The toughest challenge that business-to-business sales professionals and leaders face today is dealing with the margin-draining games played by the economic or procurement buyer to gain additional discounts. These traps are a part of every purchasing training manual and have been fine-tuned over the years to drain maximum discounts out of even the largest and most sophisticated suppliers.
These professionals don’t use the product and apparently don’t care about the supplying company, the quality or value of its products and services, or the level of trust in the company’s relationship with its salespeople.
The story of the CEO of a high-quality software company seems to be the best example of dealing with this type of buyer. His sales team spent considerable time qualifying and understanding the needs of a large global technology customer and developed great relationships with the committee of customer managers who had been tasked with making the purchasing decision. The team convinced the committee that it had the best solution in terms of value and price. The team had apparently closed the deal.
Suddenly a manager from purchasing showed up and asked the CEO, “Do you know what the stomp is? It’s when the big customer stomps the vendor.” He sent a clear signal that the deal wasn’t concluded until a cascading series of discounts and concessions were extracted from the company. And that’s how the deal went down. The discounts were given, concessions were made, and finally the deal was done. The sad part is that it didn’t have to happen like that.
This story is being repeated in too many situations throughout the global business community. There was a time when this type of procurement behavior was relegated to commoditized manufacturing businesses such as automobile sales, but it has now spread to the sales of high-value medical devices and professional services. This is the decade of the rise of purchasing, or the economic buyer. These buyers are taking control and driving prices down using every tactic in their well-developed playbook until they are successful in meeting their cost cutting goals and earning a place at the executive table. This state of affairs is the “new normal.”
Because of this pricing pressure, high-quality, high-value large companies aren’t covering their cost of capital. Profits are draining from once-profitable businesses and companies are going out of business because they don’t know how to deal with the “purchasing pricing buzz saw.”
One tactic to combat the preceding is to invest in training salespeople to understand customer value and develop better relationships with their customers. Over the past decade companies have been spending more and more dollars on training salespeople. Some estimates point to yearly training budgets of $1,000–$1,200 per salesperson. With an estimate of 15 million salespeople in the U.S. alone, that’s a lot of training dollars. This segment of training is also one of the fastest-growing service segments, with an estimated growth of 10 percent in 2011 alone. However, the cost of the training is small compared to the wasted time and unnecessary discounting that occurs because the training doesn’t prepare salespeople for effectively dealing with the pricing games that purchasing people play today.
All these efforts around understanding value and developing relationships are wasted on the hard-hearted economic buyers and the games they play to get lower prices. That economic buyer is usually a purchasing professional, but she might also be a department manager or even a senior executive who is being coached by a purchasing professional on how to get high value for low prices. The list of tactics to bluff and win against the hapless salesperson is long and well known. The problem is that nothing in the relationship or value-oriented sales training programs can help salespeople deal with the economic buyer and the games they play.
In fact, many of the training programs teach tactics that fall right into the traps that purchasing professionals use to get high-value products and services for low prices. Just the simple threat of putting the business out to bid is often enough to drain dramatic price discounts from a salesperson who is just trying to satisfy the customer. Why? Because salespeople have been trained that customer satisfaction is very important.
If the threat is not enough, another common tactic is to actually put the purchase out to bid, qualifying several vendors that are in truth, unacceptable to the customer. They are Rabbits—there simply to drive the price of the preferred vendor or the Advantaged Player down as low as possible. This practice has always been true of commoditized products and industries, but it is now occurring in highly differentiated areas such as software, professional services, and medical equipment.
There was a time when only the big guys, the marquee-named companies, seemed to have all the advantages. They used their scale and brand to squeeze the little guy. Now even medium and small buyers have learned the tactics of the mighty and squeeze their suppliers. Even large, world-class suppliers in high-value industries services are seeing their margins shrink due to run-ins with procurement. This situation is not going to go away when the recession ends. Buyers have learned to get lower prices and will continue to use that power until vendors figure out a way to blunt those efforts with better tactics of their own.
Company-Supported Sales Traps to Avoid
Many tactics can cause salespeople to drop price. Salespeople can learn about those tactics, but before they can successfully play the game needed to ensure increased revenue and profits, they must understand some things that their own companies do that undermine a salesperson’s ability to successfully negotiate with a customer. The following sections describe them.
Encouraging Desperation Pricing
In the 1987 film Broadcast News, there’s a line I like. The failed anchorman played by Albert Brooks says, “Wouldn’t this be a great world if insecurity and desperation were attractive qualities?” The reality is that procurement managers are drawn to insecurity and desperation like blood draws sharks. So the first thing salespeople and executives must be able to do is manage their desperation. Having so much faith in the value of your products or services that desperation doesn’t even come into play is a better tactic. If you must be desperate, though, for Pete’s sake don’t show it.
