SALES & MARGINS
Using referrals as evidence, get out of the pricing rat race by showing your prospects how they can make more money buying from you than they can earn buying from your competitors.
Commodity salespeople frequently rely heavily upon price. That’s why lumber and building material salespeople frequently earn such low margins. When salespeople can increase their company’s value to their customers and prospects, they all of a sudden become less dependent upon price.
An important point was driven home for me several years ago when I read “The Dollarization Discipline” by Jeffrey J. Fox and Richard C. Gregory.
In the book’s Introduction, the authors published this quote by John Ruskin:
“There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.” Most salespeople understand this principle—at least intellectually— but when it comes to practicing it when customers and prospects are screaming about the price, it’s easy to lose one’s courage and resort to lowering their prices.
There is a mathematical fact that an old boss shared with me that got my attention many years ago when I lacked courage to say no to lowering my price. The fact is: When you lower your price to a customer by 10%, you must increase your sales to that customer by whopping 50% to earn the same gross profit dollars you would have earned had you not lowered your price by 10%.
I am going to use round numbers to hopefully make this explanation easier to follow: Your original price is $100. At a 25% gross margin you’ll earn $25 in gross profit. (Cost = $75). If you cut the price by 10% your price is reduced to $90, which minus the same cost of $75 = $15 gross profit or 16.67% gross margin.
To earn the same gross profit dollars you earned before you dropped the price to this contractor, you must raise sales to him from $90 to $150. A $150 sell price times a gross margin of 16.67% would yield $25.
When I realized I would have to raise my sales to this customer by 66.6% to earn the same gross profit I would have earned had I not cut the price, I decided that I was digging myself into a deep hole that the odds were I’d never dig out of.
I believe the key to the salesperson solving this problem is for him to invest whatever amount of time it takes to learn how to defend his company’s prices.
If you’re honest with yourself, how often would you answer the following questions with YES?
- Are you often afraid of losing a customer’s business if you don’t meet his price demands?
- Do you think maybe your customers will respect you more if you do battle for them with your company’s decision makers and come back with a lower price?
- Do you sometimes justify lowering your sell price by telling yourself, “something is a heck of a lot better than nothing.”
- Do you believe you must have a price advantage over your competitor to get an order?
The “value” you are perceived to offer begins to reveal itself on your very first contact with the customer. This is why image is so important.
When you call for an appointment, I promise you the prospect is sizing you up based on the professionalism you portray on your initial call.
In writing “Dollarization,” Fox and Gregory emphasize the value of the salesperson in monetary terms. The authors say: “Businesses don’t buy; they invest.”
The definition of Dollarization is to work diligently to put together the precise words that will describe you, your products and your company in terms of what doing business with you will do for the profitability of your customers and prospects.
Dollarization is just one way for sales people to overcome the “price objection.”