Ten minutes into a pricing training session, a senior salesperson asked, “How is anything you teach…
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.
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:
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?
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.
Reed K. Holden is the founder of Holden Advisors. He is an enthusiastic and persuasive advocate for demonstrating customer value and price leadership with companies that need to adapt in highly competitive markets. In 2102 he published Negotiating with Backbone: Eight Strategies to Defend your Price and Value and in 2008, he and co-author Mark Burton published Pricing with Confidence: Ten Ways to Stop Leaving Money on the Table, a top-selling pricing book for executives. He also co-wrote The Strategy and Tactics of Pricing 2nd and 3rd editions during his tenure as CEO of Strategic Pricing Group (now Monitor/Deloitte). Contact him at www.holdenadvisors.com.