It is clear that there are both valid arguments for and against adopting a sales strategy that grants the sales force full pricing authority.
On the one hand, it is claimed that delegating pricing authority leads to the optimal customisation of prices and increased profitability as local salespeople are in a better position than their superiors.
On the other hand, it is claimed that delegating price authority comes at great costs, in terms of lower value clients, incentives to lower pricing and less resistance to price objections.
As is often the case, there appears to be no ‘one size fits all’ solution to the puzzle of pricing authority delegation that haunts so many sales managers. Where local sales people are better informed than their centralised superiors and it is costly to monitor the efforts of sales people, it is likely that a high level pricing authority strategy is most appropriate. Where local sales people are less informed, more risk averse or lack incentives, however, it is likely that a limited pricing authority strategy will be most appropriate.
But it is also important to take other factors into consideration. If sales managers find it difficult to align the incentives of their people with that of the firm, it is usually best to adopt a sales strategy with limited pricing authority. This will deter sales people from offering low prices and targeting low-value customers, while it will encourage them to challenge price objections.
If sales managers find it difficult to monitor the efforts of their salespeople and the market faces a high level of uncertainty, it is often best to grant a high level of pricing authority. This is because providing the sales force with higher pricing authority will reduce the firm’s costs of gathering information and minimise the costs associated with information inefficiencies (such as information leakages).
If sales managers are to provide their sales force with full pricing authority, however, it is important that they provide their people with an appropriate level of commission to drive the right behaviour. This is necessary to motivate the sales force to target higher value clients and expend a greater amount of effort into each sale. By properly aligning the incentives of their people with those of the firm, sales managers will be more likely to maximise profits under a pricing strategy that delegates full authority to the sales force.
Written by: Steve Eungblut, Managing Director of Sterling Chase