Published in Leasing Life, June 2011
In recent years my colleagues and I have probably discussed pricing with around 300 leasing company executives.
Some tell us their salespeople have great market knowledge and are even shown competitors’ quotes. Sometimes. Maybe. Occasionally.
Others talk about the ‘the plan’. “If we achieve that plan margin and – hopefully – generate enough volume, we will hit our profit plan, the parent company will be happy and everyone will get their bonus.”
Another group set a target margin for each sales channel, reflecting the costs and risk profiles in that channel; eg the Public Sector team needs to earn less margin than the SME team because the operating costs per deal and credit risk are so much lower.
A fourth tell us they use an RoE formula to price their deals.
I am oversimplifying, of course. In fact many companies use several of these approaches and often in very sophisticated ways. However these approaches don’t deliver the optimum price: as high as possible but still deal-winning. And customers only hand over competitors’ quotes to drive down the price. Lessors should identify situations where they are already the cheapest and make sure it’s only by a few cents or pence.
When a salesperson issues a quote they believe they are pitching the price just right. Yet when we compare quotes issued by different salespeople (or teams, or departments, or divisions) within a company we always find wildly different quotes being issued for very similar deals. How can that be right?
We also find that when margins are slipping, companies manage prices centrally, usually adopting one of the approaches listed above or setting a high minimum margin. This is a recipe for disaster; without investing time or attention to set optimised prices, volumes decline and salespeople become demotivated.
Often it’s unnecessary to pitch low to win a deal. In one piece of research the directors of 500 large companies were asked whether they were in a price war. 55% said yes. When asked who started the price war, 95% said it was someone else!
It’s not right that a vendor leasing business can issue an online quote today without the system realising it issued a higher quote two weeks ago to the same client for the same kit – which was accepted. This gives some indication of how far we still have to go.
Pricing has become much more scientific in recent years. Lessors should aim to set optimal prices for every product, lease term and payment profile, tailored to each individual client and delivered in real time at the point of sale without human intervention. Few lessors’ pricing systems begin to recognise this goal.
The first step is to identify every piece of internal and external information with any bearing on competitiveness, build this into a decision matrix, use this in live quoting, identify how successful each decision and quote have been and use that information to modify the price quoted on similar deals next time.
Colin Tourick