Not showing desperation isn’t easy. Desperation comes from something even more scary—measurement. Salespeople have objectives. Executives have Wall Street. Objectives are the ante to get into the game of winning business. They are not just objectives, but hard-to-obtain objectives called sales quotas. Furthermore, the sales quotas are easily measurable. All business people know that they have to hit their numbers. When was the last time you heard of a human resources manager being fired for not making his or her numbers? Salespeople are a special category; they live and die by their numbers—weekly, monthly, quarterly, and yearly. Their compensation is directly related to the last set of numbers. If they slip one month, salespeople know they might have a month or so to make up the difference. If they let it slip much more than that, they know that they are history. Among sales professionals, this reality breeds a certain kind of desperation. When procurement people sense desperation, watch out. All bets are off.
Even if desperation is not there, many procurement people have figured out how to create it. The easiest trick a buyer has is to delay a purchase. The longer they can wait, the more desperate salespeople and their managers become. Because procurement managers know that most salespeople are on monthly quotas, they have learned to wait until the end of the month in the hope that the salesperson will accept virtually any price just so he doesn’t miss his quota. This trick is well known to consumers. Heck, even my 89-year-old mother used that trick a few years ago by visiting a car dealership toward the end of the month when salespeople are increasingly desperate to meet their quotas. There was no selling, no thought of value regarding convenience and service. She got a great deal, and it was the first car she had ever purchased!
I wish that this desperation game were simply a tactic created by procurement people, imposed on sales professionals from one end of the negotiating table. However, the sad reality is that desperation often has its origins from the same side of the table that the salesperson occupies. How many times have you been pressured to hit your numbers at the end of the month and quarter? How many times have you seen a manager or senior executive travelling through your territory trying to close business to make the end-of-period numbers? It happens every day. The point is that this type of desperation makes salespeople lousy negotiators because they are too desperate to close a deal and are willing to suffer procurement tactics to get the order.
Succumbing to the “White Horse Syndrome”
I have a name for what happens when sales managers come into the field to “help” the sales reps. I call it the “White Horse Syndrome” to honor the well-intended objectives of the executives. They actually believe their actions are akin to the hero who jumps on a white steed, rides out into the untamed territory, and single-handedly saves the town from the bad guys. The reality is not only do they undermine the sales rep calling on the procurement manager, but they also telegraph even more desperation on the part of the company. Their big weapon? Just a bigger discount.
I learned this lesson some years ago when I was the new marketing manager of a medium-sized technology company. We weren’t hitting our numbers. A few days before the end of my third month, the division president (let’s call him Bill), paid me a visit in my office. He suggested that I offer a 10 percent discount for large-volume orders as an incentive for us to meet end-of-period numbers. I quickly agreed. After all, he was the boss and I was new—I just didn’t know any better. We offered the discount and—guess what?—we hit our numbers that month.
The entire marketing team went out to celebrate, and I was feeling good, but then I closely monitored sales activity for the following weeks. Sales were plummeting. They didn’t just get soft, they evaporated. They were as low as Gandhi’s cholesterol. So I made some inquiries and quickly figured out what was happening. The 10 percent discount we offered went to our distributors. Now, distributors don’t actually consume products. They simply store them and distribute the products to customers who use them in the production of products and then sell those products to the people or companies who finally use them. It’s that last activity—coming back for more—that most marketing efforts should focus on.
All our end-of-month discount did was to encourage the distributors to load up the channel. The discount did nothing to encourage sales by the only constituency that matters—the end customers. With the distribution channel loaded, the distributors just sat back until their inventory needed replenishing—something that the low demand for our product predicted would be some months in the future.
You can guess what happened next. At the end of the month, Bill paid me another visit and suggested we extend and increase the discount. But by now I had learned my lesson and I trotted out all the arguments for why this strategy was unsustainable and would do nothing but erode margins. Bill listened carefully, nodding his head as if he understood, and then ordered me to again offer the month-end discount.
This time, even with the discount, we failed to meet our sales goals. The channel—apparently still stuffed from the previous month—couldn’t handle any more, nor would it open up until we figured out how to increase real sales to actual customers who would consume the product. Actually, the truth was worse than that, but it would take another month to figure it out.
A month after that, Bill again dropped by, suggesting I approve another discount. This time I held my ground, and we had a spirited conversation about the matter. The upshot is that I won the argument. We put our marketing efforts into demonstrating our value to the customers to stimulate orders and empty the distribution channel. We did that pretty well because something else happened. I started getting calls from our distributors asking when we were going to announce the discounts they had come to expect. This time, we didn’t grant the discounts, and the business revenues returned to a reasonable and much more profitable level. The distributors had been delaying their orders in anticipation of yet another panic discount. This time, we held our ground. It had only taken us two months to train our dealers to wait until the end of the month. But I’m happy to report that it took only two months to retrain our customers to change their ordering behavior. Both our revenues and margins increased.
