Selling Your Price: How to escape the race to the bargain basement
Preface – The race to the bargain basement
Scott walked into Christine’s office on a January Monday morning with no idea what to expect. When you’re a sales rep and the branch sales manager asks if you have some time to meet with her, you make the time. So here he was.
“Hi, Scott. Grab a chair,” Christine said, gesturing at six seats surrounding the small, round conference table she used for informal meetings. “How’s it going?”
“Can’t complain,” he said. “New year, same battle.”
Scott was a bit intimidated by Christine, but he respected her more than any manager he’d known. She was all business, but she certainly knew her stuff. When she joined the company a year ago, she had persuaded the powers-that-be at corporate headquarters to introduce a new sales system called Action Selling. As far as Scott was concerned, Action Selling was the best thing that ever happened to his career. And he wasn’t alone. Sales reps around the country regarded the new system as a gift from heaven. Christine was a rising star at Partner Dental Supply, expected to move up in the company and fast.
Characteristically, Christine wasted no time but got straight to the point. “I’ve been going over your numbers,” she said, indicating a printout on the table in front of her. “You increased your volume by 10 percent last year. And it looks like you picked up, what, seven net new customers?”
“Eight,” Scott said proudly.
“That’s great,” Christine said. “Congratulations. But here’s what I’m wondering: In the prior year, you had almost exactly $1 million in sales. Last year you boosted it to $1.1 million. There’s your 10 percent rise in volume.”
“But while your volume went up,” Christine continued, “your margins slipped by 3.5 percent. In the prior year your average gross margin was 35 percent, right in line with our branch norms. Last year your territory dropped to 31.5 percent.”
“Our competitors are killing me on price. All of them.”
Scott stopped smiling. Like I didn’t know that? he thought. “Tell me about it,” he groaned. “Our competitors are killing me on price. All of them.”
“But company-wide, margins actually increased by 1 percent last year,” Christine said.
“They did?” Scott was genuinely astonished.
“I just received the year-end numbers,” she said. “Nationally, margins are up 1 percent. But margins for the Los Angeles branch rose only 0.8 percent. That puts us slightly behind the company average. And your territory accounts for most of the shortfall.”
“I have to match competitor’s prices or lose my customer’s business.”
Scott shifted nervously in his chair. “Well, I don’t know what’s going on with our other sales reps, but it can’t be what’s happening to me,” he said. “All of my clients are cutting costs. Every day I have to fight like a dog to save my accounts from cut-rate offers from competitors trying to get in the door. I have to match their prices or lose my customers’ business.”
“Do you?” Christine asked. The question hung in the air. I’ll just tell that to the Western regional manager when he calls me on the carpet to explain why my branch can’t keep up, she thought. “Well, Gary, I’ve got a rep named Scott who has no choice but to discount whenever he runs into price competition. Nothing to be done about it, you know.” Yeah, that’ll get me where I want to go in this company.
Scott didn’t like the look on Christine’s face. For a long moment, she appeared to be wondering whether to terminate him. Then she collected herself and grabbed a notepad.
“First let’s make sure we understand what’s happening,” Christine said. “In the prior year, you did a gross margin of 35 percent. In the year that just ended, you did $1.1 million in sales at a gross margin of 31.5 percent. That’s a drop of 3.5 percent. Factor in the 1 percent company increase, and you’re short 4.5 percent,” she said, her pen scratching the pad. “So despite the fact that your volume increased to $1.1 million, Partner Dental made $49,500 less money on your sales. And since your commission is based on gross profit, you made less too — even though you had more clients and more work to do.”
“Yeah, I noticed that,” Scott said, careful to keep the sarcasm muted. So did my wife, he thought, remembering an unpleasant Saturday when he had tried to explain how it came to pass that he was working longer hours and picking up new clients but actually making less money.
He was working longer hours and adding clients, but making less money.
“So we agree that maintaining margin is important both for the company and for you personally?” Christine asked.
“Of course,” Scott answered.
“But you have no option except to cut your prices to match the competition’s lowest offer?” she asked.
“Hey, you don’t know what it’s like out there!” Scott protested. Even as he spoke, however, he knew this wasn’t true. Christine had an excellent grasp of what was going on in the field.
But she didn’t argue with him. “Maybe I don’t,” she said agreeably. “Can you give me an example?”
“I can give you a hundred examples,” Scott said. “Just last week I called on Dr. Wright at his dental office in Santa Monica. I’m barely in the door when Susan, his office manager, shows me a flyer she got from Discount Dental Supply. They’re running a sale on surface disinfectant — 64-ounce bottles for $14.95. It’s the same disinfectant I sell them for $15.95. Susan says their practice is feeling the economic squeeze, and Dr. Wright has told her to cut costs on consumable supplies. She asks if I can match the competitor’s price.
“What can I do?” Scott concluded. “It’s the same disinfectant. So I tell her, yeah, I’ll match the $14.95 price. It’s either that or watch her buy it from Discount Dental. This kind of thing is happening in my territory every day. I’ve never seen it this brutal. And it keeps getting worse. Everybody is trying to cut costs to the bone.”
