Price Pressure | Self-Inflicted Wounds

In the 1987 film, Baby Boom, there’s a scene every business person can appreciate.

JC Wiatt, the central character played by Diane Keaton, accidentally discovers an untapped market. She’s delivering sample jars of homemade baby food to the rustic general store when some out-of-towners approach and ask about price.

First, she tosses out a low figure. Then, with each admiring “ooh-aah” from the group, she blurts out a higher number until she lands on a figure nearly double her starting price.

It was a true win-win scenario: The buyers got a great deal, JC got a great price. In the real world, however, such clearcut win-win experiences can be elusive.

Salespeople in particular are feeling the effects of price pressure. They interpret a customer’s every frown, sigh or probing question as a sign of reluctance and an obstacle to closing the sale.

One reaction is to frantically start calculating ways to lower the price. Cut margins? Browbeat a supplier into lowering fees? Promote a less expensive material? Offer a top-of-the-line product at a bargain price?

Keep in mind, the customer has yet to express any displeasure or to demand a lower selling price. The salesperson, however, interprets the signs and jumps to the conclusion a lower figure will secure the deal.

Recently, a client made several powerful points regarding such phenomena.

Material and production costs have gone up, but in his industry, many vendors are holding the line on price. They feel pressured by customers, the market and the economy to absorb these costs. They assume the customer will reject any price increase, so they don’t even broach the topic.

My client offered a basic example:
Old Cost:   $80     Price: $100     Profit: $20
New Cost:  $90     Price: $100     Profit: $10
In the short run, such apparently small differences may have no immediate effect. Every time a salesperson chooses to absorb a cost increase, however, they’re cutting into the company's profit margin. Cents quickly become dollars and dollars quickly become hundreds and thousands in lost revenue.

Over time, these little cuts add up to some very negative numbers. Multiply these little differences by every product, service and salesperson, and it doesn’t take long to turn a stable, profitable company into one that’s struggling to survive.

When this happens, the fact these are self-inflicted wounds is no comfort at all.

__________________________________

Related
Price Pressure | Death by a Thousand Cuts
Price Pressure | Internal Forces
Price Pressure | External Forces
Price Pressure | Is it Hurting Your Bottom Line?
Price Pressure | Market Forces & the Solyndra Fiasco

2 comments:

Robert M Chapman said...

Once I had a disscusion with a business owner who was paying his salespeople a commission based on the volume of the sale. Most of us believe the sales commission should be a factor of the gross profit. Needless to say probably, the busines went broke, the bank held the owner responsible for the debt and the sales people are off working their magic for other companies.

In your example, a 2% commission paid to the sales people whould have been $1.80, down from $2.00.

Had the commission been 10% based on the gross profit, it would have been $1.00, down from $2.00.

Now I will tell you, when you pay sales people on the gross profit of the deals, they will no longer come to the owner asking for a price reduction. They will begin to ask if the margins can be increased.

How many business owners would like to change the attitude of their sales teams?
Bob C

Barbara Spencer Hawk said...

Bob, what an excellent example.

Paying sales people on gross profit rightly shifts the focus from making the sale at any cost to making the right sale to the right customer at the right price.

I can see how that shift transforms a sales team into a highly motivated and invested company sales force focused on the bottom line.

I hope every sales manager and business owner is paying attention.

Post a Comment

Related Posts Plugin for WordPress, Blogger...