Of all the challenges salespeople face in our industry, none is more pervasive than the “price objection.” The true challenge lies not in the objection itself, but rather in the expectation that salespeople should always be able to do something about it. Sales Leaders and managers can offer the best support by creating an environment that recognizes the importance of a well-structured pricing system.
I still vividly recall a lecture during my pursuit of an economics degree when Daniel Fusfeld, the former head of the University of Michigan Economics Department, noted that “costs determine price.” It was a rather profound statement to make given the fact that classic economics theory and sales practice have assumed that supply and demand are the primary determinants of price. But that theory does not always prove valid in the real world.
If you need proof, consider the drastic price fluctuations of OSB last year. When OSB prices nearly doubled, LBM dealers throughout the country were forced to increase pricing to cover costs. It didn't matter to most LBM dealers whether their customers would squawk; the fact was that the dramatic cost increase of materials prohibited them from holding their pricing steady. This simple example has been repeated constantly over the years. Costs determine price.
In order to help your salespeople recognize the importance of this fact, sales managers should educate their sales staffs (and perhaps themselves) about the fundamentals of a typical LBM dealer financial statement. Teach your salespeople what happens to every dollar earned by the company. They most likely will be surprised to learn how little is left over at the end of the day.
To begin with, a typical LBM dealer invests between 76 and 78 cents of each dollar to purchase the materials that will be resold. This should come as no surprise to a salesperson because most should know that the gross margin price of a product is commonly 22 to 24 percent. After that expense, a dealer typically invests between 9 and 12 cents on their people; between 6 and 8 percent on capital expenditures; and another 2 percent on bad debt and other miscellaneous expenses. Ask your sales staff to estimate the gross profit of your company. You may be surprised by their answer, but not as surprised as they will be to learn that a successful LBM dealer earns 3 percent gross on the bottom line!
The implications of this are significant. First and foremost, your salespeople will discover that even a “point” (i.e., 1 percent) reduction in price equates to a 33 percent loss in profit to the company. Moreover, the price reduction is often unnecessary because your competitors have no significant buying advantage over you in the marketplace.
In addition, the psychological implications of a price reduction are significant. A builder who easily obtains a price reduction from a salesperson wonders why the better price wasn't offered in the first place. Thus, a new precedent is set and the builder will continue to expect price reductions on future bids. The worst aspect of the price reduction is the nagging feeling the builder has when left wondering if the best price was actually obtained. Therefore, it is possible, perhaps likely, that your salespeople will enhance their own credibility and the confidence of your customers by holding firm on your price.
The reality is that sales-people commonly offer price concessions unnecessarily. Of the many examples of this I've witnessed during my career, none was more poignant than the negotiation conducted by the purchasing director for a national siding dealer. A manufacturer salesperson displayed unusual zeal in pursuing the national account by asking the purchasing director, “How do my prices look?” The director casually responded, “You're within 75 cents per square.” Almost instantly the salesperson said, “I can get you 50 cents lower ... but that's it!”
The salesperson got the business, but this is not a story of sales success. The salesperson failed to consider that he may have already been 75 cents lower per square at the start of the negotiation, which was exactly the case! The purchasing director confided in me that he had already made his decision and was prepared to award the siding manufacturer the business. His last-minute comment was a casual ruse designed to ensure that he was receiving the best price. Among the many implications of the panicky sales response, the most profound was the loss of revenue for his employer that amounted to tens of thousands of dollars.
Maximize Your Margins Sales leadership is not merely the ability to generate sales volume, but rather the ability to maximize gross margins. Thus, outstanding sales management leadership requires that salespeople are trained and supported in ways to maximize pricing. Try the following to help your sales-people increase sales margins: