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Buying better is only part of gross margin improvement

I frequently observe companies in our industry using highly-aggressive buying strategies to lower their cost of goods, but they provide their sales force with very little education on how to optimize gross margin. This sounds so bizarre that it’s difficult to believe.

Highly-trained buyers can be extremely effective at negotiating lower market costs, but perhaps the same fervor doesn’t exist among the organization’s sales personnel with respect to gross margin. As an example, the sales producer’s compensation plan may provide a more handsome reward for sales improvement than it does for optimizing product mix and upgrading sales.

As an industry, we have undoubtedly made improvements in gross margin control, but we still have a long way to go. Special order sales are a good place to begin. Depending on how special order sales are classified, special order sales account for between 25% and 40% of sales, yet few businesses have professionalized the pricing of special orders. In many stores, the inside and outside salespeople are in a markup rut when it comes to special order pricing.

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I have spent many hours over the course of my career researching the benefits of balancing the ways personnel go about getting things done. When it comes to optimizing productivity, research makes it pretty clear that building teams with a diversified approach produces the highest level of results.

On the other hand, companies that make hiring decisions without the benefit of professionally-designed instruments (psychological tests) to help them identify the behaviors they are hiring, only recruit and hire based on their gut feelings and those of their coworkers whose opinions they respect.

All managers have most likely made hiring decisions they regret. Maybe they thought they were hiring a salesperson who was a master prospector, but after a few months the manager realized he was guilty of wishful thinking when he offered them the job. They didn’t have the “right stuff.”

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Managers can improve their success rate if they will use hiring tools as opposed to a gut feel to predict the strengths and weaknesses of the people they are bringing on board. One of my mentors was masterful at using a perfectly designed, yet simple tactic that would reveal whether a salesperson was charging our company more than they were charging our competitors.

At the end of a long negotiation when he sensed the timing was right, he would address the salesperson with these words: “I want you to look me directly in my eyes and tell me that you are not selling your products to any of your customers at a lower price than you are selling us.”

In the absence of this kind of bluntness, I question how buyers can know if they’re buying as effectively as they think they are.

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When making sales calls, it’s not unusual for a buyer to tell salespeople that the price they quoted is too high. At this point, the salesperson has several options:

  1. They could lower his price.
  2. They could explain that their product was of a higher
    quality, or had a longer warranty than his competitor’s
    product.
  3. They could explain that their lead times were much
    shorter, etc.

Or, the salesperson could ask the buyer this question: Are you telling me that if our price was identical to our competitor’s price that we could do business? The salesperson is not offering to lower their price, they are strictly asking a question. They are also learning if the buyer is a sincere prospect, or is he just negotiating to keep their current supplier honest. If you are going to give your salespeople pricing authority, I recommend that you invest in basic negotiation training for your sales team.

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