Real Issues. Real Answers. Non-negotiable pricing

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“We don’t deliver prices in our industry. We deliver starting points.” Rick Davis made that statement in his presentation at the LBM Sales Master Class. The problem, Davis notes, is that salespeople presume there will be a negotiation before it even occurs. This results in salespeople sometimes lowering prices unnecessarily in an industry notorious for razor-thin margins. Then again, many would argue, it’s better to make the sale with a slim margin than to let your competition get the sale. It’s a timeless challenge with no easy answers, which made pricing an ideal topic for this month’s survey.

As the title suggests, this month’s Real Issue. Real Answer. is inspired by a reader whose company is thinking of making its pricing non-negotiable. Here’s what he wrote: “We currently give salespeople some freedom to adjust prices in order to make a sale, to keep a customer happy, etc. But we’ve noticed that some of them discount as much as they’re able without getting approval. We’re thinking of locking-down our prices, and not allowing reps to change. However, we question whether the additional margins we’d earn would be worth the aggravation to our customers and employees. We’d love to hear from other readers before moving forward.”

We built a very brief, three-question survey around this question, and sent it to the LBM Journal subscribers who’ve opted in to receive our email communications. A big thank you to the 150-plus readers who took time to join the conversation. It truly is a great question, as demonstrated by the insightful answers you’re about to read.

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Question 1:

First, we wanted to gauge where LBM dealers stand on this topic, so we asked: “Which one statement below best describes your company’s pricing strategy?” As the chart shows, nearly three in four respondent companies give salespeople some flexibility with pricing. The majority, 57%, allow salespeople to adjust prices within a set range before requiring approval, while 17% give salespeople free rein to adjust prices as they deem necessary. Just over a quarter of respondent companies, 26%, do not allow salespeople to adjust prices without approval. Here are some comments:

“Gross margin discipline is essential. It helps to educate the sales force as to the realities of doing business. A little education goes a long way in this regard.”

“We have a special ‘discounted’ price list that can be used in competitive situations.”

“I give our salespeople some flexibility, within a well-defined, set ‘range.’ In over 50 years in business, my strategy has always been, ‘If I give up something, I have to get something in return.’ We’re, perhaps, more cognizant of our costs than most other companies. If we make a price concession, we’re usually in the process of upgrading the sale, or (i.e.) increasing the size of the order. I also, personally, authorize price adjustments based on whether the current business trends are on the upswing, or during down times.”

“We like to think that we follow option 2 (adjustments within a set range without approval), but for the most part, we really are following number 3 (adjust at will, no approval necessary).”

“We do once in a while adjust a price, but everything else is sold at what our current market price is. I do follow the market, and we are usually ahead of the other dealers in our area on pricing. Our relationships with our contractors are the main thing, they know that our pricing is going to be competitive, so they really don’t spend much time shopping us.”

“Any price adjustments outside of a 10% reduction, or on a list of specific products, need approval from the owner.”

“While required to sell within a set range, a majority of the time, it is approved to sell below the set range.”

“We took away the ability for salespeople to adjust, and over the course of two years, our margins have risen 5 points. It takes a lot of pressure off of the salesperson when they know they can’t negotiate.”

“Our salespeople earn commissions on the gross profit of their sales. In the past, we allowed them to make adjustments up or down according to what they felt it would take to make the sale. We are changing to a floor for going down. If we need a price below the floor, salespeople must get permission from their manager. They can raise the price for a higher margin if they can make the sale.”

“Salespeople can adjust prices, then a price override report is sent to the manager who addresses the changes with the salesperson.”

Question 2:

How would you advise this dealer?

“We currently give salespeople some freedom to adjust prices in order to make a sale, to keep a customer happy, etc. But we’ve noticed that some of them discount as much as they’re able without getting approval. We’re thinking of locking-down our prices, and not allowing reps to change. However, we question whether the additional margins we’d earn would be worth the aggravation to our customers and employees. We’d love to hear from other readers before moving forward.”

Reader responses:

“Agree. Lock down prices, and set margin expectations on special orders.”

