Chris Mele is the managing partner of Software Pricing Partners.
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Imagine that you’re in the market for a used car. You see a certain price online and figure it’s a good deal. You’re willing to pay that amount to drive off with the car. But when you get to the dealership, another customer tells you that they managed to snag a $3,000 discount for the same car model. Suddenly, you’re no longer willing to pay the proposed price—you know that if the other customer got a discount with the salesperson you’re speaking with, you might be able to get one, too. You negotiate and manage to walk out with a slightly better discount, having paid $3,100 less than the sticker price.
Seeing that another customer got $3,000 off for the same car, you weren’t willing to settle for anything other than a minimum of a $3,000 discount. You could certainly chalk up your success to good negotiation tactics on your side—but ultimately, other variables were at play as well. Those variables all go back to the salesperson. If the salesperson wasn’t willing to give you the discount, you wouldn’t have gotten it. If the salesperson hadn’t given the other customer a discount, you likely wouldn’t have expected to be able to secure a lower price. If the salesperson had rushed you through the process instead of being attentive, you might not have even purchased the car.
The Amount Customers Are Willing To Put Forward In Large Part Depends On The Salesperson
Used car sales and software sales seem like vastly different worlds, but they have something in common: They both demonstrate a conceptual flaw with the concept of willingness to pay. It’s a false assumption that the customer primarily drives willingness to pay. Salespeople have significant sway over how much money customers are willing to put forward—and software executives often underestimate that sway.
In essence, salespeople function as entrepreneurs within software companies. They tend to have distinct sales methodologies and philosophies and often have free rein to experiment. That experimentation usually manifests in the form of discretionary discounting behaviors.
A software company can conduct survey after survey on their prospects’ willingness to pay. But these surveys don’t take into account salespeople’s willingness to discount. Software companies don’t tend to be disciplined about pricing; they don't treat it as a science. As a result, they have friction-filled pricing processes where salespeople have leeway to give discounts they believe will win sales. The problem with that approach is that B2B buyers value transparency, and these days, it’s easier than ever for them to get it. Prospects trade notes. A prospect might be willing to pay, say, $30,000 a year for workflow automation software until they learn from an existing customer that the salesperson they’re working with tends to give out discounts of up to 20%. Suddenly, the prospect won’t want to pay $30,000 for the solution. Willingness to pay is a complicated concept to begin with. And when prices are all over the place, it’s an irrelevant one.
Salespeople Are Trying To Survive In A Dysfunctional System
At the core, salespeople are motivated to give discounts because they’re trying to survive in a dysfunctional system. Dysfunctional systems result in dysfunctional outputs. Software salespeople are evaluated based on the revenue they generate for their companies. They’re expected to hit sales targets; their jobs depend on hitting those targets. If the difference between hitting their quarterly sales goal and keeping their job versus not hitting their quarterly sales goal and getting fired comes down to giving a 20% discount to a prospect to win the sale, it’s understandable that a salesperson will do so.
Additionally, many software salespeople get commissions. Because of that, they’re incentivized to keep deals moving as quickly as possible. Say a salesperson sells enterprise CRM software priced at $50,000 a year. They get a 10% commission for each sale, which is typically based on the landed (net) price. If that salesperson can wrap up a sale by giving the prospect a 15% discount, it’s in their best interest to do so. They’ll earn their commission and can quickly start working on their next sale—the next sale that will help them keep their job. When salespeople defend prices, it can extend the sales cycle, which hurts their ability to make more commissions and hit their sales targets. So, it’s understandable that salespeople don’t usually go out of their way to defend prices.
Software Executives Need To Change How They Pay Salespeople
To fix the dysfunctional state of software pricing, software executives need to embrace a new pricing philosophy grounded in transparency. But they also need to change how they pay their salespeople.
Managing salespeople is all about the balance of flexibility versus control. At many software companies, early on, executives give salespeople tons of flexibility. But as companies mature and systems are put into place, leaders often end up pulling back on that flexibility for more control. Part of that pullback should be on pricing-related issues. Yet, I’ve observed that most software companies never complete this transition, letting salespeople have far too much flexibility in setting net prices.
Current compensation structures for software salespeople incentivize them to sell for volume to generate revenue for the company, not to sell at a product’s net price for profitability. Instead, executives should reward consistency and adherence to their companies’ price books. Salespeople can be incentivized to sell for profitability through rewards and recognition. Instead of giving sales teams compensation structures that hinge on commissions irrespective of profitability, software executives should create a new policy that states, “If you come within a certain percentage of the company’s scheduled net price, you’ll get most of your commission. If you get extremely close to the company’s scheduled net price or sell at the full scheduled net price, you’ll get your entire commission—and extra rewards and recognition.” Once such a policy is implemented, salespeople’s behavior will change virtually overnight.
Software sales is a tough game. When salespeople feel more secure, when they don’t feel the pressure to close deals in a frantic urge to get to what’s next, they’ll get better results for their companies. Companies are less likely to win when salespeople act as solo operators. Executives will get better results when they get salespeople on the same team: team company.
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