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WHAT IS PRICE REALIZATION?
Price realization measures actual vs. expected price achieved.

You can’t sell at target price every single time, but that’s the goal. (Or rather, it should be.) This discrepancy is one metric you need to measure. On the surface, this seems like a relatively easy task.

However, when you just can’t sell at the target price, you need perspective on how much you should drop the price. Your price may be higher or lower than what you charged in a prior period. It’s important to measure price performance relative to your targets. However, you also must evaluate the amount that real prices are up or down relative to actual values in your base period.

This means measuring actual performance vs. budget. (This is much like comparing actual price to target). It also indicates a need to compare actual performance to historical actual performance. (This is price realization analysis.) This helps you increase profits through a clearer understanding of your actual price performance.

WHY IS PRICE REALIZATION IMPORTANT?
You absolutely must understand how your prices are performing on an ongoing and regular basis. Otherwise, you can’t possibly take advantage of successful strategies. You can’t correct your course on unsuccessful ones.

Keep a close on the difference between actual and targeted prices to:

Closely monitor sales teams and their selling tactics
Understand how customers respond to pricing changes
Leverage discounts strategically
5 WAYS TO ACHIEVE PROFITABLE PRICE REALIZATION
Successful price realization refers to your most profitable outcome – when all actual prices equal your target prices. If you’re struggling to plan how to achieve this, here are five strategies to start with.

1. MAKE DISCOUNTS STRATEGIC
When sales reps feel backed into a corner on a deal, the last bone they throw is usually some sort of discount or allowance. Some customers even go as far to ask for a discount or rebate during price negotiations.

Unfortunately, these price concessions can destroy your profits. Discounts undermine your entire pricing strategy.

That doesn’t mean you have to give them up completely. Some customers demand something just to know they have a little control. Even minor discounts can tip the scales in a sales professional’s favor.

But you have to be strategic about them.

Set a threshold for the maximum difference between actual and target prices. For example, you could set a max discount of five percent for an entire deal. All discounts, allowances, and rebates have to fall under that umbrella of five percent. Differentiate these thresholds by products, though! Five percent may be far too much for low-margin product but not enough for a high-margin one.

Once you have these set, hold your sales reps accountable for them. Measure their prices sold against target prices as well as their actual historical prices. After all, the end goal is to have them sell at target price every time, but they can’t just flip a switch overnight. If they’re getting better at selling at target price, it’s a cause for celebration and reward.

Build price discipline metrics into their regular sales incentives to help them understand they shouldn’t focus solely on selling more but also on selling profitably.

To help them adjust to this strategy, train them to focus more on value than on numbers. They can’t ask prospects, “How much are you willing to pay?” but instead tell them, “Here’s the value you’ll get from this transaction, and here’s how much it’s worth in dollars.”

My team and I recommend putting together a strict approval process to keep reps from making rash “in the moment” offers to the customer.

2. ALIGN PRICE WITH VALUE
When you cannot change the customer’s mind about the price of a deal, it’s time to change the deal itself.

To keep pricing profitable, always remove value-added features when lowering prices or delivering concessions. For example, if a customer really wants seven percent off his total order, you can deliver that price. However, take away a value proposition with a monetary value equal to that seven percent. These elements could include support or expedited shipping.

This keeps your customers in a value mindset, seeing a deal as a package of many components. Customers who refuse to budge from the price mindset still get the product or service they pursued at the price point they want. They just get it with fewer bells and whistles.

By segmenting out these value additions, your customers can get a better idea of everything included in your prices. This makes value-based sales easier for your rep as well.

Next time a customer requests a discount, ask him or her what they’d be willing to give up within the deal. Then set a lower – but still profitable – price for a new deal excluding that value proposition. Your customer is happy and feels like you’ve met them halfway. Meanwhile, you haven’t really sacrificed anything and should be able to earn the same margin on the deal.