“Not changing the prices adds credibility to our business and the salespeople don’t have to think about negotiating so it takes the pressure off of them. Plus, our margins have risen steadily.”

“Any salesperson that makes ‘unauthorized’ price concessions, without first getting approval, won’t be working for us for very long. If that employee comes to me first, to explain what benefit to the company (not to him/herself) can be gained by offering a discounted price, outside the parameters of the pre-established norm, we’ll always listen.”

“We run all our pricing through central pricing system for all ‘package’ or volume quotes. Any over-the-counter pricing is ‘auto priced’ based on customer type… consumer, builder/remodeler/GC. Any price overrides are captured by our POS system and managers receive notification. If a ‘coaching moment’ is appropriate, they address directly with that associate.”

“If you lock down prices, you have to make sure the price team is in-tune with the market you serve. LBM dealers sell many SKUs, and therefore not all price strategies fit all product groups and all markets. You also have to make sure there is support or a ‘war room’ for sales as an immediate resource for negotiations and tactics.”

“I often struggle with this as well. When I review our daily Order Exception Report where I see discounts given, I get kinda agitated, but I’ve mostly decided to  stop paying attention to this on small orders. When I was nit-picking these inconsequential discounts in the past, I almost always found that there was usually a good reason why they gave the discount—typically product damage or customer goodwill. But when I did this, it also made our employees feel like I was fixated on all the random little things they did wrong, while overlooking the things they do right all day long. I still ask for more information when an aggressive discount is given on larger orders. I usually get a good explanation, but it reminds our salespeople that I’m paying attention and I think (hope?) this makes them more mindful about only discounting when necessary.”

“I would talk to the salespeople about not going to the deepest discount first. They will find most of the time they will still make the sale. I think locking down prices is a mistake. Run weekly margin reports for each salesperson and talk to them on what you expect.”

“Reinforce your value proposition with both your sales team and customers, then create incentives for your sales team based on margins not just sales volumes. Make it a win-win situation. Higher margins for you, additional pay for your sales staff. This will also drive your sales team to put more effort into higher margin products.”

“Sometimes we are higher priced than the competition, sometimes lower. It averages out. Once salespeople understand that and the customers understand that, we simply have to offer the best service.”

“Our inside sales reps are on a short leash with little wiggle room. Our outside staff are on commission and incentivized to make as much as they can while securing the sale. Training, coaching, and experience is needed to get the sales reps to get as much as they can out of a sale.”

“Don’t take away their opportunity to make the sale. Salespeople are in the best position to know the competitive situation. If they are making bad decisions train them on the importance of gross profit. Give them feedback on the gross profit by customer and transaction. Tie their compensation to gross profit dollars.”

“You absolutely should remove that freedom. I guarantee that if they have to come to you for approval for that price exception, they will discover that the discount isn’t actually necessary 98% of the time. We have seen major margin movement upwards on key items, and in general, since removing the ability to discount, and minimal to no customer issues.”

“Give them a range.”

“Good idea as long as pricing is reasonable. We spend a lot of time managing the purchasing of product. We should exercise the same care on pricing. Minimum margins and target margins should be established and controlled.”

“Different customers and projects can have vastly different costs. Operational, cost of funds, returns, etc. These and other factors will undermine any ‘lock down’ of pricing. Consider a checklist that would effectively determine any deviation from established pricing.”

“You must have limits. For negotiation to happen, both sides need to give something or it is considered giving.”

“We have found that with our larger accounts, create a special price list monthly for them individually. This way, there is no need for price changes. We send the customer this price list and it is static for the entire month.”

“Are your salespeople on commission? Does the commission drop if the price is discounted? Do you pay commissions on sales or profit dollars? What type of proof do you require from a customer who claims they can purchase at a lower price? Are your salespeople trained on the reasons price is set where it is? How much experience does a salesperson need before you allow any pricing discounts?”

“We pay our salespeople a percent of the GP dollars (not the sales $). The percent number is determined by two variables— the total GP $ and the GP%. Based on our formula, a salesperson reduces his/ her own commission pay when reducing the sales price or conversely, raises it by setting a higher price. In other words, they have skin in the game. But this does not absolve the sales leaders of their responsibility of watching what’s going on and giving feedback to the salesperson when they have engaged in the act of ‘stupid pricing’.”

