Today's post is by Darrin Fleming, managing director at Stratavant, which provides strategic marketing and value-based sales and marketing tools for B2B companies. Read the original post here on the Stratavant blog (this version has been slightly edited and is used here with permission).
What are some common circumstances that often lead to price discounting? Let’s examine a quick list.
It’s the end of the quarter, and the sales team is not going to meet sales goals.
There’s an economic dip in your industry, and sales have been sluggish for an extended period.
There’s a structural component to the compensation plan that rewards discounting.
Some element of your pricing plan is confusing for reps and/or prospects.
You have a surplus of inventory that’s about to become obsolete or otherwise unmarketable.
Your competitor is offering endless discounts, and you feel you have to match those discounts to keep from losing new and existing customers.
No matter what your reasoning is for lowering your price, continual price discounting is going to end up creating two major problems for you.
PROBLEM #1: You will trade a temporary uptick in revenue for a substantial reduction in profit.
Almost all sales leaders are evaluated on their ability to post revenue gains each quarter. The more sales reps discount on price, however, the more units they need to sell to achieve those revenue gains. This can create an endless cycle of lower margins per deal and sales reps’ chasing long-shot prospects in lieu of finding high-value customers. A lack of profit is going to ultimately affect other critical areas, such as research and development and marketing.
PROBLEM #2: You will move your offering toward a commodity.
Most companies want to avoid competing on price alone. When you do this, your business becomes a ruthless race to make products cheaper and faster. For many business-to-business (B2B) companies, it’s nearly impossible to produce a quality product at extremely low margins. If your offering gets cheaper but shoddy, your brand will take a beating.
The other problem with selling in a commoditized market is that you are now courting and creating relationships with customers who have a transactional mind-set and want short-term gain. In general, they are not the kind of customers who will remain loyal to you for years or offer much in the way of up-selling or cross-selling opportunities. Key accounts and anyone willing to pay a premium for higher value will go elsewhere.
How can you avoid the pitfalls associated with price discounting? Here are three tips.
- Align your compensation plan and any incentives programs with strategic goals. If you reward sellers purely on volume, it’s only logical for your reps to offer discounts. This is a sign of a price-discounting culture, which means it’s up to leaders to take the reins and steer the company in a more balanced direction. Perform an audit of your incentives programs and compensation plan and make sure to encourage behavior that will help you meet your strategic initiatives.
- Train reps to talk about value. When reps are frequently hammered on price, they need a bigger toolbox than the standard role-plays on how to overcome price objections. Teach them how to strategically and systematically move their customer conversations away from price and in the direction of value. They should be able to uncover the measurable financial benefits that customers care about. This can then open discussions about what customers would be willing to pay for those benefits.
- Invest in an ROI tool. A return-on-investment (ROI) tool can be of invaluable service when it comes to having conversations around value. Even the act of making an ROI tool available on your Website for prospects can be transformative. How so? Any prospect that takes the time to interact with an ROI tool online is already thinking beyond price and about value. This is an organic way to help your sales team center the conversation on value and sidestep common objections about price. In addition, a discussion about ROI is just more compelling than a flat price negotiation.
Use these tips and eliminate price discounting, or at least keep it to a reasonable level in your organization. Your sales reps shouldn’t feel they have to offer constant discounts in order to make sales. Support them properly with the right tools and training, and you’ll soon start to see the payoff.
Do you discount price? How do you respond when customers ask for discounts? Share your thoughts in the comments section.