Wednesday, October 30, 2013

Sales Discounts: Discounting the Price is Discounting the Value


Sad to say, many salespeople get in the habit of using discounts to close deals. There are several reasons that this usually isn't a good idea.  First, the sales discount reduces your profit on the sale. Second, a discount implies that the best price wasn't offered first.  And finally, a discount "cheapens" the price/value of whatever you're selling in the mind of the customer.
It's much more effective to think of list pricing as something that you defend, rather than discount, according to Robert Nadeau of the Industry Performance Group.  He recommends the following process:

1. Identify What's Different

In order to justify paying a higher price for your offering, your customer will need to see either you, your offering and/or your company as different (and, specifically, better) than the competition.  There are six basic types of "differentiators":
  1. Feature. A characteristic or capability that your offering has and other products lack.
  2. Brand. An emotion uniquely tied to your company or offering.
  3. Convenience. Your offering is easier for the prospect to purchase and support than the competitor's.
  4. Quality. Your offering is higher of quality (lasts longer, works better, etc.) than the competitor's product.
  5. Commitment.  You're personally more committed to the customer relationship than the competition.
  6. Integration. Your offering works better with products that the prospect has purchased in the past.
The more differentiators that you can identify and articulate, the easier it is to defend your price.

2. Create a Financial Case

Now that you know what's different about your offering, tie each differentiator to one or more of the following five types of financial benefits:
  1. Increased revenues. How will your offering help the prospect improve their revenue? How much more product could they sell? How much are those extra sales worth to them?
  2. Decreased costs. How will your offering help reduce the prospect's costs? How much will they save in labor costs? How much will they save in overhead?
  3. Improved quality (of their own product). How will your offering help improve the quality of the prospect's offering? How much will they save in reworks, scrap, overtime, corrective action costs, and so forth?
  4. Faster delivery (of their own product). How will your offering improve the prospect's ability to deliver their own offering? How much will they save in canceled orders, expediting costs, air freight charges, and so forth?
  5. Lower risk. How will your offering reduce their exposure? How much will they save in penalties, legal fees, and litigation?
The bigger the financial impact of the problem and solution, the less relevant your price becomes.  And tying those benefits to your differentiators gradually pushes the other choices (specifically, the lower-priced competitors) entirely off the table.

3. Get Consensus on Financial Impact

Work with the prospect to get agreement on specific negative financial impacts of the problem that your offering solves.  Make sure the decision makers agree with the cost analysis.  The bigger the negative impact, the better the value.
Then work with the prospect to define all the ways that the problem that your solution addresses impacts their revenue and profit. Include direct costs, lost opportunity costs, personnel costs–whatever applies.
For example, if you can service your product at the customer's site within one hour and the low-cost competitors can only get provide within 24 hours, determine how much it would cost the customer to be without support for 23 hours.
Approaching a sales situation in this way gradually forces the competition out of the picture because it builds a financial case around what's unique about you and your product.  As you build the financial case, the prospect becomes convinced that only your product makes financial sense.