We often get stuck in the middle of a heated discussion across the boardroom table about whether salespeople should be allowed to either set prices or offer discounts. I find myself sitting there, sage-like, until the fury has died down and both sides turn to me for the ‘expert’s view’. I thought I would save you the angst and give it to you up front.

There have been quite a few studies (mainly in the USA) that indicate that companies in the same sector that do not allow salespeople discretion to discount make more money. However it is not quite as black and white as that…it sort of depends on the nature of the business, the mindset of the sales team and how you manage them.

A good starting point is to distinguish between two rejections on price which are sometimes difficult to tell apart:

1. “I have a price from your competitor that is lower than yours and I cannot see a reason to pay a premium to you.”
2. “I like your product and am intending to buy from you, but I am going to have a crack at getting a discount because you look scared and I want some of your profit.”

It takes takes a deep understanding of the context of the purchase and the needs of the company behind the somewhat aggressive buyer, to call his or her bluff and stand your ground. There are many reasons why front-line salespeople won’t do this:

Deals are binary for them... In their world, sitting in front of a customer, they are faced with a choice: Give the customer the 5% discount that they are asking for or lose the deal (and the associated bonus).

At the centre of the organisation we aggregate the swings and roundabouts to get our market view. The salesperson’s market view is the customer across the table from them right now.

Nobody ever tells you that you are too cheap… This is an inherent cognitive bias that afflicts almost all companies. Unless properly measured, your view of your price position is almost always inflated.

Field Salespeople are unfamiliar with the maths… There is seldom anywhere in career path of the average salesperson where someone sits them down with a P&L and shows them the disastrous effect dropping price has on the bottom line.

There is an assumption that the competition will not react… They may not get a chance on this deal, but the next time they come up against you they will have learned their lesson and launch a pre-emptive strike…. (don’t get me started on the whole price war metaphor thing).

5% doesn’t sound like much… Who hasn’t heard salespeople round to the nearest 5%… after all it is only a 20th…. not if it is another 5% discount from list and the discount is already 65%… then it is a 14% drop in price. A 5% drop in price will put a 4.9% EBIT business into the red.

Negotiating is different from Selling…. a salesperson will go out of their way to delight a customer, after all that their job! Delighting the customer when negotiating price is not usually a good idea.

The ability to discount is a badge of rank… It is like the company car grade or the title on the business card (do you have anyone who is still a Sales Representative? …or are they all Area Managers now). The more senior you are the more of the company’s money you are allowed to give away. The discretion to set or discount prices will have to be wrestled from their cold, dead hands.

Having said all that…

If you cannot generalise at the centre about the price sensitivity of the market and you do not have the time feed the decision up the management chain, then perhaps the salesperson does need to make the judgement whilst sat in front of the customer. If this is the case this is what you have to do:

Train the hell out of them… teach them the maths until they can do it in their head without thinking (some won’t make it). Teach them to understand benchmarks, context and value so they can judge price sensitivity. Teach them to negotiate (needless to say we can help with this).

Measure them and reward them to drive good pricing behaviour… We still see some companies where salespeople are measured on volume or value yet allowed to discount. We tend to put the CEO straight fairly quickly (we find a baseball bat helps). Even bonus paid on profit or contribution doesn’t always crack it.

Give them permission to lose customers on price… this is an anathema to most companies, but if you always win you are not pushing the envelope on price.

HERE’S A WACKY IDEA… to start down this path, give them the discretion to increase prices but not discount. Measure and celebrate those that get the best price for the value your company offers.

The tender is a devilish device designed to cynically negate all the carefully crafted embellishments of the salesperson and all the wonderfully concocted unique propositions of the marketing department. However they are about as much use in choosing a supplier who will give you long term value, as a beauty pageant is as a means of choosing a life partner.

In the eyes of a procurement professional, a tender makes all other things equal so that the suppliers can be focused on sharpening their pricing pencil until it is little more than a well-chewed stub… so short it can barely be clenched twixt finger and thumb.

So how do you win business is in the face of such a soulless adversary?….

The first thing to say about tenders is, that if the first time you hear about one is when the request arrives on your desk, then you should assume that you have already lost (Sorry if this sounds rather like the old joke about the lost tourists who stop to ask a farmer for directions and get the reply ‘If I were you I wouldn’t start from here’)

You need to consider how a tender comes about to understand how to tackle it. In instances where there is already an incumbent supplier, the technical part of the tender document will be written based on the product or service they are already getting. Unless they have a burning desire for change, what in effect they are asking for is ‘more of the same please… but cheaper’.

Because the document assumes there is only one way to provide the product or service, you have no way of registering that yours has an advantage and that they will need to accept some risk or cost of change….Also I have never seen a box in tender documents asking you to put in why they should pay more.

