Ten minutes into a pricing training session, a senior salesperson asked, “How is anything you teach us going to make us more money? We are compensated on revenue.” It was a great question. “It isn’t,” I replied. Revenue plans conflict with pricing for profit objectives. We later suggested to company leaders that they align sales compensation with profit. Though they felt strongly about improving margin, they did not act on our advice. Within six months, this large national bank had failed. If salespeople are compensated to achieve sales volume, they will drop price and even jump to discount floors to close a deal.
This story is too often repeated. All functional groups have the same goals: to grow revenue and profits. But they talk about growth differently. Marketing has a goal to grow market share, product managers must deliver innovative products, and the pricing team must improve margins. For salespeople, credibility and personal service may be important, but getting the best discounts for customers keeps business coming in.
How do you support your salespeople—through compensation plans, tools and messaging—to become champions of the organization’s pricing strategy? How do you get their buy-in to do so? These are crucial questions every company must address.
Snakes in the Woodpile
Years ago, right after Ross Perot sold Electronic Data Systems to General Motors and got a seat on the board, he walked the factory floors to uncover opportunities for improvement. He spoke to a line manager about solving company problems, advising, “When you see a snake in the woodpile, just kill it. Don’t appoint a committee on snakes.” The manager replied, “Mr. Perot, that will never work at GM.” Decades later, GM is still appointing committees to discuss snakes … and to address ongoing recalls.
Many companies don’t see the snakes that create obstacles to developing sales champions who drive growth in revenue and profits. The following are common reasons that salespeople advocate for more customer discounts, rather than profit for the company:
- Sales incentives are misaligned with the company’s financial goals
- Limited understanding of company value compared to competitor value
- Lack of visibility into how and why prices are set
- Lack of insight into customer negotiation games
These are not the fault of sales. Salespeople are casualties of internal processes that no longer work and fall prey to increasingly savvy buyers who know how to get discounts. Companies must kill the snakes, as Perot says, by empowering sales to be price champions and deliver on their company’s potential. The objective is to close sales at profitable prices without leaving money on the table. How can leadership change behavior to promote the evolution of salespeople into champions?
Building Sales Champions
Let’s start by considering the teams that support sales: marketing, sales managers, pricing, legal, solution architects, delivery people, etc. Is there alignment across these teams to provide customer value? Are prices aligned with value? Is compensation aligned with pricing?
The following four steps will help prepare sales to support company profits rather than to advocate for more customer discounts.
1. Create rational individual performance goals
When sales has any control over price, is compensated on volume, or is pushed to close an important sale too soon, the incentive is to squander valuable profits to accomplish that mission. The incentive mismatch problem doesn’t have to come from sales to affect them. Product and factory managers, compensated to keep the factory full or to achieve revenue or market-share goals, can pressure sales to close last-minute deals by dropping price.
Senior executives are often the worst offenders, especially those incented to meet quarterly revenue objectives purely for the sake of Wall Street. Customers delight in leveraging this end-of-quarter desperation.
W. Edwards Deming, father of the Total Quality Management movement, said, “Any time you measure someone at the individual level, they probably won’t work to achieve goals that are best for the firm.” That message still resonates today. Too often, individual performance goals conflict with revenue and profit goals for the company, or fail to address both.
Aligning individual and corporate goals can have a big impact. Eric Maurer at Alexander Group, a sales–effectiveness consulting firm, found that “by adjusting the sales compensation plan to include margin as the main measure (of performance), a company achieved a 5 percent increase in contribution margin.” In addition, “the sales reps were spending up to 60 percent of their available selling time on products with the highest margin.”
Salespeople should be compensated to achieve pricing and sales objectives. In most cases, that equates to sales and profits. It can be accomplished using a measure of sales dollars heavily weighted by contribution margin. As contribution margin declines to zero, sales compensation should also decline or be zero. Any mixed packages that weight sales revenue equal to—or higher than—contribution margin rarely work, because salespeople still focus on the sales dollars.
