The knee-jerk reaction of many businesses to falling sales is to reduce prices. The rationalization is, "We’ll make it up in volume," or "If there’s enough gross income, there has to be some net income around here somewhere!"
It ain’t necessarily so!
Lawrence Steinmetz and William Brooks introduce the subject of selling at higher margins by explaining the vital importance of maintaining the gross margin for business profitability. It should be obvious that a business must be profitable to survive and to finance future growth.
Here is an example showing how many additional units a business would have to sell to break even with a 10% decrease in sales price.
|| Before change
|| After Change
Units ||1,000|| || 2,000 ||
Sales ||$1,000,000 ||100% ||$1,800,000 ||100%
|Cost of Sales ||600,000 ||60% ||1,200,000 ||67%
|Gross margin ||400,000 ||40% ||600,000 ||33%
|Fixed costs ||200,000 ||20% || 200,000 || 11%
|Variable costs ||200,000 || 20% || 400,000 ||22%
|Net income ||$ 0 || 0% || $ 0 || 0%
By decreasing its sales price by 10%, this company would double the unit sales required, just to break even! Each company should evaluate its own operating statistics to estimate the impact of price changes.
We have seen over and over again that even big companies that get into price wars can be brought to their knees and even become bankrupt. The most classic cases are airlines that were once household names and have either disappeared or become bankrupt, including TWA, Eastern, People Express and Delta. Although WalMart is a current exception because of its bargaining power and operating efficiencies, discount retailer leaders of the past, such as Sears, K-Mart and J.C. Penney are on the ropes.
A better response to declining sales would be to conduct market research about why sales are decreasing. Then adjustments can be made in marketing strategy and possibly product design. In some cases, like buggy whip manufacturers and oil lamp manufacturers whose goods became obsolete, the company will have to take an entirely new direction to survive.
A challenge that companies must face is the conflict of interest of salespeople. Salespeople are beaten up daily by their customers demanding the lowest price and haven’t received the training or don’t have the mindset to do their jobs properly. Salespeople are generally paid commissions based on their sales, not necessarily on the profitability of their sales. Corporate buyers are trained to chisel their suppliers on price, even when getting the lowest price may not be in the best interest of their employers.
Price objections are actually diversionary tactics. The real question is, what are the competitive advantages offered by your company and its products? One critical benefit for commercial accounts hammered on by Steinmetz and Brooks is timely delivery. If the customer doesn’t receive goods on time, especially if they are incorporated into their products, the customer may face down time for its employees and late shipments to its own customers.
Many times a buyer may say a competitor is offering similar goods at a lower price, but the competitor doesn’t have them in stock or is incapable of producing them in the desired quantities.
Salespeople need to learn and know the competitive advantages of their companies and their companies’ products, and stick to their guns in determining the facts of the situation and answering the customer’s objections by emphasizing the benefits to the customer of what they have to offer.
A list of common customer price objections and suggested strategies and responses for salespeople are included at the end of the book.
Salespersons and business persons who want to understand the importance of a healthy gross margin in the business and how to deal with their customers’ price objections should study How To Sell At Margins Higher Than Your Competitors.
Buy it on Amazon: How to Sell at Margins Higher Than Your Competitors : Winning Every Sale at Full Price, Rate, or Fee.
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