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by Kelly Riggs
One of the most significant challenges that confront sales management is the salesperson that insists on cutting prices to gain business. Although salespeople have no shortage of excuses for taking a little off the top, it is my experience that this pervasive problem is almost always a sign of poor or undeveloped selling skills.
To be clear, there are times when companies or salespeople should choose – strategically – to lower a price and, as a result, accept a smaller margin. But, while there can be good, rational reasons for cutting your price, the much more common scenario is that salespeople simply use a lower price to close a deal because they lack the skills to present and negotiate value.
Translation: You give away the company’s money so you can get paid.
Sadly, the only one to blame in that scenario is the owner or CEO of the company. If management is not willing to invest in training for their salespeople, they will certainly lose that money – and much more – as average salespeople use the only tool they know to get business – lower prices.
Translation: Pay me now, or pay me later.
It’s a complaint as old as the profession of selling: “Our prices are too high.”
But what most salespeople fail to understand is that price cuts are better described as profit cuts. When selling prices are reduced, it is crucial for them to understand that the company is losing profit.
Oh, stop pounding the table… I hear you: “Some profit is better than NO profit, genius.”
Well, clearly, you’ve never run a business. See if that flies with the owner or CEO. Because there has to be enough profit to pay you, pay for the product (or service), pay for all the assets, and pay all the general and administrative costs. Do you have any idea how much that is?
OK, back to profit cuts. Once you provide a discount to the customer, that lost revenue is always disproportionately applied to the company. For example, if you’re a salesperson on salary and are not paid any commission on the sale, the company eats 100 percent of your price cut. But, let’s say you’re paid a 20 percent commission; the company eats 80 percent of the price cut while your loss is only 20%. Cool, huh? It’s like having your very own personal investment bank to offset your losses. And you thought your company wasn’t generous??
But, to rub salt in the proverbial wound, let’s dig a little deeper. Just how damaging is a TINY little 10 percent price cut? 10 percent doesn’t sound like much, but a little math will demonstrate how much impact that 10 percent discount has on the company.
Let’s assume your product sells for $100 and you have a 35% margin in the product. Each sale produces $35 in gross profit. But, if you then sell the product for only $90 (a measly 10% off), then your margin plummets to $25 (which is almost 30 percent less profit!).
Now, assume you’ve sold 10 units at that discounted price of $900 vs. the $1,000 you would have received if you sold the units at regular price. You now have $100 less profit in the cash register (which nobody uses anymore, I don’t think). So, how much more product would you have to sell in order to recoup that lost $100?
Yes, indeed, we can make it up in volume, right?
Oh, absolutely! You only need to sell 4 – just FOUR – additional units ($25 profit each) to make up the $100. But 4 more units is a 40 percent increase (14 instead of 10). That means that you have to sell 40% more product to receive exactly the same amount of profit.
Translation: The company has to work waaay harder to make the same profit just so the salesperson can get paid.
40 percent more product! So, how do you like the whole ‘sell-for-less-and-make-it-up-in-volume’ strategy now?? Well, there is some good news – if your margin is 50 percent, it only takes 25% more sales to break even (that’s sarcasm in case you missed it).
But, there is also bad news. Salespeople think it makes sense to discount because the only alternative is to LOSE the business. But, what they fail to understand is that the company now has to gear up to accommodate the 40 percent increase in business. More inventory. Another truck. Another employee in the warehouse. Depending on the company, the additional needs will vary, but an increase of 40 percent rarely goes without additional investment. Which further cuts into profit.
Oh, and by the way, it usually has a negative impact on customer service as well (think about it).
Nice, huh?
But, to answer the criticism from your average salesperson who is slightly clueless, losing the business is NOT the only alternative. We could also train salespeople to sell the value of our products and services and negotiate from a power of differentiated strength. And it is critical to teach salespeople about the financial impact of their decisions in the field – not to scream at them when they mistakenly give away the farm, but to EDUCATE them.
Here’s why: while the financial side of price cuts are important, if not critical, to sound decision making, there is a more pressing issue. Salespeople who sell on price rarely establish value for their products or services, so buying decisions are limited to one common factor – price. Best price wins, and it becomes an ingrained habit.
“There is hardly anything in the world that someone cannot make a little worse and sell a little cheaper, and the people who consider price alone are that person’s lawful prey.
John Ruskin (1819-1900)
I can hear some salespeople screaming at this point: sometimes you HAVE TO lower prices! The competition drops their prices and I have to do something!
OK, no argument here – sometimes it is impossible not to reduce prices, but there are good ways and bad ways to do so. The question is, do you know the difference?
First, regardless of what some may think, there is no such thing as a commodity. Buyers often need a number of things that other companies cannot provide:
And that is just to name a few. But do you really think a savvy buyer is going to admit those needs? No way. It is in their best interests to characterize your product or service as a commodity – and it works.
Selling is negotiating, and good negotiating requires that you establish value for whatever you are selling. Salespeople seem to understand this when they are selling their own products – a car or a home, for example – but they get brain dead when they are using someone else’s money.
But, improving gross margins is not a one-dimensional issue with a paint-by-numbers solution. Compensation systems have to be designed properly, salespeople need to be trained to create value, and corporate support systems (customer service, shipping, delivery, accounting, etc.) have to be able to reinforce that value to customers.
The question is, just how gross are your margins?
Kelly Riggs is a business performance coach and founder of the Business LockerRoom. A former national Salesperson of the Year and serial entrepreneur, Kelly is a recognized thought leader in the areas of sales, management leadership, and strategic planning. He serves clients ranging from small, privately held companies to Fortune 500 firms. Kelly has written two books: “1-on-1 Management™: What Every Great Manager Knows That You Don’t” and “Quit Whining and Start SELLING! A Step-by-Step Guide to a Hall of Fame Career in Sales.”