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The Sales Initiative With the Highest ROI

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 meIf 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.

Ability to sell value vs discounting

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!

Economics Marketing Personal Development Sales

Five Myths About Price and Discounting

I can’t think of any concepts more misunderstood than price, pricing, and discounting.  An alarming number of businesses price poorly.  We even teach falsehoods about price at the college level.  Let’s discuss five myths about pricing, and its Mr. Hyde alter-ego, discounting.

I usually start breathing fire on this topic, so buckle up.  If this starts feeling a little too close to home, don’t get mad.  Get better.

Myth #1:  Price should be related to your costs.

Price should relate to customer value, period. Cost-plus pricing (your costs, plus some margin should equal price) is only useful to set a minimum, or a walkaway, not your actual price.

Take this one question quiz: Your customer wants a price that is below your costs.  You tell him so.  Question: is the average customer more likely to:

A: Erupt with a sympathetic “Oh, in that case, tell me what you want me to pay!”

B: Let you know, politely or otherwise, that your costs are not his/her problem, and (gently but?) firmly give you some version of “take it or leave it”.

So, if your costs are none of the customer’s business at the low end– and you know it – why should your costs be any of your customer’s business at the high end?

Customers will only pay any price (high or low) voluntarily – at least in the long run.  The reason they pay the price they do is that they find sufficient value in the outcomes your offer delivers.  Figure out your value, quantify it, and then set your price accordingly.

Myth #2:  Dropping your price will increase demand.

This myth is taught in economics classes the world over, up through the college level.  Economists build mathematical models using the law of demand.  Here’s the catch:  The law of demand assumes a few things in order to get the math to work:

  • All consumers and all producers have all information about all alternatives at all times – for free, and without effort.
  • All buying decisions are made without emotion…buyers are all Dr. Spock-like in a world that still uses money.
  • Related to “emotionlessness”, price is merely a number. Offered price does not communicate value to any buyer at any time.
  • All products and services are perfect substitutes for each other. They are absolute commodities, with no differences. There is no such thing as differentiation.
  • It costs nothing to switch vendors. There are no costs to qualify a vendor, and the human bias toward the status quo does not exist.
  • …there are a bunch more, but isn’t any one of these good enough to make my point?

Real life example: If your offer’s ROI is often north of 500% at similar clients, a hesitant customer isn’t going to be motivated by price. Price isn’t the problem with the deal.  Discounting is only going to convince your prospect to doubt the numbers.  Well, OK…not “only”.  There are the financial consequences, too.

Myth #3:  Price is just another feature…no more or less important than any other.

My jaw drops every time (yes it’s happened) a sales “professional” says “It’s the company’s job to make money at the price I sold”.  Then they wonder why nobody in the company invites them to the grownups’ table.

Psychologically, price is the final comparison against value – (value=desirability of your offer’s differentiation). Therefore, it’s the counterbalance against the value of all the differentiated features.  Companies with pricing savvy have proved this for decades, and in many industries – even “commodities” like steel and money.

This is so deeply embedded in the human psyche that price actually communicates value.  Buyers look more favorably at high-priced alternatives – assuming there must be a reason for the price. Dropping price perceptually diminishes every other feature in your offer.  No other feature can do that kind of damage.

If you’re unable to build value in the customer’s mind for the other features, then, sure…go with myth #3.

Myth #4:  You can “make it up on volume”.

The mathematical argument here is that by increasing unit volume at a lower contribution margin, you’ll not only get back to break-even, but get further above it.  (if it isn’t going to end up as more profitable, why work harder for the same – or fewer — profit dollars?).

The mathematical argument assumes your fixed costs won’t rise too.  Let’s think that through.  Say you’re a manufacturing leader and need to double capacity because your company decided  to “make it up on volume”.  The math assumes that you accomplish twice as much using the same plant, equipment, staff, utility bills, G&A, etc.  How many seconds of business school does it take to sniff out the fallacy?  Sure, in an infinite universe with infinite possible realities, it must be possible to “make it up on volume” somewhere, but I haven’t seen it anywhere in this dimension.

Here’s some independent research:

  • McKinsey & Company analyzed the entire Fortune 1000, and on average, a 1% drop in average pricewould cause an 8% drop in profit.
  • Mara and Roriello,in Harvard Business Review, studied an even larger sample, and found1% drop in average pricewould cause an 1 % drop in profit.

So…”make it up on volume” disciples:  how much do you discount before down becomes up?

Myth #5:  You can discount for “one time”, or for a “limited time”.

This is the myth of the “limited time offer”.  Your pricing policy is one of the easiest things to train customers on. No reputable company will really give a discount just once, and everyone knows it.  Nowadays, every customer just assumes it .  In fact, it’s actually harder to convince a prospect that an offer really isa one-time thing than it is to simply sell the value in the first place. Plus, the easy option is more profitable.

It gets even worse: customers are very hard to “un-train” on a new pricing policy. Once you go into the discounting tar pit, you might only get out as a fossil.

Worst of all: People change employers.  When one of your customers gets a job elsewhere, they carry knowledge of your discounting behavior with them.  See why it’s a tar pit?

Extra Value Bonus:  

Myth #6: If a customer says “Your price is too high”, it must be true.

Whenever somebody took the time to tell me what they think of my price, they  signaled that talking about my offer and its price was worth their time.  What they are really saying is usually “your value is too low”, or “I don’t understand your value well enough”. The other popular option: “I want your product, but am just checking to make sure I’m not paying any more than I have to.”  This is simply a due diligence step, not an actual price issue.

The customers who really think your price is too high don’t even return your calls.

Bottom Line

As I said, if this article started feeling a little too close to home, don’t get mad.  Get better. If you want to get better, contact me.

To your success!