A CUSTOMER CONCESSION SHOULD ALWAYS ACCOMPANY A PRICE CUT
By Bill Lee
What's the first rule of negotiating? Never make a price concession unless you at least attempt to get something in return. Too many salespeople have either never heard of this rule or else they're awfully shy about implementing it in their price negotiations.
The first impulse when a salesperson encounters price resistance is to cave in, so the company invariably suffers gross margin erosion. If, however, salespeople can be trained to always ask for something in return before agreeing to the concession, the overall margin may actually increase in spite of the price concession.
I believe salespeople should begin planning the negotiating process well in advance of making the sales call. Most salespeople know their customers pretty well, so they know which ones are likely to reject their initial quote and insist on a lower price on one or more key products or maybe the entire quotation.
Customer's negotiating tactics will vary from customer to customer, but an individual customer’s negotiating tactics are unlikely to vary much from day-to-day. So each time salespeople quote one of their customers, they should be prepared to respond to whatever technique their experience has taught them that this particular customer is most likely to employ.
Ask yourself this question: How long has it been since you heard a customer use a new and different technique in an attempt to get you to lower your price? Unless you're brand new on the job, I'll bet it's been years. My point is this: If you can predict what the customer is going to say, don't you think it's reasonable that you should be able to prepare an effective response?
Here are some examples of typical responses I've heard home builders use when the supplier salesperson quotes them a price:
• Hey, your price on lumber is way out of line...
• [Your competitor] was out here this morning trying to get the roofing on this job. He had you beat by over $100 and he's quoting the same brand you guys are quoting...
• Good grief, man, you're $200 high. I didn't ask you to be competitive on the last job, but I can't keep on paying you a premium and be able to compete with my competitors. You've got to get your prices in line.
• Let me show you the deal [your competitor] offered me this morning. What would you do if you were me?
• Not only is your price out of line, but so are your terms...
• I can't believe you're serious. You've got to be kidding. Do you think your material is gold plated or something?
The list could go on and on. If salespeople don't figure out how to deal with these and other tactics their customers and prospects use to gain a lower price, they will forever be putty in their customers' hands.
Recommendation: At your next sales meeting, suggest that the meeting leader list on a flip chart the negotiating tactics that each of the salespeople most typically hear their customers use. Then brainstorm what kinds of responses each salesperson has found to be the most effective. When you all put your heads together, you'll be surprised at how much more innovative you'll become at dealing with each objection.
There are at least five options when a customer balks at your price:
1. Cave in, meet the price, take the order and go home.
2. Make a trade-off.
3. Offer additional service to your initial offer.
4. Suggest splitting the difference.
5. Walk away from the deal...and the order.
Caving in is obviously the least desirable. Don't give up without a fight. When customers see salespeople caving in to easily, they figure that they have left themselves plenty of room to move.
Suggesting a trade-off is a viable option in any industry. But before you ever make the sales call, make a mental list of concessions you might ask the customer for in return for lowering your price. For example, you might say, "If I were to be able to get competitive on the framing package, could you see fit to give me the trim on this job?"
If the builder agrees and you do get the trim order, odds are that the concession you had to make on the framing would still produce a satisfactory gross margin when you take both packages into consideration. So the deal becomes a win-win for both you and the customer.
If you already have the builder's trim business, go for the windows, skylights, locksets, etc. But get something in return. It's best to know in advance what concessions you're going to ask for.
If your roofing price is $100 high and your price doesn't include putting the shingles on the roof, an option might be to offer this additional service in lieu of losing $100 of gross margin. If the product were gypsum wallboard, you might offer to place the material in each of the rooms rather than stacking it in the garage. Of course, the cost of the additional service must me less than the pricing concession for this option to make good economic sense.
Spitting the difference is often an effective way to cut in half the concession you have to make. Inexperienced negotiators must remember that effective negotiating is somewhat of a game. So don't be too quick to jump to this option or it will lose much of its effectiveness.
You'll usually be well-served to agonize for a few moments as if what the customer is asking for is cutting your profit to the bone. What you're hoping for is that the customer will suggest splitting the difference before you do. When it's the customer's idea, your negotiating position is enhanced.
Option #5 is a negotiating tool that too few salespeople have the courage to use. But never forget this: The willingness to walk away from a deal is the most powerful of all negotiating maneuvers. Sometimes it's important to let a customer know that there is a limit to how low you can go.
Here is an example: "As much as we want this order, we cannot do any better price wise. If we were to lower our price by one more nickel, there's no way that we could possibly give you the service that you have every right to expect and have any profit left over for ourselves. We sure do want your business, however. How about giving me the benefit of the doubt on this one. I'll guarantee you that when this job is over you'll come out way ahead of the game if we supply the material."
Go to www.BillLeeOnLine.com for more information on Bill Lee's book, Gross Margin: 26 Factors Affecting Your Bottom Line.