When I was consulting, I made a regular practice of listening in on inside sales phone calls. This was done with the full knowledge of my clients’ inside sales reps. In one instance, I worked with a large distribution company that I’ll call MegaCo. The company added huge amounts of value to most of the products they sold — cutting, forming, kitting, labeling, etc.
The first person I worked with had been at the company for years. One of our first calls went like this:
“Thanks for calling MegaCo, this is Jody. How can I help?”
“Hi Jodi, this is Bob from NeedItNow Manufacturing. I have a PO for you. I need 10 of stock number 1ABC, 12 of item number 2DEF and 20 of item number 3GHI. Can you tell me the cost for each item?”
Jody replied, “Sure. 1ABC is usually $63.50 each but I’ll give them to you for $55 each. 2DEF is usually $108.40 each but I’ll give them to you for $95 and the 3GHIs are usually $94.43 each but I’ll sell them at $80. How does that sound?”
“OK,” Bob said, obviously writing down numbers. “That’s $55, $95, $80, right?”
“That’s right,” Jodi said.
“Thanks, and when can those ship?”
“They’ll go out today.”
“Great. Use PO XYZ123, please. Thanks, Jodi.”
“Got it and you’re welcome, Bob, have a good day,” Jodi said, ending the call.
It was obvious that Bob was placing an order — not calling for a quote. He only wanted the prices to fill out the information on his PO. He had given no indication that he was asking for or expecting a discount. From my perspective, Jodi had given away 14% of the company’s gross margin for no reason whatsoever.
After we hung up, I asked Jodi why she had offered such big price reductions.
She shrugged. “He’s a good customer,” she explained.
All of the calls I listened to that morning followed the same routine: Jodi gave away thousands of dollars of profit, even though the customers rarely demonstrated any price sensitivity. She also chose round numbers for her pricing choices. This is a very common tendency for distributor sales and service people — and they also tend to mark up by round numbers (“cost plus 20%”).
Customer Service People Think Discounts are Part of the Value They Provide
I’ve seen this behavior countless times and it illustrates some truly flawed thinking on the part of many people in customer-facing roles. They believe that part of value they add to customers is providing discounts.
Distribution companies need to teach this principle over and over again: The value we provide is the products we sell, the services we offer and the great people who help our customers. Price is how we get paid back for that value, so we can continue to provide it.
In Jodi’s case, no one had explained this equation to her. Like many customer-facing employees, she wanted to please customers and had developed her discounting habit as a way of doing it. Although many distributors use the term “inside sales” for the employees who handle their orders, the reality is that many of these individuals have a “customer service” mindset. They are not trained on how their employers generate profits and they are not skilled at negotiations.
Income Statement Realities
Jodi previously received training on products, the ERP and phone etiquette. But she had never been trained on how the company makes money or on the importance of maintaining pricing and margins.
Consider this: If Jodi’s employer was operating at a 10% EBITDA, then every 1% Jodi raised prices would have raised profits by 10% — and she could have raised prices by much more without risking a loss of sales. Most of the customers who called her were placing orders, not price-shopping.
The Challenge for Distribution Leaders
When I met with the COO who hired me to review my experiences with his sales people (inside and outside), I described this epidemic of discounting; I even used that term. Like many executives, he had no idea that his customer-facing employees were giving away profits so easily.
That’s not unusual. In my current work at MDM, I talk to distribution leaders regularly. It’s fairly rare to find an organization that has developed a strong training and monitoring program that effectively teaches sale and service employees:
- The enormous leverage that small price changes have on the bottom line
- Price is how you get paid for the value you give customers — not something to give away as part of your value
- How to take orders without discounting whenever possible
- How to minimize discounts when asked for them
- Why you should avoid rounding down to simple prices
- Why you should avoid simple markups from cost
- How to deal with price objections
- The importance of not discounting small orders
- How to distinguish between customers who are calling to place orders vs. asking for quotes — and how to price in both situations
If you believe that your company would benefit from understanding how to develop and implement training to help your sales people price smarter, you should attend our upcoming MDM Pricing & Profitability Summit on April 15-17 in Denver. Get more information at pnp.mdm.com.
As always, I welcome your feedback in the comments area below this article or via email. You can reach me at firstname.lastname@example.org.