You have heard, probably more times than you can count, the pricing riddle of the LBM industry: “Why do people negotiate constantly with us, but would never expect to negotiate on the price of milk or a stick of butter at a grocery store?” The answer is easy: You tell them to!
This became clear during a dialogue with the VP of IT and customer services at a client company. The story began when we studied the company pricing structure and discovered the inconsistency of pricing policies, a trait characteristic to most LBM dealers. One branch was earning eight margin points more on a product category over a sister branch located less than 40 miles away. At another branch, the average margin one salesperson was getting on special orders was 12% higher than another salesperson sitting at a desk 15 feet away.
The difference is not due to the “market” or competitors “low-balling.” The problem was created internally when my client instituted “suggested pricing levels.” Suggested? “Yes,” he said. “We put suggested pricing levels in the system that we want salespeople to get.” This is a recipe for pricing disaster. The reason the clerk at the grocery store doesn’t negotiate on the gallon of milk or the price of eggs is that nobody told her to. She didn’t ask for the “last look” before ringing you up. She didn’t insecurely ask if the pricing “looked okay.”
My May article shared insights into negotiation strategies because, after all, sometimes we do have to negotiate. But what if we couldn’t? What if salespeople were not permitted to negotiate?
If salespeople were not allowed to negotiate…prospecting skills would improve. If the buyer in front of the salesperson won’t pay the fair margin, the salesperson would need to prospect to find someone who will.
If salespeople were not allowed to negotiate…pricing would stabilize and provide a competitive market advantage. It seems counterintuitive, but a stable pricing structure gives your clients confidence in your offer and, not insignificantly, reduces the risk that customers will discover they are getting worse deals than other customers of yours—i.e. your customers’ competitors.
If salespeople were not allowed to negotiate…customers would be confident and satisfied. A customer who believes she has negotiated the best possible price is a satisfied customer. As noted in my April column, the only way a customer really knows your best price was offered is when you say so. We buy the gallon of milk at the price advertised because the checkout clerk is not expected or permitted to negotiate. Salespeople will get the asking price for your goods if not expected or permitted to negotiate.
There are clearly situations in which a salesperson should negotiate and be equipped with the skills to do so successfully. The question raised here is truly a theoretical construct designed, as economists like me are prone to do, as a means of considering implications, outcomes, and raising new questions. So what if salespeople, like a grocery store clerk, were not allowed to negotiate?
If not allowed to negotiate…salespeople would become more confident in their pricing, achieve a more professional mindset, and develop other selling skills to justify fair pricing margins. They would have situations, albeit not all, when they get the sale at the original asking price. They would discover ways to slow the process, deliver better presentations, design better proposals, and manage conflict professionally. In short, they would become truly professional salespeople.
The reason we give up a point on the widget, but the grocery store clerk doesn’t, is because we were told to. Stop suggesting pricing and consider fixing your profits.