I’ve never endeared myself to those sales professionals who view each sale as an opportunity to maximize gross profit. These individuals believe that every small business pricing strategy should be predicated on squeezing a little extra from the customer on each and every sale. They do just enough to win the business, but never enough to keep it long-term. This mindset believes that if you offer too good a price (when you could have charged more) then you’ve simply left “money on the table”. What these individuals fail to realize is that this sales approach leaves far more on the table simply by alienating customers, and not building long-term relationships.
Does Every Sale Require Negotiation?
Let me first start off by saying that this is not a statement that negotiation isn’t important. This simply isn’t the case. In fact, I believe negotiation is the most important aspect of sales success. If you can’t negotiate, then you’re dead in the water. However, I just happen to believe that not every sale is one worth negotiating. Based on my experience, there is both a time and place for negotiation. Large volume orders are worth negotiating. Contractual agreements are worth negotiating. Pricing is worth negotiating. However, if your customer feels that every single order will become a point of contention, or a drawn out negotiation, then you can be rest assured that you’ll never win the majority of their business.
Instead of trying to maximize gross profit on every sale, view your customer relationship as a series of repeat sales, where each opportunity at a sale is another opportunity to impress your customer.
To learn more about the above negotiation essentials, please go to: Sales Negotiation: Defend Price, Customer Scare Tactics & Managing Concessions
“Doing Just Enough to Win the Current Order!”
As mentioned, a number of sales people will do just enough to win the order in front of them. They begin discussions with the customer by ascertaining which competitor is selling them product. If the sales person is well aware of their market and competition, they should have a fairly good idea of what price range to offer. Let’s look at the following example.
There are three sales people in this scenario.
- Sales Person #1 works for your company.
- Sales Person #2 works for your biggest competitor.
- Sales Person #3 works for a smaller competitor.
Your company’s sales person is pursuing business at a customer who is dealing with your biggest competitor (sales person #2). This customer is paying $1.50 for a widget from the competition. Your sales person knows the competition well and therefore knows this $1.50 price range. Your sales person could easily offer $1.20 (with a healthy gross profit percentage) and win the order easily.
Instead, your sales person decides to offer $1.45 because they always try and maximize their gross profit per sale – and of course, they can’t leave any money on the table! Your sales person gets the order. The customer isn’t blown away by the savings, but it’s a savings nonetheless. Typically, this is what happens next.
1. Your Sales Person Adjusts Their Inventory Forecast: Your sales person immediately starts to forecast inventory for the customer. They’ve won one order and can surely win another.
2. Inventory Allocates Product: Based on your sales person’s forecast, procurement proceeds to ramp-up additional product for the customer.
3. Your Sales Person Loses Next Order: Immediately after getting the business, your sales person loses the next order back to your biggest competition (sales person #2). Your competition uses the same sales approach of maximizing gross profit per sale and they too do just enough to win this one order.
4. Endless Price War Ensues: Your sales person realizes your competition has won the business with a new bid of $1.40. Now the bidding war starts. Each order switches hands between your sales person and your biggest competitor. Each time, pricing is reduced and gross profit erodes. Because each sales person is trying not to leave “money on the table”, they continue this game of giving the customer just enough to win the current order.
5. Inventory Sees Infrequent Sales Forecasts: Because your sales person is not able to secure the customer’s business long-term, inventory sees an infrequent demand pattern. Some months your company has too much inventory and other months you don’t have enough. Some months your inventory holding costs are high, because you have too much product, and other months you miss sales because of a lack of inventory. It’s a vicious circle.
6. A Third Competitor Comes in and Steals the Customer: Finally, that third sales person comes along and steals all of the customer’s business. They don’t try and maximize gross profit on the sale. They just immediately go in at $1.20 and take it all.
One of the more important aspects of sales success, and defending your company's pricing, is to be able to maintain your position as the vendor of choice. To read more about maintaining your position as the incumbent supplier, then please read: Defeat Overseas Competitors With Three Simple Steps
Take a Fresh Look at Your Pricing Strategy
When reading the above, ask yourself the following: “What do you believe the customer is thinking?” Well, I can assure you the customer is glad they have a new vendor. They’re extremely happy not to have to deal with those two sales people and the ridiculous price war. Finally, they may come away so impressed with the third sales person’s approach that they decide to work with them on a whole whack of other products.
If you were the customer, which sales person would you want to work for? Would it be one of the two that played one game after another, or would it be the third who didn’t care what price you were paying and just wanted to get down to the business at hand? This scenario happens all the time. In fact, this is likely something that’s happened to your company. You do just enough to win the business, bring the inventory and then go back and forth exchanging hands with your competition in an endless price war.
Don’t get me wrong, there are times when market pricing plays a role. However, when your business has a competitive advantage, make sure to use it. Steal customers and grow market share – this should be your approach. Pursue healthy gross profit, but don’t make it complicated.
Using Your Competitive Cost Advantage Strengthens Your Negotiation Position
When I asked you to put yourself in the shoes of the customer, what did you think about the negotiation skills of the first two sales people versus the third sales person? Well, you might think that the first two were good negotiators and that the third party (who just went in at $1.20) was rather weak in negotiation. However, you’d be wrong. Using your competitive cost advantage actually improves your negotiation position over the long-term.
1. Competitive Cost Advantages Improve Negotiation Positions (Later On)
Would it be fair to say that the third sales person made an immediate impression with the customer? Of course it would. Do you think that sales person could use that as a position of strength later on when negotiating a larger order? Of course he or she could. The third sales person used this opportunity to steal the customer and win the business – without playing any games.
This sales person has demonstrated they are serious, hungry and doesn’t waste any time. This is a position of strength in negotiation for the sales person because they’ve set a precedent. The customer knows the sales person doesn’t play games, and if the sales person uses this leverage in future negotiations, they’ll have much more credibility than the first two sales people.
2. Competitive Cost Advantages Expose Competitor Sales Strategies
Let’s assume you’re the customer buying that $1.50 widget. You’re dealing with two sales people going back and forth in a price war, dropping a couple of pennies off the price each time. Over time, your price declines to $1.40. Then the third sales person comes along and sells it for $1.20. What would you think if those first two sales people tried to come back and match the $1.20?
I would hope you would think that they had been taking advantage of you and your company. This is the second benefit of using your competitive advantage. It exposes your competition and their poor sales strategies. There is simply no way those first two sales people can come back at $1.20 without being exposed.
3. Competitive Cost Advantages Open Up Opportunities
This whole situation has opened up a number of opportunities for the salesperson. They’ve made an immediate impression and secured the business. The customer will surely provide the salesperson with other items to bid on. This is the third benefit of using a competitive cost advantage. It opens up huge opportunities.
4. Competitive Cost Advantages Smooth Out All Prices
Your company won’t always be able to use a competitive cost advantage to win business. There will be times when your pricing won’t be lower, or will be within the market’s range. However, your customer will never question your company’s sincerity when it comes to pricing. This helps put your company in a position to win the business when everyone’s pricing is equal.
When it comes to discussing your small business pricing strategy, make it a point to find those products where your company has a competitive advantage. Use these products to set the stage to impress your customer. Get your sales people thinking less about trying to maximize gross profit on each sale and more about securing large volume orders. Be aggressive when you need to be, and use your competitive advantage to win business.
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