One of the most difficult pricing challenges facing marketers is how to maintain consistent, value-based street prices in highly competitive markets where every deal is seemingly at risk.

For many of us, the temptation to maintain flexible pricing policies in order to negotiate customer-specific deals is too much to resist. Like a dieter trying to lose weight, these marketers try to "cheat" by treating themselves to a one-time price discount to close a particular deal. However, just like the dieter who must face the reality of the scale at the end of the week, price cheaters must face the reality of their bottom line. Unfortunately, that reality, all too often, is increased price erosion and decreasing margins.

Companies that do not manage their pricing by policy will, in most markets, lose control of it. In the process, they risk alienating their best customers, slowing the sales process and eroding profitability. It happens because customers' willingness to pay for a product or service depends not only on their perceived value of it but also on the expectations customers form about the need to pay for the value they receive.

Sound policies create expectations in each customer that the price is determined objectively and has some relationship to the value received and/or the cost to serve. Unsound or nonexistent policies lead buyers to expect that they can manipulate information or their own behavior to win discounts without giving anything of value in return.

A common fear for managers who are replacing ad hoc discounting with transparent and consistent pricing policies is that sales reps will not accept the change. Although a minority might not make the transition, most will accept the change if it is implemented well.

Sales reps don't like being beaten up over price, they don't like the long sales cycles that reactive price negotiations cause, and they don't like having to spend their time making the case for discounts internally. Sales reps are motivated when management stands with them in resisting bad deals and empowers them with the authority to cut good deals consistent with pre-approved policies. Interestingly, most customers don't enjoy manipulative, drawn out price negotiations, either. They do it to survive suppliers who they believe will exploit open, loyal customers.

When companies fully define pricing policies, their sales reps can have full authority to offer even the deepest discounts, subject to rigid constraints based on the customer characteristics and behaviors, allowing a customer to qualify for them.

For example, when confronted by a customer who demands a lower price to meet competition from an Asian supplier, the policy-empowered sales rep would not need to appeal to a higher level of management to authorize a lower price and so delaying the sales process and risking the deal. Instead, the rep could say, for example, that the company would grant a discount of 20% if the customer commits to volumes months in advance, just as the Asian supplier would require.

Perhaps the customer might still decide to fill most his needs from Asia, but still want a contract with the company to cover just the amounts that might be required to meet short-term variations in demand. In that case, the sales rep would inform the customer of his company's policy to supply product in those situations only at spot prices, sympathizing with the customer but assuring him that price commitments require corresponding volume commitments.

The effects of pricing by policy are almost universally desirable. Customers learn that there is no reward for simply beating on the supplier, and that there is no need to fear that a competitor is getting a better deal. Consequently, customers lose the incentive to keep sellers in the dark about their true needs and the value of them.

They also learn that there are tradeoffs between the prices they pay and what they get. This process of "give-get negotiation" forces customers, even purchasing agents, to learn what their organizations really value. If policies are designed well, they drive changes in customer behavior that reduce your cost to serve them.

Good policies will make it easier for sales reps to resist pure price negotiation and to align price paid with value received. Sales reps, however, need to believe that those are necessary and valuable objectives for them, not just for their company. The first step in that direction, even before policies are in place, is to measure and reward salespeople for driving profitability, not just revenue. Many companies reward salespeople for making larger and more frequent sales, not for making more profitable sales. Unfortunately, giving salespeople revenue-based incentives and empowering them to negotiate prices is a toxic combination that poisons their motivation to sell value.

Consider the dilemma facing sales representatives who are compensated on a percentage of sales. Say that the company's margin is 10% on high-volume deals. A sales rep who invests a great deal of time with the account, selling value and/or getting the customer to change behaviors that drive up costs, might at best be able to increase the profit earned on the deal by an additional 10% of sales, doubling the profitability. Even if all that increase is in price, however, his revenue-based commission increases, at most, 10%.

In contrast, instead of trying to sell value, one of his colleagues spends the same amount of time selling two deals of equal size with only a 10% margin. As a result, the colleague's effort increases the company's profit contribution by the same amount, but he earns twice as much commission for doing so. Even if the colleague has to cut the price 5% to win the deal, reducing the profit by half, he gets a bigger commission than the first sales rep who spent time selling value rather than volume, and as a result has to hear about his failure to keep pace!