Pricing discipline in sales:
the margin is lost in the conversation, not in the market.

Warren Buffett considers pricing the most important question when evaluating a business. In most institutions, however, it is not decided in the strategy. It is decided every day in sales, one conversation at a time.

Buffett said this in May 2010, when he was interviewed by the US Congress’s commission of inquiry into the financial crisis^[1]. In essence: if you can raise prices without losing customers to a competitor, you have a very good business. If you have to pray before every price increase, you have a poor one.

For a bank, that sounds remote at first. Terms depend on the interest rate environment, on local competition, on the supervisor. Your own room for manoeuvre looks small.

It is larger than it looks. But it is rarely given away in the price list. It is lost in sales, one exception after another.

The price sits in the system. Whether it holds shows in the conversation.

Every institution has rate sheets, price lists and a delegated authority framework. On paper, everything is settled. Whether the price holds is still decided at the advisory desk: does the adviser explain the account fee or waive it? Does a quarter of a percentage point come off the loan because the customer mentioned the bank next door?

None of these decisions is wrong on its own. Some are even wise. It becomes a problem in the sum, and in many institutions nobody looks at the sum.

Three places where margin is lost

The exception is quicker than the conversation. A special rate is approved in two minutes. Justifying the value of an offer takes longer, and it can go wrong. Anyone with three more appointments on a Friday afternoon takes the shorter route. If the approval costs nothing, not even a reason, it becomes the norm.

The authority framework sets the amount, not the reason. It defines who may give how much away. Whether the customer gave anything in return – more volume, a second product, a longer commitment – it almost never asks. A negotiating tool turns into an allowance.

Steering counts units and volume. If you target deals, you get deals, at a lower price if need be. When targets and commission depend on volume, an adviser who gives way on price is acting entirely rationally. What has to change then is the target system, not the adviser.

The exception grid

Two questions are enough for a first assessment. How often does your sales force deviate from the standard price? And do you know that from an analysis, or is it a feeling?

Off the cuff, most institutions place themselves under “managed price”. Only the analysis shows whether that is true. And anyone who cannot answer the second question with a figure sits in the bottom row until proven otherwise.

What I look at in the first weeks

Before I talk to an institution about pricing discipline in sales, I look at the exceptions. No new software is needed for this:

The exception rate. How many deals in the last twelve months were closed on special terms, broken down by product, branch and adviser? The spread tells you more than the average. If two branches with a similar customer base are far apart, the market is rarely the explanation.

The quid pro quo. Every approval gets a mandatory field: what did the customer give in return? Have that filled in for a quarter and you will see fewer approvals afterwards. Nobody has banned anything.

The target system. Targets and commission have to reflect the earnings per customer relationship, not just units and volume. I have described which steering figures are suitable on the page on sales steering.

The conversation. Advisers who can explain the value of their offer in two sentences give less away. That can be trained. Training without a change in steering fizzles out, though, which is why it comes last for me.

What I bring from sales leadership

In the turnaround of the 36 branches of GE Money Bank Austria, the lever was more products per customer, not more customer contacts. The same logic applies to price. Earnings come from better deals, and for that you need to know how good the previous ones were.

That is why the rate of special terms was among the first figures I wanted to see in every sales organisation I have led.

Does this apply outside banking too?

Yes, and often even more clearly. In retail, in the trades and in mid-sized companies with their own sales team, the price round for next year is coming up right now. A price increase announced in a circular and taken back in the customer conversation has not been put through. The mechanics behind it are the same as in a bank. How I work with mid-sized companies is described under Transformation in mid-sized companies.

Three questions for your institution

1. What share of deals is closed on special terms, and who in your institution knows the figure without looking it up?
2. What did the customer give in return for the last major exception on terms?
3. What is your sales force measured on: volume or earnings?

The board often gives a different answer to the third question than the branch. That alone is a finding.

→ To the sales check: twenty statements, four minutes, no registration

And my own prices?

Anyone who asks sales for pricing discipline should practise it themselves. That is why my fees are published openly on this website: with ranges, with fixed prices for getting started, and with the cases in which you are better served elsewhere.

I do not give discounts without something in return either. What is credited when an entry engagement turns into a mandate is set out there as well.

→ Fees & terms

Sources

1. Financial Crisis Inquiry Commission: Transcript of Interview with Warren Buffett, 26 May 2010. Archived by the Federal Reserve Bank of St. Louis (FRASER). To the source (fraser.stlouisfed.org)