This chapter is from the book
This chapter is from the book
This chapter is from the book
The Root Causes to Avoid
Many tactics can prompt salespeople to drop price. Salespeople can learn about those tactics, but before they can successfully play the game, they must understand some processes or culture in their own companies that undermine a salesperson’s ability to successfully negotiate with a customer.
Encouraging Desperation Pricing
All businesspeople know they have to hit their numbers. Salespeople are in a special category: They live and die by their numbers—weekly, monthly, quarterly, and yearly. Their compensation is directly related to the last amount of revenue they generate. If they slip one month, salespeople know they might have a month or so to make up the difference. How do they often achieve their objectives? By granting price discounts. 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 isn’t present, 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 work on monthly quotas, they have learned to wait until the end of the month, in the hope that salespeople will accept virtually any price just so they don’t miss their quota. Consumers know this game too, and have learned to buy cars at the end of the month.
I wish this desperation game were simply a tactic procurement people created and then 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 as the salesperson. How many times have you been pressured to hit your numbers at the end of the month or quarter? It happens every month. The point is, 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. The real problem isn’t the limitations of the salespeople. In most case, the incentive system and management are the real culprits. But it gets worse.
Succumbing to White Horse Syndrome
I have a name for what happens when sales leaders come into the field to “help” the sales reps. I call it White Horse Syndrome, to honor the well-intended objectives of the executives. They actually believe their actions are akin to a hero who jumps on a white steed, rides out into untamed territory, and single-handedly saves the town from the bad guys. In reality, not only do they undermine the sales rep calling on the procurement manager, but they also telegraph more desperation on the part of the company. Their big weapon? Just a bigger discount. Procurement people have learned to ask executives from suppliers to visit, knowing they can get bigger discounts. Buyers just love it when that happens.
I learned this lesson some years ago when I was the new product manager of a medium-size 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 our dealers so we could 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 team went out to celebrate, and I was feeling good, too. But then I closely monitored sales activity for the following weeks. Sales were plummeting. They didn’t just get soft—they evaporated. So I made some inquiries and quickly figured out what was happening. Distributors don’t actually consume products. They simply store them and distribute the products to other customers. The only effect our end-of-month discounting had 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—and the low demand for our product predicted that would be months into the future.
You can guess what happened next. At the end of the month, Bill paid me another visit and suggested that we extend and increase the discount. By now, however, I had learned my lesson. I trotted out all the arguments for why this strategy was unsustainable and would do nothing but erode margins. Bill listened carefully, nodding 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. The truth was even worse than that, but it would take another month to figure it out.
A month afterward, Bill again dropped by, suggesting that 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. The distributors had been delaying their orders in anticipation of yet another panic discount. It had taken us only 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 distributors to change their ordering behavior. Both our revenues and our 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. 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 Prepare and Play the Game Right
Yes, salespeople and their leaders have responded by mindlessly discounting, hoping to make up any losses through higher volume. You might be one of them, and you might not like what you hear. Those who live and die by discounting don’t live very long. Fortunately, there’s a better way.
Sales professionals labor under the assumption that all the power is on the customer’s side. Discounting becomes an addiction that 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.
When 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 in every negotiation. They validate the tactics customers use, and fall into the procurement pricing trap each and every time. We often see the mental light bulbs come on during our seminars when salespeople realize that they’ve been played by their customers for years.
Sales professionals have tricks and tactics available to fight back, protect their margins, and keep the business. Negotiating in these customer situations isn’t supposed to be surrender. Remember, the bigger an entity, the bigger its appetite. This is true for both suppliers and customers. The big secret is that the procurement folks are sweating the deal just as much as you are—they’ve just learned not to show it. They have learned how to bluff in the big poker game of purchasing, and they believe their bluff will work every time. The big secret—and one of the reasons for this book—is that if you bluff back, they’ll often fold.
To maintain margins, you must outplay the games of procurement. With Backbone, salespeople have a way to blunt the price focus of procurement professionals and not fall prey to their tactics. They have a way to assess the game the customer is playing and adopt tactics that preserve precious profits from mindless discounting. Business executives also have a way to provide the direction and support salespeople need to be effective players in the great game of procurement.
One of our Backbone-trained customer account managers (let’s call him Bob) was preparing to renew one of his largest and certainly toughest negotiating buyers. After considering the tells of the situation, Bob realized that this buyer was a poker player and that his own position was the advantaged player, the preferred vendor. In response, Bob prepared for a negotiation that would introduce his company’s first price increase in some years. He prepared the cost data to support the price increase.
Bob was gratified that the client accepted the price increase. It’s important to note that Bob represented a highly commoditized product with a lot of competition. Bob understood that this fact made his task more difficult. Balancing this disadvantage was the fact that Bob’s company remained the advantaged player. In the end, the advantage of being the preferred vendor outweighed the disadvantage of selling in a commoditized environment. After all the game playing, Bob persevered. The price increase he negotiated increased revenue and profit for his company by more than $5 million.
Why did the buyer agree to the increase? Because Bob understood that what really motivated the buyer was concern about supply chain disruption. The company simply couldn’t take the risk of going with a lower-priced supplier without a reputation for reliability. Bob understood that his company was in the advantaged position and played to his strength in the poker game. In fact, the company was so concerned about the combination of supply chain risk and the cost of facing similar price increases every year that it accepted terms in a three-year contract. Backbone created a win–win.
Consider the game of the advantaged player: A salesperson is at the negotiating table with a customer. Other players (competitors) are probably at the table as well. The buyer, no doubt, spends a lot of time talking about how the other competitors’ prices are much lower than the advantaged player’s price. In fact, some yelling might be going on about how the advantaged player has to lower price to close the deal. Does he really 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 Pplayer has the winning hand. He doesn’t have to discount; he just has to play the game and close the deal.
Consider Rana, 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. The plan was gorgeous and provided everything the customer asked for. Rana even had the lowest price. But that only lasted until the potential client convinced its preferred supplier to match the price.
What happened? Rana lost the order and wasted hundreds of thousands of dollars in time and effort by pursuing a piece of business her team had no chance of winning. That’s the game of the rabbit. The sad part is, if Rana had diagnosed the situation properly, she could have saved her team’s time and effort. She could have figured out that she was going to lose the business before expending the resources. Backbone would have helped her understand that her position was untenable. Not only was it money and effort down the drain, but the company missed pursuing other opportunities it could have won.
Customers get involved in eight easy-to-identify games, with certain tactics associated with each one. If you understand your position in the game, you can play the game better. You can walk away from the table if you have a losing hand or out-bluff the customer if you have the winning hand. Playing the game properly isn’t hard—and it can even be a lot more fun. Success does require the concerted effort of both salespeople and executives who are both committed to understanding the game and using the right tactics to protect profits and revenue along the way.