So, turning hindsight into foresight this is how you go about it:

1. Identify all the potential customers that you think could especially benefit from your product or service….regardless of where they are in the tender cycle.
2. Research them like hell and set about building contacts at as many levels as possible. If there is not a tender in the offing they should be more inclined to talk to you.
3. If you are successful in making contact, use your very best discovery skills to understand the world from their point of view…How they make their money, what’s important to them, what makes the individual decision-makers tick, what gets them worked up.
4. Gently and subtly, without being rude, point out what they are missing by using the incumbent supplier and make sure that you are on the next tender list. If they can see that you have invested time in them it would be mean to exclude you.
5. Turn up the volume a tad just before they start to draft the technical section of the next tender. The aim is to have it written it in such a way that only you can fulfill its requirements.
6. Make sure that they see value in doing things differently and expect to pay more for this approach.

A tender is not the time to do your selling, it is a time to remind them of the (very subtle) selling you did months if not, years ago.

If you are going to have to undergo the somewhat degrading spectacle of appearing in a beauty pageant, it probably helps if the judges already know you and you have been out on a few dates together.

I know this doesn’t help you win the tender sat on your desk today, but it should help you win some a couple of years hence.

The Moral of the Story is simple…. be proactive not reactive. Put the first step in place today. If you want a rich seam of business to mine in the future, make it someone’s job to find and engage targets now.

Believe me, you will thank yourself (and possibly me) in 2-3 years time!

…of course we can help, if you need to build this capability.

A little while ago we were analysing the pricing strategy of a manufacturing business that sold to industry through a variety of large national distributors. They told us that they went to great lengths to stay sweet with the purchasing directors of the three or four large chains that serviced their market. They agreed to large double digit rebate discounts and lavished corporate entertainment on these important individuals including treating them to a champagne lunch at international rugby matches.

One of the things we do when we get digging into the commercial affairs of a client is to perform a little test we call Switch Point Analysis. We carefully consider everybody in the supply chain – end-users, influencers, specifiers and various people working in distribution – and ask ourselves could this person decide to switch our product for that of the competition or vice versa? … if so what is likely to make them do that? …and what role does price play (if any) in their decision?

The unfortunate thing we found (or fortunate depending on your viewpoint) when we looked into this for this particular client, was that the purchasing directors that they lavished all this attention upon were very unlikely to influence their market share. They were always going to dual source their type of product and from their lofty tower in head office they had no way of controlling the amount sold of each vendor’s goods.

We became increasingly convinced that the day-to-day decision about who would get the market share was in the hands of the fork lift truck drivers at the distributors’ branches around the country and that the most likely criteria for their choice would be something like: whose product was closest to the door.

Our advice was to ease back on the rebate agreements, make excuses and not go to the rugby, buy a box of baseball caps to distribute to the fork lift truck drivers and persuade them to put the product near the door for their convenience.

The Moral of the Story is: That purchasing people want you to think their power to decide the fate of your business is second only to that of the almighty. Stop and think about it for a moment and you will realise that there is nearly always someone else choosing whose product to buy and it is very… very seldom on price.

Do you remember the scene in the movies when the hired assassin opens the brown envelope and takes out a complete dossier on his next target?

Now I am sure that none of you have ever wanted to bump off any of your customers – no matter how difficult they are and no matter how little they pay. However there is something to be said for going into negotiations with all the facts at your fingertips.

A little while ago we completed a project which involved three senior directors going out to the market to present a new pricing system that we have helped them develop. The end result was that ten specific customers would end up paying quite a lot more. Seems they had been underpaying for the service they had been getting for years.

The culmination of our process was a full day and a half of training for the directors in question. We presented them with a complete dossier on each customer drawn from their own data and external sources. Each dossier included:

1.    A copy of the new price list (printed nicely and laminated so it looked like it wasn’t negotiable)

2.    Notes on the way the pricing mechanism works including some calculated examples

3.    A set of notes from the training sessions we had run explaining how to present the prices at this stage and how to answer common objections

4.    A history of the customer’s trading over the last three years showing ratios and trends indicating that their business had cost more to service

5.    A financial model showing how the new charges would affect their costs based on recent months’ activity

6.    A copy of their forecasts for their activity compared with actuals showing how hopeless they were at helping us plan the capacity to service them

7.    Details of the customer’s business with his marketplace – his overall strategy and performance, the price of his products, his approach to market etc.

8.    Details of the current relationship with the customer from the people at the sharp end including their quirks and how they make life difficult

9.    A list of all the little favours that were done for the customer at no charge (including all their cock-ups that we helped brush under the carpet)

10.A set of carefully thought through arguments supported by statistics justifying the cost increase and showing how they could work with us to save costs in the future by changing their behaviour

There was around £4m of profit either way riding on the outcome of these meetings. I can’t remember anyone being more thoroughly prepared.

The moral of the story is: Why would you go into major negotiations that could earn you or cost you millions without doing everything you could to prepare?