There are so many initiatives to choose from in sales performance area — it can be hard to prioritize, but limiting discounting is a no-brainer.
Which one has the highest ROI? For most businesses, the highest yield comes from building a systematic approach to pricing and discounting.
Here’s the math. For the average company making 10% pretax profit:
- One dollar in new sales yields 10 cents of profit.
- One dollar in avoided discounting – on all the deals you’re already winning — increases your company’s profits by that entire dollar.
Certainly, every business has different issues and challenges, so exceptions exist. However, controlling “discounting spend” carries a built-in 10:1 advantage in ROI. In all of my years of experience consulting sales organizations, and leading others, 10:1 boils down to “a worthwhile issue to explore” (being married to a Brit has developed my skill at understatement).
Your pricing and discount approval system might be invisibly killing your company. If you are a CEO, CFO, CRO, CSO, in Sales Leadership, or Sales Enablement, you are probably suffering a profit leakage. Worse still, many companies aren’t even measuring or tracking the problem.
What’s Your Discount Spend Per Year?
At this past week’s Sales3.0 Conference, I conducted an unscientific “man in the lobby” poll on company processes around pricing and discounting. I had conversations around this question:
How many dollars in discounts did you give out last year? I don’t just mean discounts based upon invoice terms. Include any reduction in price below list, standard, or typical (for semi-custom and custom products).
Nobody I talked to could answer. Think about that: a significant number of sales enablement and sales leaders I talked to didn’t even track discounts given. Gut check time: do you? Given the profit impact of discounting, this begs the question “why?”.
Pricing and discounting is my specialty, of course. If you would like to address the issue, I’m happy to give you my best thinking about your situation. Contact me. If you don’t have a crystal-clear analysis of your discount spend, call me anyway. As you can see from my informal poll, you are in good company.
How Do You Distribute Discounts?
To make you feel even less alone, let me share a few more common situations. Many companies give discount dollars out reactively. Discounts often go disproportionately to:
- The salesperson is best able to game the system, possibly the squeakiest wheel.
- Reps reporting to the regional manager who used to be the salesperson above.
- Whiniest customer.
- Most politically connected channel partner.
- ..I could go on.No need to, though, is there?
These schemes not only kill profits, but they also demoralize your salesforce. Everyone in your whole company knows who gets the discounts. If the distribution doesn’t make good sense, word gets around. Especially if you are paying your salespeople on revenue instead of profit, you are steadily stirring a pot of resentment. Some of your salespeople think that “favors” (a perversion that only sales-compensated teams believe in) are being doled out to select “golden children”. This can have an effect on morale and retention, in addition to the direct “profit surrender” effect above.
When you discount vs. when you can build value
It’s no mystery that sellers combat discounting by building value in the customer’s mind. I don’t favor the term “selling value” because value is only in the customer’s mind, and “selling” sounds too much like “telling” to the untrained ear. Here’s the thing, though. As the graph below shows, your ability to build value has pretty much faded by the time the customer wants to discuss price and discounts.
Here’s the good news: Most sellers need only a few simple tweaks to their regular selling process and methodology, and coaching those tweaks is straightforward for sales leaders. I don’t want to sugarcoat it, though: these tweaks require coaching sellers through a behavior change.
Here’s the better news: when your sellers build value, prospective customers have clearer expectations of their outcomes — financially and personally. Very often, they have a higher preference at a premium price. It often happens that the premium price is more resistant to competitive price discounts than the lower price you might have agreed to without using good value discipline.
Who Can Build Value?
Here’s the best news of all: it all works even better when everyone who touches your customers is on board. Your product can trigger value in many unexpected corners of a customer’s company, and the more of these you find, the more value there is to be built.
What does Great Look Like?
A robust, disciplined price exception system can work a lot of ways. In fact, it may have the same process steps and participants you have now. The process steps are less important than changing what gets discussed during those steps.
Price exception decisions need to use much more objective information than most do today. When they do, they are harder to game, and can be deaf to whining.
Coaching salespeople to build value becomes part of the sales culture. Luckily, this doesn’t have to complicate coaching. When a seller can articulate value built, coaches know they’ve done a great job with the entire sales process and methodology. It’s only when sellers can’t articulate value that coaches need to diagnose problems with detailed methodology and skills coaching.
Finally, sales shouldn’t be the only department who cares about revenue instead of profit. That value system keeps sales leaders from making the transition to general management. It creates culture problems in organizations. To that end, your compensation plan may need to change. If your people aren’t paid on profits, they’ll settle for profitless revenue. Even if you can’t measure profits precisely, pay them precisely based upon a consistent profit estimate
Pricing is Profit.
Every dollar of additional price on a won deal is a dollar of profit for your company. Discounting discipline is a great way to stop profits from leaving your firm. An investment in shaping up your discounting discipline is one of the highest return on investment places you can apply your company’s scarce resources. If you know how many dollars in discounts you gave out last year, what would happen if you could only prevent 10% of those lost profit dollars? 20%? 5%? Now compare that number to the cost of other sales performance initiatives you’ve implemented. Does this shape your upcoming priorities?
Contact me if you’d like to explore your situation together. If you found this post valuable, please share with your networks, like, and/or comment below.
To your success!