2. Build sales confidence in the company and in the financial value created for customers
Ask salespeople how they feel about the products and services they sell. You don’t need to do research or set up a committee. Just go to lunch and ask for their views. Salespeople often tell us that “our products and services are commodities.” Perhaps it’s because customers, whose sole agenda is to set the stage for getting lower prices, pound this message into sales at every chance. They want sellers to know there are plenty of good- enough alternatives. While savvy companies understand and correctly dismiss these claims as negotiation ploys, too many other companies don’t help salespeople defend their value to the customer. Instead, they allow their customers to set the price and then react to the fallout.
For many sellers, confidence comes from knowing they sell better products and services that deliver more value than those of their competitors. Customers choose vendors for very specific reasons. Go on a value hunt to find out why. A value hunt is simple: Go out and talk to your customers and ask them why they buy from you.
It is important for salespeople to understand the value their firms create for customers. It changes the conversation with customers from price to performance, innovation or better solutions. Salespeople become partners rather than customer-service specialists. Value provides them the confidence that the price is set right and the knowledge that everyone in the firm stands behind it.
Once you know your unique value, the next step is to train sales to qualify customers’ value needs and then have value conversations with them. Once the sales team buys into a value-based approach, you’ll need tools to explain that value and support the offered price. These can include software, simple spreadsheets or discovery tools that encourage value conversations about how your company’s solution will do a better job meeting customer needs.
If you believe your company doesn’t do anything special for customers, a customer value hunt will confirm it. Then the question becomes whether to focus on being the low-cost producer or to innovate to provide a more valuable solution.
Trying to package undifferentiated products or services with a value story will fail with sales and may put their credibility with customers on the line. If they sense they are being given a weak hand, their first thought will be to preserve credibility. They will ignore value and take the safe route of using price discounts to close sales.
But remember, value is often found in the services wrapped around a product, even if that product is a true commodity. Understanding which services are valuable, and the associated cost to deliver them, can drive more profitable pricing than the product itself.
3. Make price easy to understand and support
Make sure your salespeople understand your price and how it compares to a competitor’s. Without this understanding, sales will think any price is too high for their good customers.
Why are prices set the way they are? The right answer should be based on your company’s price strategy, developed to consider company objectives, product costs, your value to customers and how that compares to the value competitors bring. To encourage salespeople to support and ultimately champion price strategy, you’ll want to explain prices in this context.
It’s important to drive buy-in with the people who execute price strategy. Pricing leaders must show why prices are fair and demonstrate how to have value conversations with all members of the customer buying process. That way, when salespeople face procurement in tough negotiations, they will have the proof points needed on how they deliver value and the confidence to hold firm on price. This is the path to building pricing champions in the sales force.
4. Help salespeople identify negotiation tactics and prepare correct responses
Salespeople must be prepared to effectively communicate value and price and stand up to procurement games. These are well-practiced tactics to get lower prices. Despite what procurement claims, there is almost always a difference among suppliers that provides financial value to the customer. Successful salespeople can articulate that value and stand firm on price.
To prepare for a negotiation, start by decoding specific customer buying behaviors, qualify the role of procurement and learn to identify the tactics used solely to get discounts. Procurement tactics can include delays, approving other suppliers or even going out to bid. In most cases, their purpose is to get lower prices from an already-selected and preferred supplier.
Small adjustments in value called “give-gets” can be an important tool during this stage of customer interaction. If the customer wants a lower price, simply remove something of value. For instance, if a customer balks at the cost of a dedicated service rep, offer to switch to a call center or an automated chat service to save money.
Proactive planning helps keep sales focused. For example, a salesperson negotiating a large contract with a banking customer assumed that various delays were the result of a customer who needed further incentive to close the deal. The salesperson was prepared to offer another discount until he realized that the customer was using these delays as a tactic to secure a lower price. He held his price, called the customer’s bluff and closed the deal at a profitable price.
Without a good process in place, sales may react in ways that compromise profits, revenue or both. But with good analysis, planning and tactics, sales can leverage its position to protect both.
Building salespeople to be price champions can transform a company. The rules driving the process are simple: Know your value, communicate it to your customer and defend your price. You win by making salespeople champions of the company, products and prices in the challenging world of customer negotiations.