“I see,” Christine said. “And this Discount Dental flyer was sent only to dentists who happen to be your accounts?”
“No,” Scott admitted, reddening. “But the point is, the products we sell are exactly the same as the ones our customers can buy from our competitors. And when the economy is pinching their business, customer loyalty goes out the window.”
“That’s certainly one point,” Christine agreed. “But it raises another point, doesn’t it? If we want to compete on any basis except being the lowest-cost provider, our customers have to perceive some added value in dealing with us, right? I mean, unless we give them a good reason, why should they pay more to do business with us?”
“…unless we give them a good reason, why should they pay more?”
“Yes, but you don’t know what it’s…” Scott began again, lamely.
“There’s another point,” Christine interrupted. “If the only thing our salespeople can do about price competition is to match the lowest price out there, why should Partner Dental add to its overhead by paying salespeople? We could play the low-cost game with nothing but direct mail and the Internet, couldn’t we?”
“If the only thing our salespeople can do is to match the lowest price, why pay salespeople?”
That one jolted him. “Good salespeople develop relationships with customers that the Internet could never match,” Scott protested.
“But Susan the office manager was ready to desert you for a difference of one dollar?” Christine asked quietly.
Scott said nothing. I thought I was doing pretty well, considering, he thought. Is my job on the line here?
Knowing that she had Scott’s full attention, Christine switched tacks. “Aren’t you finding that the new Action Selling system helps you avoid a lot of price objections?” she asked.
The question surprised him. “Action Selling is great,” he said.
“How do you think I got those eight new clients? But it isn’t my new clients who are hammering me on price. It’s the long-term ones.”
His answer seemed to surprise Christine in turn. So you’re telling me you aren’t discounting to get your new business, she thought. I’ll bet the invoices would say otherwise. She chose not to challenge him on it, however. His margin numbers gave her all the ammunition she needed to let Scott know that something had to change. “You think of Action Selling as a system that applies only to gaining new business?” she asked.
“Oh, I know we’re supposed to use it with existing customers too,” he said quickly. “But there aren’t as many opportunities when you’re making route calls on customers you already know well. In fact, I’ve been wondering if I could use some training on negotiation skills to help me counter price issues like the one I had with Susan.”
“I see,” Christine said thoughtfully. “So you don’t think that Action Selling applies as well or as often when you’re talking to current customers as when you’re calling on new prospects. Is that right?”
“Well, it’s not that the principles don’t apply,” Scott said. “It’s just that there isn’t time to plan and orchestrate every call on existing customers the way I do with new ones. The dynamics of the calls are different. And the price pressure out there really is incredible, Christine.”
“Scott, do you remember how Action Selling defines an objection — including a price objection?”
“Sure,” he said. “Action Selling defines an objection as a customer’s response to an unasked question. But when Susan is holding a flyer that offers her the same disinfectant for less money, what question did I fail to ask her?”
“Action Selling defines an objection as a customer’s response to an unasked question.”
“Excellent!” Christine said, surprising him.
“That’s exactly what you should be asking yourself,” Christine said. “Scott, doesn’t it seem that Action Selling offers you an alternative to matching or beating competitors’ prices on an item-byitem basis? Shouldn’t Action Selling be something you do instead of negotiating price?”
“Well,” Scott said, trying to regroup, “of course I know that Action Selling helps to keep the price issue in its proper perspective as just one part of a value equation. But seriously, Christine, what question can I ask customers like Susan when they’re under pressure to cut costs and somebody else has a lower price on the same product I’m selling?”
“I have a hunch about that,” Christine said. “It has to do with something you just said: ‘value equation.’ But let’s see if we can figure it out together.” You can lead a horse to water but you can’t make it drink, she thought. Am I being unfair because Action Selling is so clear to me while it’s new to him? I don’t know if you’re going to make the grade, Scott, and if you can’t, you aren’t going to take me down with you. But for now, let’s see if you get it.
“Suppose we start with a quick review of the Action Selling system,” Christine said. “You say it works wonderfully to win over new clients. But 90 percent of your business comes from existing clients, and Action Selling should be helping you find ways to add value that justifies higher margins with them. In fact, I say that’s how most other reps in our branch have managed to increase their margins despite the same brutal price competition you’re facing.”
“Action Selling is more than a method for keeping price in perspective — it can be an alternative to negotiating price.”
Ouch! Scott thought. You’re not playing around, are you? But if other reps are increasing their margins in this environment, then I guess I must be missing something, all right. Hope I can keep my job long enough to find out what it is.
“Why don’t you tell me how you use Action Selling when you call on new prospects,” Christine continued. “Maybe along the way we’ll discover if I’m right when I claim that Action Selling is more than a method for keeping price in perspective — that it actually can be an alternative to negotiating on the prices of individual items we sell.”
“Hey,” Scott said, “If you can show me a way out of this price-cutting nightmare, I’m game.” So is my wife, he thought. “Well, you know how Action Selling works, of course…”
“No, I’d like you to explain it to me, please,” Christine said. She leaned back in her chair looking attentive.
Okay, Scott thought. Here goes.