Improve your pricing strategy to improve profits

BY RICH SCHMITT
Management specialist

The topic of dealing constructively with price objections seems to have hit a nerve, so I want to provide a checklist for getting some traction in this area.

Consider these suggestions as a rough draft for your plan to make your team experts at handling pricing objections. (Of course, doing all these points in a single visit may get you a punch in the nose — in some states, it could be worse. However, over the course of a month, there may be 10 or 20 opportunities to learn more from the customer.)

The objectives:

• Make more money.
• Be perceived as competitively priced in the eyes of your target customers and your team. Not always low but always fair.
• Create and then support centrally managed system pricing.
• Provide your team with pricing tools beyond dropping the price when someone asks about or objects to a price.

Get your computer pricing up to snuff

Many companies don’t spend enough time getting their system pricing properly set and that can lead to downstream problems. The pricing must be continuously adjusted to address market, product and customer changes.

Create market-based pricing — Pricing should be tuned to the product, type of customer and individual customer. When the customer’s price is computed by your system, that price should be a credible price. On the highly competitive SKUs, the price should be spot-on for your market. Your reputation is damaged when you are high on these items. The pricing on this list should be reviewed weekly. For all others, try to hit the high side of what will be acceptable.

Stop showing cost and gross margin percentages –

1. At the very least, don’t show the cost or gross margin percentage on the order entry screen.
2. Good salespeople determine the pricing in the market by talking to customers not by looking at costs and historical transactions.
3. Lesser and lazy salespeople sit at the computer and say that it is the same or better than spending time in the field. They review the gross margin, cost, hits and sales history when these have very little to do with your customers and competition.
4. Determining market pricing using a computer should be considered similar to a “divining rod.” (Years ago, people hired snake-oil guys with divining rods to find water on their land. These magical rods were really just willow branches in the early days and bent coat hangers as time progressed. These diviners would walk over their customers’ land and when the rod reacted, they would indicate where to drill a well. Since there is water under much of North America, their odds were good. If this is how your sales team does their job, why not get them a nice long willow branch and avoid the PC support costs from your information technology team?)

Get your team onboard with a couple things up front

Your pricing is fair — You must, first and foremost, convince your team that your pricing is fair. If you cannot do this one thing, you have lost the hearts and minds of your team in this difficult battle. When your team thinks your pricing is unfair, messed-up or mismanaged, they will not defend it when pressured.

Every penny your team gives away in discounts must be replaced somehow — Most companiess’ profit problems are the “Death by 1,000 papercuts” that I mentioned in a previous column. Each “little” discount they allow is coming out of the money that the company uses to pay its bills and keep its people employed. If they give away too much, additional adjustments will need to be implemented to keep the expenses in line with the reduced incoming dollars.

The company is not making an outrageous level of profit — Most wholesalers make modest profits, at best. Many times your team thinks the company is “rolling in profits” and thus see no reason to change their “Robin Hood” approach to selling. (If you are making outrageous profits, you can omit this point.)

Products, even within categories, are different and must be priced differently. Some products are priced low because they move fast and are competitive, while others are priced higher because they move slower or have higher costs. It is more complicated than just looking at what you pay your supplier for the product.

Always lead with the customer’s price from the computer system

1. When asked about the price, the starting point is always the system’s price.
2. In the event that the salesperson feels he cannot lead with the system price, he is required to send a note (not call) to the pricing coordinator with his concern stating why the price is not proper. The purpose is to quickly fix any improper system pricing or to “fix” the salesperson’s impression of the price.
3. Of course, bids and quotations are handled differently

Never give a discount without being asked.

1. Tell the customer his price from the computer system if he asks.
2. Don’t adjust his price if he doesn’t ask or challenge the price.
3. Don’t assume that the pricing is being challenged just because he asks what the price is. He may need to know for other reasons. (He needs to bill his customer.)

Use smaller discounts when discounts are required — 5s, 10s, 15s and 20s are a great counting method for kid’s games but terrible for discounting. Tell your team to give a 3% or 4% discount where they used to give 5%. Try 7% where they once gave 10%. Often they will find that the customer is just as happy with a lesser discount than you have been giving.

Set limits on the discounts that can be given without additional approval. Allow them limited price-dropping authority that is to be used judiciously. Beyond that, a manager needs to be involved. The manager can then be a gatekeeper and voice of reason when the salesperson is under huge pressure to dump the profits.

Don’t be afraid of ghosts. Some of the objections are just ghosts that are fabricated or imagined but not based upon a real competitor or a real price. While I am certain that your customers never stretch the truth, in some markets the customers will actually lie about competitive pricing in order to get their salesperson to increase their discount.

When the customer discusses pricing, it is not always an objection. When our kids were young, they asked lots of questions like, “Where did my brother come from.” That question could be the beginning of the “birds and bees” talk or a discussion of which hospital we went to. So the first step is to understand whether the customer needs to know the price to finish a quote, whether he is offended by the price or is just throwing something out there hoping that your sales team will drop the price. Again, lead with the system price to start the discussion.

