Monday, March 28, 2016

Discounting based on Quantity?

"Locking in" business without knowing
more about your customer looks more like this.
Let’s think about quantity discounts.  For many folks the idea of “locking in” business by offering up a special discount seems to make sense when future potential is involved.  Here’s how it works.  Acme Manufacturing has yet to purchase your new product but based on your knowledge of the Acme’s size and an intuition that Acme could buy lots of your product, you provide a discount. 

Our analysis of many first time sales situations, indicates a couple of key points:  

First, the discounts are provided unilaterally, with no probing of the customer’s current purchase price.  What’s worse, we see this tactic used with new, emerging technologies and products never before introduced to the customer.  Sometimes, the seller offhandedly informs the customer, “The normal price for this product is $1,000, but I am going to knock off a hundred dollars so your ‘special price’ will be $900.”  Other times, the seller just provides a discount without even mentioning the deal.

Second, sellers provide these special deals without taking time to gather significant information from the customer on the value created by the product.  Many times sellers base their need to discount on information provided about a solution that didn’t really work; assuming something that didn’t work can even be called a solution.  Here’s an example of how that scenario might play out:

The salesperson is called to look at a waterproof motor in use at the customer facility.  The only issue is, the customer’s wash down procedure causes the motor to leak.  The motor fails regularly causing massive headaches, downtime and other electrical issues.  Somewhere along the way, the seller learns the old motor sells for $500 dollars.  The new technology will replace the motor.  Water issues will go away.  The new technology costs about 30 percent more than the failing technology of the past.  And, the customer uses quite a few of this type of motor.  So, the seller assumes they can’t sell their new product for much more than the $500 dollars already being spent.   I believe this is a major mistake.

There are three points sellers must understand…
1. Customers don’t have a true appreciation for discounts they see as “unearned.” 
According to research cited by negotiation expert Tony Perzow of SPASigma, potential customers see no real value in discounts which do not require something in return on their part.  What might be a better approach?  A discount which is tied to a long term commitment, a discount contingent upon placing a multi-piece order or a discount involving purchasing associated products.

2. Once the price level has been set, it is very difficult to raise the price.
Once a price is set, there is little opportunity to raise the price if the customer doesn’t meet your large order criteria; and this happens quite frequently.  Further, a discount provided up-front minimizes the opportunity to profitably provide added features, services or even a deeper discount if the customer does hold the key to big order potential.

3. Most sellers fail to understand the true cost of quantity discounting. 
For example, in the world of distribution, a gross margin of 25 percent is common.  Assuming there are no offsetting cost reductions such as order processing, shipping charges or discounts from your supplier, the math is relatively straight forward.  Using a 25 percent gross margin and a discount of 10 percent for the sake of easy math, we must sell something like 66 percent more product just to break even on gross margin.  Here is the formula:

Current Gross Margin / New Gross Margin = Unit increase required

We have attached a handy table developed by the State Government of Victoria to provide you with a handy reference guide. 

Checking the effect of discounts on the gross margin
If you cut your prices by...
 And your present gross margin (%) is...





Of further concern in the distribution industry is that typical net profits run between 2-4 percent.  Shaving margin without some other offsetting factor can create profitability concerns.

There has to be a better way….
Wouldn't it be more appropriate to understand the customer’s situation before providing a discount?  Let’s start with a few questions:
  • What is the customer’s problem with the current product used?  Breakdowns, scrap produced, bad data gathered, downtime, rejects or something else?
  • What is the value of your solution to the customer?  To answer this, you must think about the cost of downtime, rejects produced, energy wasted, outsourced labor, repair parts consumed, etc.
  • Does your solution help the customer avoid other costs?  Travel expenses might come into play here.
  • Are the customer’s human resources better used because of your solution?  Referring back to travel expenses listed above, how much greater might the productivity of existing employees be if they weren’t sitting in a drafty airport waiting for the 5:50 AM flight out of town?

