Discounting is bad business. It kills your top and bottom line and destroys morale of the sales team as quotas are missed. You assume your reps discount because they lack the skills to sell at full price. They discount because they believe it's the only way they can close the deal. The divergence in these beliefs fuels the multibillion-dollar sales training industry.
With 84% of training content forgotten in 90 days, it is a key reason why most of the money invested in training is wasted.
Discounting only occurs when one or more of the following exist:
- The buyer believes the actual price is below the asking price
- The asking price is greater than the value they will gain from owning the product
- Your sales reps are not adequately skilled at negotiating without discounting
The first case happens with commodities and the buyer is motivated by fear of looking foolish. Imagine turning up at the your son's Little League game with your new family minivan and proudly boasting you paid sticker price! You'd be laughed off the field, because everyone knows you don't pay sticker price for a car. On the other hand, how much were you able to beat down the sales person when you bought your last iPhone? Nothing - because you know Apple doesn't discount. In commodity markets where there is little to differentiate competing products, like cars, buyers are conditioned to expect the actual price to be lower than the asking price. However, with highly sought after products discounting is virtually non-existent.
In number 2 on the list, the motivation to negotiate is driven by our basic desire for an even exchange. The buyer will give money for your product provided that the value they gain from your product is greater or equal to the money they are giving - an even exchange. If it's not, or they can get an identical product at a lower cost, then they will buy elsewhere.
The final case is simply a matter of skills, if that is in fact the real problem... (continued below)
of companies believe they need to reduce discounting
Click the image for the story behind the number
(continued...) Number 1 on our list is fairly cut and dry. If you're in a commodity market, the street price is well established and you've accounted for it in your financial planning. In this type of market, discounting is a non-issue. Whether or not you have to keep your product in that commodity space however, is a whole different question.
Number 3 on the list is relatively simple too. Simply select a sales methodology that fits your culture and put your sales team through the program. However, if you've addressed the skills issue, but your buyers believe there is insufficient value in your product to justify the price, you'd have been better off donating the sales training cost to a worthwhile charity - then at least someone would have benefited.
Training better negotiators will not solve underlying
product and messaging problems.
That's why number 2 on the list is the big one to solve. And it's the one costing you big money.
If your prospect can't see value in your product greater or equal to the asking price, there are only two possible reasons:
- Your sales person does not know the real value of your product for this prospect
- Your price is more than the value your product delivers for this prospect
Both issues are problems to be solved, but they are not problems your sales team can solve!
Here are some potential underlying causes to consider and investigate:
- Do your marketing campaigns attract only potential customers who value your product highly? If not, your sales team will be consumed with forcing your product on people for whom it is not a great fit. Bad fit = low value = low price.
- Does your company have a single shared understanding of the needs your product meets, and the people who have those needs? If you surveyed your sales, marketing and product staff, and asked them to explain what you do and who you are of value to, would you get a consistent message? If not, then you're selling a product of unclear value to the wrong people, and you'll never achieve the growth you desire.
- Does your product actually meet needs that are important to enough people to achieve your financial targets? If not, then the answer is simple, but hard to implement. You need to change the product, or change who you sell it to, to make the numbers work.
Once you've aligned Product Development, Sales and Marketing on the same message, your sales team has been appropriately trained in negotiation and all parties understand the value your customers gain from your product, there is just one more thing to check.
You may recall from my second post in this series that the most effective way to drive sales behavior is through the compensation plan. If you want to drive full price sales, you must ensure that the compensation plan drives behavior which achieves that. Does the commission rate change once the rep is 100% of quota? Is the quota achievable? These questions are discussed in the next post in this series.
Impact of Discounting on Profitability
Discounting can devastate your profit projections. Click the graph for more
Discounting is a cultural phenomenon. As a leader, you allow it to occur, or you don't. If you allow it, and your financial models are based on full price sales, then you're making it almost impossible to deliver your planned financial results (see the Impact of Discounting on Gross Profit chart). If your reps need to discount to compensate for a product that does not provide a greater value than the list price - either they're selling to the wrong people or there are basic messaging and/or product issues to resolve. Providing sales skills training before you address those challenges will simply provide your reps with better skills that they can use in their next job - when they join a company that enables them to meet quota!