I don't know a distributor who doesn't lose sleep over what seems like the inevitable degradation in gross margins.
There are a number of factors that weave together to make margin shrinkage an issue for everyone. In many areas, competition has increased dramatically. As new competitors vie for your business, they naturally lower prices to buy their way into your accounts. In many industries, products cost less today than they did five years ago. In the face of decreasing prices, it's difficult to maintain gross margins. And, of course, in this era of Wal-Mart, Target and ubiquitous demands for lower prices in every other aspect of our lives, salespeople constantly hear that refrain voiced in the B-2-B sector.
What to do? Is margin degradation inevitable? Should we just give in to the pressures and try to lead the pack in cost cutting?
Before we default to looking inward and reducing costs, let's consider a series of pro-active sales practices that can buck the trend and actually bring you higher margins!
Here are ten specific sales practices which, when implemented in
combinations that best fit you, will result in higher margins!
First, let's look at sales management practices. My first three practices are behaviors of effective sales managers.
Create and communicate specific expectations for margin growth.
Over and over, I hear client companies complain about margins shrinking. With furrowed brows and pensive expressions they encourage their sales people to, "Raise margins, guys!"
Nice thought. But unless you set down with each individual sales person and spell out a list of specific, measurable expectations, your cajoling will be useless.
If you want the salespeople to focus on raising margins, you must give them specific expectations to do so. I recommend annual goals for the total dollars of absolute gross margin dollars, as well as for the average G.P. percentage. So, if you want to raise your margins from 24 to 24.5 percent, spell it out with specific goals for each individual salesperson.
Train and equip the sales force to do what you want them to do.
While it's a necessary start to create specific expectations for margin growth, that won't accomplish much by itself. If you want them to do what you want them to, you need to show them how. Read through the list of sales practices that follow, pick and choose those that you want to pursue. Then create the tools and processes that a salesperson should use to successfully implement them. Then, provide them instruction in how to do them along with opportunities to practice. At that point, you'll be ready to move on to practice number three.
Monitor and manage margin growth.
If you've set specific and measurable goals with them, and equipped them with the tools and how-to processes, you have every right to expect that they will do what you've asked them to do.
Meet regularly with each individual salesperson in a one-to-one conference and review his/her performance relative to your goals. Measure progress monthly, discuss mid-course corrections, and provide encouragement and coaching as necessary.
Now that you have attended to your management practice, the next step is to decide which of the following sales practices you want to encourage. Here is a set of very specific practices that will build your gross margin.
Add a point to routine quotes and bids.
Most people get into ruts when it comes to quoting a certain product or range of products. We just naturally put a standard mark up on the final price. Break out of the rut, by trying one point higher. For example, if you routinely quote some product category at 15 percent gross profit, try it two or three times at 16 percent, or 15¾. Chances are you are leaving some money on the table by using the same mark ups you've used for years.
Obtain the competitions' pricing.
We all try to do this before the deal is done. It is, however, much easier to gain this information after a deal is done and then use it for the next round. After the deal is done, and the customer has made up his mind, just ask about the competitive pricing. Whether you won the deal or not you can still use the opportunity to collect useful information. Ask for what everyone else quoted. There's little pressure on the customer to keep that information confidential. After all, it's a done deal. No harm in divulging that now.
As you gather the information after the fact, analyze it to see what patterns your competition is using in their price quoting.
Use the patterns and insights you gained to predict their next quote. Instead of fearfully using very low margins because you are afraid of losing the business to a competitor, you'll have much better information on what you competitor will probably do, and you'll find yourself not deeply discounting so often.
Add a point on price and product changes.
Let's say several of your customers are routinely buying a product line from you. You have it in at 15% G.P. The manufacturer raises his price to you 3%. You refigure the customer's new price at 15.5% margin. You've just gain ½ a point.
Every price, packaging, and product change is an opportunity to add a point or so.
Do a better job of information collecting.
Most deals are not purely about price. In almost every survey I've ever read about why customers buy, price is never the number one reason. What are the other reasons? That's your job to find out.
Instead of just focusing your questions on the "technical specifications," dig deeper. Find out what else is important to the customer. Find out what the customer values, what objectives he/she is trying to achieve by this purchase. Then, you'll be better equipped to show him why he should buy it from you, instead of from the lowest price offer.
Create a REBME presentation.
REBME? That stands for "Reasons to Buy from Me." So many distributor salespeople look on every sales call as purely a discussion of product and price that they fail to consider the totality of the factors that influence the customer to buy. Now, if there is absolutely no difference between buying it from you and buying it from the other guy, than the customer should go with the lowest price. However, I very rarely have seen there to be absolutely no difference.
Your job is to identify all the things that are different when the customer buys it from you. Put those things into a list, turn them into statements of benefit for the customer and memorize the presentation.
Then when the customer says, "You're a point or two too high," instead of discounting, share with the customer what he/she gets in exchange for that point or two. If there is some valid economic impact, than you've just added a couple points to your margin by giving the customer a reason to buy it from you.
Promote higher margin items.
In every industry with which I've been involved, there are high volume items that almost every salesperson focuses on, and then there are very low volume items that most people ignore. That's too bad, because the high volume items are usually the lowest margin, while the odd ball requisition items carry margins that are often multiple times higher.
So, make it a point to present and demonstrate those low volume items that are not nearly as price sensitive. When most of your business is going through at 13%, it's amazing what a few items at 45% can do for you average G.P.
Promote sole-source agreements.
If you could come to an agreement with your customer to be that customer's sole source, you both could set aside the tedious quoting and price comparisons that occupy so much time. Instead, you could agree on some range of prices that are competitive and fair, and not have to worry about deeply discounting every deal.
Why would a customer do that? To save time, to develop a trusting relationship with a good vendor, to reduce his costs of acquisitions, storage, etc. The first step in getting some customers to this point is to begin to talk to them about it. Break out of the mode of "here's my price" conversations with your customers, and challenge them to think differently about how to do business with you. You'll find some interested in the concept enough to seriously consider a partnership with you.
And, if you pull that off, you'll not have to worry about the competition threatening your margins.
Copyright 2004 by Dave Kahle