“We want our OSRs to make profitable decisions, so we make sure they see the bigger picture. For example, a door package has to average out to 32+ points, regardless of unit prices, for it to make sense to make the sale positive for our company. This is easy to verify, easy to track, and everybody wins.”

“If the salesperson is doing a good job for a contractor, the contractor will actually pay more to deal with a good salesperson. We have a salesperson that tells contractors that he’s the best, and working with him costs a little more, but he’s worth it. His contractors don’t have a problem doing business with him and they hardly ever leave him. He has a great relationship with them and takes great care of them.”

“It’s not an either/or decision. The answer may be providing less freedom. It may be stricter enforcement of existing GPM guidelines. It may be locking down prices on some items that are less price- sensitive, but giving reps more discretion on the most sensitive. Regardless, the reps’ compensation must be tied to the GP dollars he or she generates.”

“Reel in the salespeople that give away the maximum allowed. Tighten the parameters only on those you find abusive of the program.”

“Most prices are non-negotiable. Developing an atmosphere that takes away the customer’s permission to negotiate could be a slow process to change, but it is necessary. Providing honest pricing that is comparable to the region/area that you serve has been a time-saver.”

“First thing…additional margins are always worth the effort put towards them. Second…I think giving your salespeople the freedom to manage some pricing is good business for experienced salespeople. Salespeople should be part of the discussion when it comes to an effective price strategy and inventory selection. When they have input and understand how the pricing is setup, it gives them confidence in the numbers they are presenting and they won’t feel tempted to take a short cut. Lastly sales training, sales management, and setting expectations should play a big part in how this works.”

“Lock them down and retrain your staff to overcome the objections while defending your competitive pricing.”

“Lock it down. Salespeople will take the path of least resistance, always. Anyone can give a low price. We expect our sales staff to sell. If you continually allow price deviations, the customer realizes they can beat you up and will continue to do so.”

“Illustrate to them what it takes to make a profit. Also, that sometimes they must stand firm.”

“We do not let out our sales staff do any pricing, our staff focuses on sales and service to the customers. They know that the sales manager spends countless time preparing for the weeks and months of sales moving forward. Our customers are our partners, they understand that we are in this together, and to stay in business we all need to make a profit.”

“The issue with letting salespeople adjust prices, is they start using pricing as their sales tool and not the value of customer service and quality of material.”

“I currently work in sales at a lumberyard that gives us full control of pricing. Our main buyer also does our invoicing and if something is too low, we may get a talking to, but for the most part, we know what we can get away with. We also think more long term. We may bid something super low the first time, but make up for it as time goes by. I think it really depends on how good your sales team is and how much thought goes into the process.”

“Freedom to adjust prices by our employees is important. If an employee is discounting too much, they will be coached after the sale on margins and good answers to the customer who is just looking for the lowest price.”

“We have set price levels for our customers, so that no matter who writes a ticket, they get the same price. We pay commissions on collected sales, not margin.”

“Pay commissions based on gross margin. Set your desired G/M to pay maximum commission and your lowest acceptable margin at which they will not earn a commission.”

“What are they comparing our pricing to? If it is Home Depot, we pull it up on the screen and will generally match if they are lower, but most of the time we are lower. We ask our salespeople to always check HD before just giving in. Also are they comparing the same product or is it an inferior product.”

“Set a minimum GP for commissions to be paid and let the salesman control the pricing.”

“Set margin range and allow flexibility. Encourage salespeople to start at the higher end of the margin range. Perhaps certain cases (jobs/projects/customers) may require special attention/ adjustments and should be discussed with your VP of sales, etc. Or perhaps you lock pricing for certain items/ categories, but not all. This would allow pricing flexibility for your customers on some products while allowing you to control others. Minimal flexibility may be better than none at all.”

“We have a minimum price established by management for the two types of customers we service, the custom home builder and the production builder. The sales team cannot sell below that price without approval from management.

Since their commission is driven by gross margin dollars, they seldom ask to sell to the bottom feeders.”

