Question (edited by me): How should we manage the perception of sales regarding the fact that production costs are just one parameter in the pricing formula? H.
Answer: Hi H, Your question has a lot behind it. First, I would bet that your company uses cost-plus pricing and you’re trying to get away from it. The reason I say that is your salespeople think in margins. In the past, when they asked for a discount, some manager talked to them about how low they could go and still make a minimum margin. This is probably a pervasive attitude in the company.
Stop Thinking About Costs
The solution is to stop thinking about costs altogether. Salespeople have no reason to know your costs. You can and should provide them with a list price, a target price, and a floor price. Then you should structure their commission such that if they sell above target they make a lot and if they sell below target they earn much less. Your targets and floors are your best decisions and should not be cost plus. You can use cost to make sure the floor isn’t too low, but you should not give cost information to sales.
OK, assuming you don’t have the authority to eliminate cost information and you really do want to educate them, start talking about value. What is the value of your product to their buyer? This is something you can learn to do. As you learn and speak about value inside your company, you become much more valuable to your company.
Many companies ask their salespeople to sell value. They proudly tell their sales team, “stop selling features, sell solutions.” They claim to use value-based pricing. Here’s the truth. Salespeople have a hard time selling value because they don’t know what value is. Here’s an even harsher truth, nobody inside the company knows what value is. Ask your most knowledgeable product person how much value a specific customer derives from your product and they will almost certainly fail.
**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.