When wholesalers rant, margin erosion always finds its way to the top of the concern list. Let’s take another look at the fundamentals of our selling strategy.
Essentially, wholesalers fall into four categories (and I hesitate to even consider the last for the readers of this discussion). They are:
• Solution providers.
• Value-added parts providers.
• Combination of solution and value-added providers.
• Low-cost discount house.
Using these categories, in only one instance does the salesperson knowing price seem like an important bit of the equation. In the first three examples, you might view price as at best a “good to know” point. Let’s delve into this
category by category.
Solution-based selling derives its effectiveness in finding customer problems and devising a plan for alleviating or diminishing them through the use of the products and services provided. The value comes not from the cost of the parts but from the enhanced revenue, cost savings or other impact provided to the customer in solving the dilemma.
A long time ago, I had a boss who was fond of saying, “How much would you pay me for making you a million dollars?” Once we arrive at the monetary worth (a cool million dollars in my boss’s terms), our price simply needs to be below that calculated value. The price is irrelevant until the final stages of the deal. Eliminating risk, elegance of solution and delivery are far more important to the deal.
In value-added selling, price is still not the primary concern. As long as the price is competitive and fair, it falls to about sixth on the customer’s hit parade following: 1) Quality of product, 2) Level of technical support, 3) Delivery, 4) Ease of doing business and 5) Training. The last consideration is 6) Price.
Most distributors fall into a hybrid third category where they provide a combination of solutions and value-adds. The rules for them follow the same points as outlined above. And typically, the highest margins fall with customers where solution-providing relationships have been established.
Finally, we arrive at the final type of distributor: the cut-rate discount supplier. I am not slamming a potentially successful business model. If your prices are the lowest in the land, a percentage of the population will gravitate toward you. Price is your salesperson, and in spite of several nanoseconds of contemplation, it’s hard to conjure up a picture of precisely why you need trained, business savvy salespeople.
Cut-rate discounters really need
logistic specialists, mechanized customer service applications and highly efficient warehouses. This group jeopardizes their business model when they hire salespeople with knowledge or skill. Why? Because it drives up their price.
I tend to believe most of the readers of HVACR/Hydronics Distribution Business don’t qualify for cut-rate discount status. So if you don’t need price for the vast majority of the selling process, why do salespeople even need to know the price, especially a competitive street price?
For the nonbelievers, let me cite an example. There are companies who perform well in spite of a conscious decision to be more expensive than other offerings. How many of you are carrying Apple products: iPhones, iPads, Mac computers? These products are always more expensive than a functionally equivalent product from someone else. On a recent visit to the Apple Store, I noticed high-caliber technical assistance, much talk of design elegance and a lot of problem-solving discussion but no mention of price. Simply put, their sales team only discusses price at the final stage of checkout. I believe the same should be true with our sellers.
So why is price so important to our sellers?
Salespeople will say customers set the price but struggle to explain how every customer in their territory set the price at cost plus 20 percent. Manufacturers in many industries worry that providing any kind of special “into stock pricing” only serves to drive down the market because distributor salespeople soon give away the extra margin by further lowering prices.
Salespeople claim to “know” the market price, which in itself is strange given the gigantic number of items they are responsible for. Price process expert David Bauders of Strategic Pricing Associates uses a price test. He asks clients to give salespeople a list of the 50 most common items sold. Salespeople are given the list and asked to provide the price (plus or minus 10 percent). The results of this exercise are eye-opening. The vast majority of distributors’ salespeople are able to hit the mark less than a third of the time. The conclusion: distributor salespeople don’t really know prices, but they think they do. And this lies central to the problem.
Customers condition our sellers to question “system” prices. Purchasing professionals in particular practice price negotiation tactics that drive a low-price message. They laugh about doing “the flinch,” which is a faked physical reaction along with the comment, “Gee, that’s a lot more than I expected.” When our sales team knows the price, their first reaction is to discount. They have no buffer of time to ponder their next move. They simply respond.
What would happen if the circumstances were set up so that the salesperson had to admit they didn’t really know what the pricing structure looked like? They would go to a pricing expert, their sales manager or someone else to plead the case for a different price. During this delay in the action, the seller would have the ability to rationalize the normal price.
They might question whether this customer had a history of price pushback. They might realize the competition was coming from a competitor without local inventory or an Internet source that charges freight on top of every order. This slowing down of the process works in the seller’s favor.
Here’s an example. A few years ago, a devastating flood hit the area one of my client’s serves. Underground electrical connections were hit very hard up and down the riverfront for many miles. While these products were not normally a fast mover, instantaneously they became a hot commodity. If a distributor had these items in stock, customers would buy them. A purchasing agent called a salesperson to inquire about buying a full case of the product, which would typically be a larger-than-normal sale. Along the way, he did his level best to drive the price down. Fortunately, the salesperson didn’t know the price. When he went to his manager, the manager put the brakes on the sale. The customer paid book price, the distributor made more margin and both parties were pleased by the results. But things could have turned out differently.
Is the cow already out of the barn?
The truth is many distributors have already given their sales teams far more pricing leeway than they should. Making use of our Iowa-esque metaphor, it may be difficult to herd the sales guys back to “not knowing the price,” but there are some steps you might take to change the general direction of pricing.
First, set guidelines for precisely which customers never deserve a price break. Very small customers with limited purchasing power should always get standard pricing. Never extend discounted pricing to customers with poor credit standing. The same holds for those making emergency or after hours pick-ups.
Secondly, set guidelines for certain specialty products. If you are the exclusive stocking distributor for a product, why discount? When your company is the only organization in town with product in stock, there is no reason to discount. Never discount special orders, hard-to-find items and repair parts.
Finally, make your team practice answering price questions. Most salespeople hate role-playing, but this is a time I believe the practice is justified. After witnessing seasoned sales professionals stumble, sputter and stammer when a customer says your price seems a bit high, I think it’s time to start practicing the answer. Let me be the first to challenge you. I’m not going to pull any punches. If you don’t have a well-thought-out answer to the price question, do you really deserve a solution provider’s margin? If you’re a salesperson and your price is always the lowest in the market, why do we need you? Tough questions, you bet. But they deserve an honest answer. Feel free to send me hate mail if you disagree.
Frank Hurtte provides Strategic Insight for New Times. He speaks and consults on the new reality facing distribution in a post-recession world. Contact Frank at River Heights Consulting via email at [email protected] or via phone at 563/514-1104.