Pricing in Silos – Bundling Across Profit Centers
A problem that students in our pricing class often articulate is they can’t bundle products together that are managed by different organizations or divisions. This is a problem in most big companies and even many smaller companies.
Imagine you have profit and loss (P&L) responsibility for product A, which normally sells for $50 with 90% profit margin. A colleague has P&L responsibility for product B which normally sells for $100 with 20% margin. You have identified a market segment who needs both A and B, but the market segment is more price sensitive than your normal customers. What do you do?
The easy answer is create a bundle. Sell both A and B at a discounted bundled price. For the sake of the example let’s say $120. This is 20% less than buying both individually. Turns out there are even more customers from this new market segment than you expected and products are flying off the shelf. Furthermore, you’re convinced these are people who would not have purchased your products individually. This is a big incremental win for the company.
So far, there’s no problem. This is exactly what a company should do. The problem arises when finance does their internal accounting and allocates the revenue to you and your colleague. After all you are each responsible for your own P&L and you each contributed to winning the revenue.
Finance starts by simply taking 20% off each of your normal prices. You get $40 and your colleague gets $80. But your colleague though complains loudly (and rightly so), “How can you do this to me? I only have 20% margin so you can’t take all my profit! I wouldn’t do this deal if I knew that.”
So finance listens and decides your product has the margin to absorb the full discount. So you take the $30 discount leaving you $20 per sale which drives your margins down toward 50%. Of course you will now miss your margin goals. You complain, “That’s not fair! My product has the best value and is most important in the sale. Why do I have to give all the discount?”
So what most companies do is … nothing. Companies rarely bundle across product lines because it is so hard to allocate the revenue to the right business unit. This is sad. Companies miss out on opportunities because they can’t manage who gets the credit. Essentially each department optimizes its own profitability, but the company’s profitability suffers. There are many opportunities with our largest and most strategic customers to sell a variety of our products. We may be able to leverage a huge discount in one product to win massive sales in another product line.
What can you do about this? Here is one place where if you have a strong pricing organization, or better yet a pricing council in your company, you may be able to push through polices and processes that help the company take advantage of these opportunities. If pricing doesn’t do this, then the only way this happens is if the VP of Sales meets with the CEO and pushes through each individual deal. Of course only the largest deals get looked at this way. Some times you can persuade the CFO to tackle this problem, but it’s rare.
My advice, if you’re in a big company and want to be a driver for change, take the next opportunity of a big cross-divisional sale to bring up the conversation on how to handle these. It won’t be resolved immediately, but you can get the company thinking that way. Like any big change in a company, you need to be a leader, think through everyone’s personal positions and figure out how to help them win. Then you will be able to enact change. This change isn’t that big, but because it requires so much cooperation it will be challenging.
How have you seen companies handle this?
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