Pricing: Point … Counterpoint
Imagine a world where, when contemplating a buying decision, price never entered your customers’ minds. Having trouble envisioning such a seller’s utopia? You’re not alone. Most jan/san salespeople would agree that price is inching its way up the scale of importance in their customers’ decision-making. On top of that, the competition — or worse yet, their own salespeople — are more willing than ever to inordinately cut their price to make a quick sale.
Combating this pricing slippery-slope can be a major headache when the tendency to discount is so prevalent. There are, however, a number of strategies distributors can implement to maintain their companies’ pricing integrity — and preserve their profit margins.
Driving Prices Downward
It seems to be an obvious rule: if your company doesn’t turn a profit, you can’t stay in business. Yet it’s all too common for salespeople to discount so heavily that accounts are just breaking even — or even costing the distributor money.
Salespeople have a tendency to discount excessively, often with no good reason, says consultant Tom Reilly, a Chesterfield, Mo.-based consultant and author of the book Crush Price Objections. Mounting price pressure from customers is one reason; there’s always another avenue where they can buy cheaper. But distributors must also be cognizant of who’s discounting — and by how much — within their own businesses.
“These ‘random acts of discounting’ are death by a thousand knife cuts,” Reilly says. His advice: “Distributors need to develop a discount discipline. What I mean by that is their first strategy needs to be identifying a rhyme or reason for why [they’re discounting], by how much, and where they’re going to discount.”
It’s also crucial that salespeople don’t dig themselves into a discounting hole they can’t get out of. Once a product’s price is lowered, it’s nearly impossible to go back.
“As soon as you discount, and the customer knows you’re willing to do that, the customer will try every time to get their way with you,” says Andy Brahms, president of Armchem Intl., Corp., a distribution company in Ft. Lauderdale, Fla.
The Reason Being...
There are many more sources of supply today than ever before, notes Scott Durann, vice president of Reliable Floor Supply, an Orange, N.J.-based distributor. This translates into greater pressure on salespeople to discount, since customers can almost always find the product somewhere else for less.
“It used to be that there were just a couple jan/san houses,” says Durann. “Now, everybody and their brother is selling janitorial supplies because everyone needs them.”
A quality gap is also partly to blame for price resistance, he says — lesser quality products on the market are setting an unrealistic benchmark for what customers feel a product is worth. Subsequently, they want quality products for the same price as lower-quality alternatives.
For example, a customer can buy a gallon of cleaner at a discount chain store for $8 instead of the $10-per-gallon product a jan/san distributor sells, but the concentrate might not produce as many gallons as the latter once it’s diluted, Durann explains. Still, the only thing the customer sees is the lower price tag.
On the other hand, the market is also flooded with products that are competitive in terms of quality, says Reilly.
“What exacerbates the problem is that everybody’s pretty much got good stuff these days — quality leveled the playing field,” he says. “What happened is that everybody got better, so more companies fall within [customers’] buying parameters, then salespeople compete based on price,” he adds.
Distributors’ role as middle-men in the supply chain also puts them in a compromising position given erratic price fluctuations.
“Distributors have a double problem,” notes Reilly. “The distributor is faced with increased pricing pressure from customers and increased market-share pressures from suppliers. So I’ve got my manufacturers saying, ‘I need more market share,’ and customers saying, ‘I need lower prices,’ and that’s how the distributor gets squeezed in the middle.”
Preempting Price Resistance
Putting price objections to rest before they ever come up is the ideal situation for sellers. “We teach the salesperson to ask better questions that call into play non-price reasons for working with a supplier,” says Reilly. “Shift the buyer’s focus to the long term. Price shoppers think in the short term.”
Salespeople should also put together a three-pronged strategy by answering the questions: Why the product, why the company and why me?
“The better they are at putting together this message proactively, the less price is a factor,” Reilly adds.
Brahms’ company pays close attention to the sales process, and carefully teaches salespeople techniques that render price irrelevant.
“Listening, and making sure that [salespeople] follow our company’s sales technique is paramount in order to be successful and reduce the amount of price resistance,” says Brahms.
His selling strategy includes getting to the qualified buyer, demonstrating the product, and mastering the close.
“If you do all the steps as we teach them,” says Brahms, “pricing resistance is minimal.”
Brahms also steers clear of the “me-too” selling he sees used in the industry. He leans heavily on his company’s private-label program to help carve out a unique market niche — and a compelling reason for customers to buy from him.
Fighting For Your Price
True, distributors are facing substantial pricing pressure, but there are a number of tactics distributors and their salespeople can employ to “hold the line” on pricing — and maintain precious margins.
Distributors need to know — and stay on top of — their products’ prices, plus the costs associated with servicing an account. If distributors don’t know what a product costs them, it’s impossible to know what pricing latitude they have.
The result: distributors tend to shave away at their margins until there’s little left in the way of profit.
“[Distributors are] trying to sharpen their pencils to the finest margin, and then when they get the account they realize it wasn’t that good of a deal to begin with,” says Brahms. His advice: set margins in stone company-wide, then train salespeople to stick to those parameters, he says. Sales training is essential in enabling them to do this — it gives salespeople the skills to sell effectively, while “holding the line” on pricing.
There are other ways distributors can shift focus from price to the value they’re providing, while still recognizing the role price plays in a buying decision. Reliable Floor Supply has battled price consciousness from its customers by bundling products, and maintaining a flexible pricing approach.
“We try to bundle things together,” Durann says. “We have to actually negotiate and see where we can bring the order to. It’s a negotiation — no legitimate deal is going to walk. There’re way too many outlets for the customer to get the stuff.” Legitimate is the operative word, though. “I’ve got to make some money,” Durann says. “I’ve told customers straight out, ‘I’ve got to keep the lights on in the place. If I gave it to you for that, I’d be paying you to take it away.’”