Finally and only after calculating the important stuff already listed, should these questions be pondered?
  • What is a reasonable estimate of the cost of the previous solution, assuming one existed?
  • What are the other costs associated with the old way of doing things?

I know what you’re thinking.  Sometimes, you don’t have time to explore the whole situation.  The customer calls and asks for a price.  What to do?  My suggestion is to stick with the standard cost.  Then begin to explore the situation.  You can always negotiate your price downward later.

Friday, March 11, 2016

Are you doing business with OEMs?

Does your OEM customer view spare parts as a revenue stream?   Solution sellers should know the answer to this
You and your customer can share
a love of those spare parts!
very simple question.   Strangely, perhaps even sadly, many distributor sales guys have never fully explored the question.  In their daily struggle to get parts specified, solve technical issues and sometimes baby-sit orders flowing from the customer, they overlook an opportunity to move up the supplier food-chain. 

For review let’s look at the types of folks selling to our customers:
Type of Supplier
Customer Perception
A company we send lists of materials to and sometimes make purchases if the price is right and delivery schedules meet our needs.
A company we regularly purchase from because they appear to provide a competitive price and good service.
A company we do more business with because their products and services eliminate hassles from our world.  These people provide technical guidance, value-add services and other assistance in a way that complements our in-house team.
Business Partner
A company that helps us make more money.  They perform services which help us make more money and are our competitive advantage in the market.

Perhaps a bit of soul searching may be in order as to where you fall in this category.  I suspect that most self-described “solution sellers” are really performing in the Valued-Supplier space with their best customers and at the supplier or vendor level for the rest.

Think differently, push to the Business Partner level. 
You need to understand how your OEM customer views spare parts.  Are they a profit center, source of service revenue or just a hassle they would like to dispense with?  All three of these have opportunities for you to help them build their business.  Let’s break it down.

OEM sees Parts as a Hassle
What would happen if you knew the machines your product was used on and had their internal part numbers in your ERP system?  When the OEM receives a call for the part, they could simply push the customer over to you and your organization’s inside sales team could quickly identify the right part, convert the conversation to an order and solve the OEM’s customer issue.  End of problem.

What’s in this for the OEM, better satisfied customers and less time spent searching through catalogs to reference the right part?  If you had a copy of the OEM’s drawing, you could provide advice on auxiliary components often overlooked (things like mounting brackets and bushings.)   For the distributor, there is enhanced margin because typically, customers searching for this type of part, are not price shopping.  The customer gets increased uptime and clears the problem sooner.  A win-win-win solution.

OEM sees Parts as a form of Service Revenue
If the OEM sees parts and part replacement as a form of service revenue, you are presented with a slightly different set of opportunities to assist the customer.  First, end customers consider it an irritant if the service person arrives without the necessary parts to make the repair.  How do we address that?  What if the distributor assisted with standardization of parts used in the design?  Would it be simpler to insure the parts were available?  If there are a sub-set of parts used, which are the most common failures?  You might assist in identifying them and perhaps putting together a traveling kit containing most commonly failed parts.  Further, you might provide the service people with “recommended spares” which the OEM could provide to the end customer.  You create the list and package the products as an “add-on” to their service work.  Again, improved profitability for the OEM who marks up your recommended spares list and nice business for you. 

OEM sees Parts as a Revenue Source/Profit Center
This is the greatest opportunity ever.  Typically, OEM operations are not good at maintaining inventories and operating distribution centers.  For distributors, it’s our middle name.  Let’s explore some of the scenarios.

The OEM receives an order and you fulfill it from your warehouse. 
In most instances, this eliminates a middle step, where you ship to the OEM and they ship out to the customer.  Time, money and effort are saved and the customer gets the part a couple of days earlier.  Further, many of the better distributor ERP systems allow for your company to print packing slips which mirror the OEMs own system.  You ship, bill the OEM and everybody makes more money. 

The distributor works with their suppliers to create exclusive part numbers for the OEM.
Each of these new part numbers lock the OEM’s customer into purchasing them from the OEM rather than on the open market.  This enhances the OEM margin and sweetens the pot for the distributor by locking out other distributors jockeying for the business. 