“Our director of sales sets minimum margins for special order items. He has four price levels and sets our customers at one of those price levels, corresponding to their loyalty to us, purchase history, payment history, etc. This prevents salespeople from ‘giving away the farm’ and gives everyone guidelines. For stock items, if a salesperson wants to give better pricing to compete with another supplier, we send the quote to our director of sales and he ‘sharpens the pencil’ for that particular job.”

“I think it is best to make a mutual decision on how to slash profits.”

“Let them adjust as they see fit, but set some limits. We are looking at basing salary off of net profit per salesperson. Base pay plus incentive based on profit, not sales.”

“We are working towards locking down prices and have approval for exceptions. This requires a great deal of upfront work, good communication, and teaching how to sell but in the long run it should pay off. Car dealerships do it everyday. You wouldn’t buy a car without the salesperson saying, ‘let me check with my sales manager.’”

“We have margin guidelines based on product category and customer type (e.g. retail, remodeler, small builder, large builder). Salespeople can adjust margin within a couple percent without approval. For example, a retail sale of windows might have a 30% margin and could be adjusted to 28% by the salesperson, while the same sale for a large builder might be at 24% margin and could go as low as 20% to match a competitor.”

“We give our salespeople the freedom to adjust the prices as needed. It is in their and the store’s best interest to be firm with prices, but also have the flexibility to adjust the prices to make the sale. To let the sale walk out the door over a minor price adjustment would be foolish.”

“Set a profit margin that they cannot go below. The challenge is, do you want to be a salesperson or an order taker?”

“We set our pricing based on market conditions, almost always off of replacement cost on commodity lumber and panel items. We do our best to update the market costs at least weekly and sometimes more often when prices are volatile so as to have competitive pricing in front of our customers. Our salespeople know that we are offering competitive pricing, and they focus on selling our service and quality of product instead of constantly haggling over pricing. There are occasions where we might adjust an item or two to sell the package but those are the exception rather than the rule.”

“Lock it down!”

From wholesale distributors

“In business for 74 years and only two salesmen were ever given the authority to adjust pricing. Of those two, one is now the owner, the other is his operations manager. As long as your salespeople give you accurate information you can compete with anyone. Biggest challenge is making sure you are open and honest, so that your salespeople will sell themselves and your company.”

“Engagement and empowerment comes from pushing authority to information. Transferring some authority to those at the lower end of the organizational chart will create a more agile business operation. Leadership is not a decision-making machine. Leadership is to provide clarity of organizational goals, and ensure technical competency through decision analysis. If both of these objectives are maintained, you will have more engaged and effective salespeople, achieving the goals of the organization, without restrictive structures.”

“Your salespeople should always have competitive market information to back up customers’ claims before discounting.”

“Turn your salespeople into profit-minded entrepreneurs. Incorporate gross profit in your compensation plan.”

From manufacturers

“I personally do all our pricing. Over the years, we have helped customers out if they need some help on price to get a job. During the slowdown starting

in 2007 and later, we cut prices to the bone to keep our staff in place and not have to make any cuts in people. But, since we are enjoying record sales now, we don’t have to ‘low ball’ a bid to get our foot in the door. I always say and have seen it for many years: if you have done a great, not good, job with customers, they will stay with you. But, at times, a new competitor shows up and they only have price and not service. Be flexible if you need to be.”

“It’s so sad that salespeople automatically assume that the customer won’t go for the price. I wish there was a way to keep track of the ones you lose due to price and how much. Then make the lock-the-price decision.”

“This dealer should optimize their customer segmentation while giving their sales reps pre-approved ‘Floor, Target, and Expert’ level pricing options. This way, margins can be increased while minimizing approval time.”

“I believe 90-95% of your customers do business with you despite pricing differences. This is especially true if it is a matter of a couple of percent. Dropping your margins to gain 5% of your market more likely will reduce your overall margins to those customers who would do business with you anyway.”

“I think using a range for pricing can be effective. We look at loyalty and number of lines a customer buys from us to help determine their pricing. That’s not to say we don’t do one-offs on occasion, but those instances require a manager’s approval. We try to limit any pricing skeletons in our closet.”

 

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