A significant challenge facing sales managers is the sales rep that insists on cutting prices to gain business. Salespeople have no shortage of reasons (excuses?) for taking a little off the top, but my experience is that this problem is usually a sign of poor or undeveloped selling skills. A fair amount of salespeople fail to understand that their price cuts are better described as profit cuts. When selling prices are reduced, it is crucial for salespeople to understand that the company loses profit.
Just how damaging is a tiny little 10 percent price cut? No, ten percent doesn’t sound like much, but a salesperson would need to increase sales by 40 percent at the lower price to produce the same amount of profit (assuming a 35 percent gross margin; at a 50 percent margin it would take 25 percent more sales to break even on a 10% discount). To compound the problem, typical commission packages pay on top-line revenue rather than gross profit, so salespeople are not responsible for controlling the bottom line and are barely penalized for dropping prices.
It is critical to educate salespeople on the financial aspects of their decisions in the field – no, 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! No argument here – sometimes it is impossible not to reduce prices, but there are good ways and bad ways to do so. Do you know the difference?
Regardless of what some may think, there is no such thing as a commodity. Buyers often need a number of things that some companies cannot provide – just-in-time delivery, strict quality specifications, uninterrupted supply, on-call customer service, warehousing services, and customized packaging, 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 if 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 (usually their employer’s). One obvious way to increase profits is to improve margins, but this is not a one-dimensional issue. Compensation systems have to be designed properly, salespeople need to be trained to create value, and support systems (customer service, shipping, delivery, accounting, etc.) have to be able to reinforce that value to customers.
Just how gross are your margins?
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