You build exclusive sub-assemblies for the OEM.
Since many distributors are assuming value-add responsibilities for nearly all of their customers, what if you slapped a high quality label on parts to identify the OEM sub-assembly and then offered up your ability to provide these quickly as needed in the field? 

You hold obsolete components to extend the operating life of machines.
In many industries, manufacturers change revision levels or otherwise change the configuration of their products regularly.  This creates issues for their end customers and tracking hassles for the OEM.  Think about ways you might address the issue by holding back inventory or working to find alternative sources.  

What’s in this for You?
First, showing an interest in something besides just selling more sends a message to the customer.  You are really a solution seller.  Secondly, you learn more about the internal workings of the customer.  Going through the exercise will very likely lead to other opportunities.

Finally, the best person to discuss this type of issue with will fall in the management team of the OEM.  This opens the door to better relationships with those responsible for writing the checks to your company.  These management types begin to understand that you provide solutions far above the normal “good service” and “smart people” played up by your competitors.  You win substantial street cred for your efforts and those pay dividends into the future.

Before we go
It’s not uncommon for OEMs to mark-up the spare parts they sell by 250-400 percent.  It would seem reasonable to
assume the OEM should be able to pay more for products sold this way, especially if you helped them develop their own business or streamline the process.  You should negotiate better margins for your efforts. 

Monday, March 7, 2016

The Customer Lunch

For the seasoned professional reading, you may scoff at this piece and see it as a restatement of the obvious. I am the veteran of thousands of customer/client lunches. Back when I was a young pup-seller, I was instructed to take customers to lunch, but not given much guidance to do so. It was the day of the two martini lunch. For some strange reason, maybe it was my rebellious streak, I decided not to do the martini part. But I made a number of observations around the whole customer lunch thing.

First, lunch with customers expanded my day. I could make a lunch appointment for 11:30 am and create time for another call. In a territory which covered most of the state of Iowa, finding time for another call was difficult.

Customers tended to open up during our lunch times. They told me about their families, personal interests, career goals and often provided coaching. It was over lunch they shared the names of other people I should call on and often gave me pointers for my own personal involvement.

Finally, I found that lunches with customers allowed the customer to act as my advocate. They often took time to invite a colleague to join our discussion. As we had food together, they shared my value with the new guy.

Over the years I had the strong opinion that lunches furthered my cause. I encouraged others to use the idea.

Lately, I have run into a whole new school of distributor salespeople who don’t share this habit. Whether because they want the time to respond to personal emails, catch up on Facebook or, to use the words of one young sell, “just chill.” They don’t engage in the practice. I had a difficult time arguing with them. It was basically one man’s opinion versus another's -- at least until now.

At a recent SPASigma negotiation seminar, negotiation expert Tony Perzow shared a bit of negotiation research with me. According to scientific research done by Lakshmi Balachandra, Professor of Entrepreneurship at Babson College, those who negotiate over food are markedly more successful than those who do not. The figures state:
“Individuals who negotiate in restaurants created 12 percent greater profits and those who negotiated over food in conference rooms created 11 percent greater profits.”

While selling is not pure negotiations, there is a strong component of negotiations in every sale. Further, negotiations are present in many aspects of setting price levels, determining method of delivery and laying out expected service levels. I believe the two overlap.

Can you ignore a potential 12 percent boost? If money is an issue, what is the cost of bringing a sack of sandwiches or a small pizza to the customer’s conference room?  Besides, it doesn't need to be lunch.  How about breakfast, a bagel, afternoon fruit or something else.

Let’s get down to the main course. 

Not eating with customers can cost you time and money. If you would rather eat by yourself than worry about small talk, maybe you should think about a different career.  

If I'm wrong, let's talk.  
I could be needed a big ole' slice of humble pie.

BTW: This message was not provided by the National Restaurant Association, but it could have been.