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Sales Ops Should Understand the Power of Price

From our vantage point, it’s clear that leading Sales Operations groups are playing an ever-increasing role in pricing. And they aren’t just making sure that the numbers are getting into the system, or ensuring that the numbers on the invoices match the quotes, either.

No, these teams are going well beyond the tactical aspects of pricing and getting much more involved in actually recommending which prices and discounts should be offered in the first place.

As far as we’re concerned, this is a fantastic trend. We see pricing as one of most significant untapped opportunities in B2B, and we’re big proponents of more rigorous pricing practices. In fact, we have an entire sister publication focused exclusively on effective pricing in B2B environments (The PricingBrew Journal).

But as Sales Ops teams get more involved in pricing decisions, it’s crucial that they fully recognize the awesome power of pricing and its massive influence on profitability.

To illustrate in simple terms, let’s consider a B2B company with 40% gross margins and 10% net profit margins. Holding sales volumes constant, what are the flow-through financial impacts of a 5% price reduction?

  • Revenue: Obviously, revenue drops by 5%. It’s certainly not good, but it still seems somewhat manageable, right?
  • Gross Margin: Gross margin takes a hit to the tune of -12.5%. Ugh. Now we might be getting a little nervous about paying the bills.
  • Net Profit: Net profit margins are slashed by a whopping 50%. Yikes! If insider trading weren’t prohibited, it might be time to sell, sell, sell!

Of course, the massive leverage of pricing works in the other direction as well. In our example, a 5% increase in price would boost gross margin and net profit by 12.5% and 50%, respectively.

The point is that the impacts of very small moves in pricing are significantly magnified as they flow from the top-line down to the bottom-line. And as Sales Ops teams get more involved in pricing and discounting decisions, they need to be extremely mindful of the financial implications of their actions and recommendations.

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