Pricing: Get the trash out!

• Do you know all of the special terms and conditions (discounts, etc.) for each customer?
• Do you know why you granted the special terms and conditions at some point?
• Do you know when you granted the special terms and conditions?
• Do you know what the special terms and conditions have cost you (in terms of lost revenues) to this day?

If even a single question had to be answered with no, then terms- and condition management is obviously missing.

What does a terms- and condition management consist of?

The foundation for a terms- and condition management is (of course) a product price list that lists and regulates both the pricing rules and the minimum prices for the individual products. This includes a price competence regulation, which grants the salesmen – depending on the constellation, possibly together with a product specialist – the necessary leeway for setting prices for the customer. This leeway can certainly be differentiated into a comfort area in which no separate coordination or review by a third party or the manager is necessary, and a critical area in which formal approval structures must be created and where the special conditions must be justified and before above all, the costs or the waiver of contribution margin due to the special conditions must be determined.

The most important component in the terms- and condition management, however, is the expiration date for each special condition. This is used for systematic resubmission and monitoring, as well as an occasion for an explicit new decision on the special condition in particularly critical constellations.

Intelligently, one also regulates a limitation of cross-subsidization separately. Cross-subsidization is a natural reflex, both for the client and for the consultant – although it is not necessary much more often than it is used.

Example: If a complex and large financing has been negotiated with a customer and then at the end you come up with the subject of account management fees, then the reaction from the RSM is very often: “Well, for $120 a year, I am not jeopardizing this deal!” But this also applies to the customer: he is equally not interested in risking his hard-earned negotiation success for $120 a year. Obviously, this is more about a psychological, ultimate success in the negotiation and not solely a monetary advantage. You could stay tough, but you could also offer half the account management fee or the waived account management fee for the first year – and the customer would certainly accept all of these three variants.

If we now extend the example given above, to the extent that we are talking about real estate financing: Imagine the development of a large residential project. If we look into how the real estate market has developed over the past years, in most cases the property has already been completely sold with all the apartments before the last installment of the loan was even drawn. Thus the financing of this project development is being used to a much lesser extent than originally planned and also paid back much earlier. The actual lending business is – with unchanged workload in the bank – significantly less attractive than expected.

And how would you feel if the free account comes on top for the next 20 years?

The terms- and condition management pursues the following goals:

• Avoidance of uselessly wasted contribution margins
• More homogeneous pricing in the external relationship (see below)
• Earlier identification of constellations with structurally disadvantageous contribution margins (see the example above)

Regarding the more homogeneous pricing in the external relationship: How do you actually want to explain prices to your customers, let alone enforce their prices, when it has got around to your customer base that everyone pays a different price? The customer will learn in return that everyone gets individual treatment if he demands it massively enough. The customer should receive individual treatment better in advice on the right solution for his individual problem than in a price negotiated down to the blood for a possibly interchangeable service.

Finally, as a note: From my own experience, I can report that the introduction of a terms- and condition management system with corresponding competence regulations means that fewer special conditions are granted. I explain this to myself with two reasons (alternatively as well as additively):

1. RSM have greater transparency about their room for maneuver and perceive the lower price limits to be more binding than before.
2. The self-confident sales employee will actively try to avoid asking his boss to approve cheap prices.

This sounds more black and white than it is, but success will prove you right.