Durann’s company promotes the company’s service and the products’ quality to customers. Reliable has also gotten creative in its marketing.
“We’re always running promotions,” he says. One strategy Durann uses is promoting a “loss leader.”
“We bring them in for something inexpensive and hope they buy seven or eight other products that will make up the margins,” he says.
Take Another Look
Brahms believes that to combat heavy price resistance in the industry, jan/san distributors must adjust the way they think about their selling organizations. “[Distributors] fail to create innovative selling techniques,” says Brahms. “They forget that they should be sales organizations first, and not product organizations. That’s what I see — they’re mixed up.”
Reilly shares his sentiment: Distributors must be able to differentiate themselves from the competition by knowing the competition, studying their product and being able to explain their definable differences, he says.
“If [salespeople] can’t give a three- to five-minute passionate and compelling argument for their product and company, they’re going to fall by the wayside and live and die by price,” Reilly adds.
Distributors need to realize they’re selling three things, according to Reilly: a product, the value of working with their company, and the individual salesperson they’re working with.
Reilly’s success at helping his customers adhere to strict discounting principles — and answer the three questions that define a distributors’ value proposition — has been “awesome,” he says. His clients have been able to push through large price increases or hold the line on pricing, and still win business.
One of Reilly’s tactics for winning business without compromising price is doing the research necessary to reveal objecting customers’ “pressure points” — or any condition that causes the customer to pay more for something. It gives distributors leverage to remain firm on pricing if it’s indeed a fair price and a worthwhile product or service.
Reilly points to one example: a manufacturing-equipment company that was successful in defining its customer’s pressure points.
A customer had come to the supplier requiring a complex equipment retrofit. The supplier quoted a price, but the customer came back saying he needed the supplier to drop his price by $180,000.
Instead of caving in to secure the big chunk of business, the supplier did an in-depth audit of the customers’ needs, and determined that the problem the customer faced was unique — only this supplier’s company had a suitable solution for it. Secondly, the supplier determined that the customer had not anticipated such a high cost — the customer had sticker shock, which was fueling the fierce price resistance.
After learning the customer’s pressure points, the supplier had the confidence it took to “hold the line” on the price. He was able to explain the reasoning behind his price, and to educate the customer on the costs involved. He eventually won the business at his original price.
“It was the confidence level it gave the [supplier] to say, ‘We’re fine where we are,’” says Reilly.
A United Front
One reason that customers constantly hammer away at prices is that, in many cases, they know they can get a discount. Distributors’ pricing strategies tend to be erratic, with a different price for every product for every customer. In fact, Scott Benfield of Benfield Consulting, Naperville, Ill., jokes that at any given minute of any day you can call three people at a distributor company for a price on a commodity, and get five different prices.
“The problem stems from not only cost-plus pricing, but a misunderstanding of how to develop a good pricing discipline,” Benfield adds.
He suggests constructing detailed “cost-of-service” models that explicitly show pricing based on order size and product. These models should originate at the executive level, with help from accountants.
Salespeople shouldn’t have free rein when it comes to pricing. “If you’re going to have somebody negotiating large orders or significant customer prices for you, that shouldn’t take place with just the salesperson alone,” Benfield explains. “The stuff I’m talking about needs to be done by an accountant and the top manager in tandem with the salesperson.”
Brahms takes a hard line when it comes to unauthorized discounting on products such as chemicals. He penalizes salespeople who discount beyond their allowable percentage. “If they do discount without authorization, they get an amount deducted from their commission.” For instance, if salesperson sells X gallons worth of chemicals at 10 percent off per gallon, a certain dollar amount will come off their commission.
Salespeople are allowed to discount up to 10 percent off of catalog items — and no more. Catalog items include brooms, buckets, mops and other items. “Anything else, they have to go by the price list, because it maintains discipline.”
Durann’s company employs a similar philosophy:
“[Salespeople] know their limitations, and they know what they’re able to do,” says Durann. If they want more than that, they know they must ask.
No matter how sophisticated your sales pitch, or how valuable the products and services you offer, price resistance is an inevitable part of doing business. Therefore, it’s a good idea for distributors to be ready to respond when a customer raises an objection.
“First of all, you have to see whether the customer is full of it,” says Durann. “Everybody is going to tell you they can get it cheaper. I’m not afraid to let someone walk; I’m not going to pay them to take product out of my store.”
You should also have a deep understanding of what your products cost you, he continues. Durann often refers to numbers provided by his computer and the company’s pricing software to make sure his prices are where they should be — he can get the data needed to call his customers’ bluffs with a few keystrokes.
“Many people are trying to see what they can get,” Durann says. “It’s about being knowledgeable about what the product costs and selling it for more than you bought it for.”
“There’s a point at which you have to walk away,” Benfield agrees. “Before you get into negotiations, you should know what that point is.” You should know the numbers well enough, and be able to provide new prices by eliminating certain services, he adds. If you do have to walk away, do it in a fashion where the door remains open to you.
Part Of The Deal
Discounting will always be a part of jan/san sales, and there are plenty of situations in which discounting is expected — and justified: large customer orders, competitive bid situations and government buying, to name a few.
But many customers don’t fall into any of these categories, and this is where it’s important for distributors to stick to their guns.
“The key to understanding price objections is first [customers are] going to test your price, and second they’ll test your resolve,” says Reilly.
“There will always be price pressure,” he adds, “but there will always be the customer who will buy on conditions other than price.”
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