I won the battle but lost the war. Bill fired me a few months later because he got tired of arguing with me. Some managers just don’t like being upstaged by their subordinates. Losing a job is no fun, but I learned a lot from that experience and was glad I had the confidence to do what I knew was right in serving the company and supporting my sales team. I got a better job, and Bill lost his job six months later.
There Is Hope if You Play the Game Right
Yes, salespeople and their leaders have responded by mindless discounting, hoping to make up any losses through higher volume. Unfortunately, discounting is a fool’s response. Those who live and die by discounting don’t live very long.
Sales professionals labor under the assumption that all the power is on the customer’s side. That’s because the inevitable response is price discounting. Discounting becomes an addiction that actually undermines the long-term health of the business. It decreases profits and erodes the quality of customer relationships. The sad fact is that panic discounting happens even in organizations that provide significant value to their customers. This value is overlooked, underestimated, or flat out ignored when, in fact, it is the key to breaking free of the conventional wisdom of folding your cards and just discounting.
To the extent sales professionals believe they must trade margins for revenues, they undermine the success of their business, which needs profits more than revenue to survive. To make matters worse, they train their customers to expect a price concession each and every negotiation. They validate the tactics that customers use, and they fall into the procurement pricing trap each and every time.
Vendors have a number of tricks and tactics available to fight back, protect their margins, and keep the business. Negotiating in these customer situations is not supposed to be surrender. Remember, the bigger they are, the bigger their appetite. This is true for both suppliers and customers. The big secret is that procurement is sweating the deal just as much as you are, but they just learned not to show it. They have learned how to bluff in the big poker game of purchasing, and they know that their bluff will work each and every time.
The name of the game today is maintaining margins. To do that, you must outplay the games of procurement. A way exists for salespeople to blunt the price focus of procurement professionals and not fall prey to their tactics. A way exists for them to assess the “game” the customer is playing and adopt tactics that preserve precious profits from mindless discounting. A way exists for business executives to provide the direction and support that allows salespeople to be effective players in the great game of procurement.
The way is to consider the negotiation with the economic buyer as a game of poker. The game has positions that the seller will fulfill. Based on that position, specific tactics exist that can preserve profits and resources. Those tactics redefine the game so that value can be leveraged, discounts can be minimized, and orders can be closed at price levels that are fair to both parties.
Consider the game of the Advantaged Player—that salesperson is at the negotiating table with a customer. Other players (competitors) are probably also at the table, and the buyer spends a lot of time talking about how the other competitors’ prices are much lower than the Advantaged Player’s. In fact, some yelling might be going on about how the Advantaged Player has to lower prices to close the deal. Does he have to? Nope—it’s all a poker game. In fact, the more yelling that occurs, the worse the hand—for the customer. The Advantaged Player has the winning hand. He doesn’t have to discount; he just has to play the game and close the deal.
Fred was a junior partner in a professional services firm negotiating with the CEO of one of his clients to do $300,000 worth of consulting work. The company was a long-term client, and Fred had a good relationship with the CEO. The CEO said that he would agree to let Fred do the work if he dropped the price to $200,000. Fred knew that the company needed to get the work done and that his firm was the best one to do it. He knew that he was an Advantaged Player and held to his price. The CEO, who was just trying to test Fred, placed the order for the work two weeks later—at the full price.
Compare Fred’s position to the position of the Rabbit—that is, the salesperson who is added to the bid list to drive down the price of the Advantaged Player. The Rabbit has no chance of winning the business. He has no contacts with the real decision maker and no chance to sell value. The Rabbit has the losing hand and is better off just not playing the game, especially if the time needed to prepare a bid is more than two minutes. It’s just a flat waste of his time.
Consider Sally, who was a business development person with a global general contracting firm that specialized in design build for chemical plants. She had been trying to do work with a global pharmaceutical firm and was frustrated that she could never get beyond the purchasing department. One day, her contact asked whether she was interested in bidding on a new plant being built in India. Of course, she was interested. She assembled a team that worked for two months putting together a proposal to do the work. It was gorgeous and provided everything the customer asked for. She even had the lowest price. But that only lasted until the potential client convinced its preferred supplier to match the price. Sally lost the order and wasted hundreds of thousands of dollars’ worth of time and effort pursuing a piece of business she had no chance of winning. That’s the game of the Rabbit.
The preceding examples describe two of the games salespeople and executives play in the great game of procurement. There are eight easy-to-identify games and tactics associated with each one. If you understand your position in the game, you can play the game better—walking away from the table if you have a losing hand but out-bluffing the customer if you have the winning hand. Playing the game properly is not that hard, and it’s a heck of a lot more fun. It does require a concerted effort of both salespeople and executives who are committed to understanding the game and using the right tactics to make sure they protect profits and revenue along the way.