When salespeople are really being pressured, they must first attempt to engage in a constructive price conversation with the customer. When they just drop the price, they lose their credibility and respect. In some situations, a price drop is the only answer, but for some less skilled salespeople, this is always their answer.

Constructive price conversations

There are several points that you want to communicate and some information that you want to gather in the course of a constructive price conversation:

You take the customer’s concern seriously — First and foremost, the customer needs to perceive that you take his pricing concerns seriously. Even if he tells you that he buys solid gold faucets for ten bucks from a competitor, you must never brush him off or treat his concern casually. “I understand that pricing is real issue in this economy so we work real hard to keep our pricing competitive. Let’s get this figured out.”

The company works hard to provide fair competitive pricing to customers — “Our company intends to provide customers with fair, competitive pricing. We sell a lot of products but when we discover a problem, we try to get it fixed quickly.”

The company’s pricing is up to date — “I’m surprised that our pricing is off, our guys monitor the market and constantly adjust pricing to reflect cost changes and competitive situations.”

If the company’s price is wrong, you will work to get it corrected — The salesperson will work to get pricing problems resolved on the customer’s behalf. “If we find an area where we are not providing you fair pricing, I’ll work with the people at HQ to get it fixed. ASAP!”

For the salesperson to obtain a price change for the customer, he will need information to present to his boss – The salesperson needs to gather information in order to provide an informed response. While gathering all this information would seem like the third degree, you should insist that your team always asks for 1 and 2 below and then as much additional information as they can obtain.

1. Ask what the customer thinks the price should be? (In a way that doesn’t sound disrespectful, “Where do I need to be to get your order?”)
2. Ask how the customer came to that price. “Okay, now I know where I need to be. Out of curiosity, where did that price come from?”
   1. If last buy from you. When?
   2. If competitor? What competitor? When?
   3. If big box? What big box? When?
3. Determine if this is a special deal. “Is that their normal price or is that a promotion or something?”
4. Get hard data if possible. “Do you have a copy of that invoice/ flier/quotation/catalog that I can show my management? I don’t want them to think I’m making this up and it will help to get this resolved quickly.”
5. Determine if the quality similar – Is the other product lower quality, different material, U/L approved, imported, lower efficiency, not Energy Star, not Energy Sense, etc. “Are we talking about the exact same brand?”
6. Terms of sale
7. What quantity is required to get the price? (The customer may be quoting the truckload discount but wants to buy just one at that price.)
   1. Cash deal, credit card purchase or on account
   2. Limited quantity (The other wholesaler will sell one at the special price and the customer is hoping he can get you to make it his normal everyday price.)
   3. Limited time offer (The other wholesaler’s price has expired. The other wholesaler will not extend the offer but the customer is hoping he can get you to extend the offer.)

Have your responses in your hip pocket - To respond constructively to any pricing challenge it is helpful to give your team some suggested phrases or lines they can use in the conversation. (When you see sports figures interviewed on TV, you can bet that most of them were told what to say and maybe even rehearsed before hand. Teams and agents know that putting any human in a pressure situation and expecting them to get it right is a crap-shoot.) The key in all cases is to insure that the customer knows that you want to be helpful.

1. “I can get to that price but that is our carton/box/bag price. Can you buy a carton/box/bag?”
2. “Wow that is a great price! I can’t get to that price, but I can sell it to you for XXXXX. Would that work for you?” When the customer pulled the competitive price out of his ear in order to get a better price from you, this may work.
3. “I’m sorry, I want to sell this to you but I can’t get close. Would you mind if I call the buyer/sales manager/my manager/president to see if I am missing something? It should only take a minute and I’ll see what we can do for you.” (This has the side benefit of giving the sales person a resource, sounding board and 2nd opinion in the conversation.)

Report back — In a past life, I got to work around some fighter jet test pilots. These are amazing people in many respects but one of their duties was to provide data for the next test pilot. Ideally, this data is provided in the written report or in conversations. There are stories of these guys having major system failures and knowing, at some point, that they were not going to survive the flight. In the midst of the disaster, they knew it was their duty to continue reporting what had happened, how the situation had been caused, how they had tried to correct the situation and what they were experiencing. The data would not help the doomed pilot but it might help the engineers to fix the problem or provide insights that would allow the next test pilot to survive. This selfless act saved many lives along the way.

While most salespeople survive a price discussion, their final duty, win or lose, is to gather pricing data and send it to HQ. Each pricing challenge is another data point with insights into the pricing concerns of the customer and, maybe, insight into the marketplace and competitors.

1. Your person has gained insight into the products that this customer uses to compare you against your competition. This should be used to shape your pricing to that customer.
2. If a competitor is mentioned, you may have learned who your competition is for this customer’s business.

Your sales team should feel duty-bound to perform this selfless act to help other salespeople and the company with future pricing issues. In my book, salespeople who won’t make the time to report back, are not team players and thus limit their value to the company.

As is always the case, with complex topics, my checklist is long. The good news is, however, that just implementing a handful of these suggestions will make you more money. In this difficult economy, increasing profits by selling more just may not be possible. So working to make a little more on the business that you do have can be time very well spent.

For other reprints on pricing, e-mail me at rich@go-spi.com.