Are Profit Vampires Sucking Your Blood?

As you relax comfortably reading this article, vampires are plotting a diabolical simple strategy.  Their evil aim: suck the

precious life’s blood from your unsuspecting business.  Like a hungry swarm of vampire bats menacing overhead, they’re everywhere.  And, based on the latest “as seen on TV vampirology”, they can feed for years before they finally finish you off.

Before you start stringing up garlic necklaces for your staff and reading through ancient and musty lore of Transylvanian past, let me say these aren’t physical forms.  Rather, they come in the way of old time myths disguised as modern business practices.  So join me as we talk our way through the vampires in the Industrial Supply Business.

The evil deeds of dastardly fellow, known as Count Purchasing, are legendary.  You could probably add a few anecdotal stories of your own.  But in our world, the greatest disaster to innocents with salesperson business cards comes when Count Purchasing transmutes into the shape of our best friend.

His sweet siren's song goes something like this: “You’re really a great company.  We really think you have worked hard…and because of all this, I am going to let you have the order… Assuming you can match the price.”  To the uninformed, it sweetly rings forth with a too good to pass up message.  At least until you analyze its hidden meaning.

Deep in the cavernous hideout of his castle office, Count Purchasing has an engraved plaque bearing the motto “buy from the best supplier, but pay the price of the worst on the planet.”  In our case, he may be touting the ill-conceived price of that organization down the street.  The one with no post-sale support, poor delivery and terrible accounting practices.  Or in the case of our technology driven products, he may use the price of a company without specialists.  All falling after your motion control, abrasives or cutting tool specialist invested days and dozens of phone calls helping his own engineering team develop detailed specifications, bills of materials and all the rest.  Simply put, you do the work and get paid like the guys who did nothing.

Vampire killing tip Numero Uno, you must recognize that Count Purchasing was trained to sing this verse.  But wait, there's more.

Another sweet song comes in the form of exaggerated quantities.  “I will be acquiring zillions of these over the next few years.  Give me the price level for your largest quantity break.”  Strangely, the large order never comes.  What’s worse is we, as innocents, often lock their organization into large quantity pricing without setting expectations for lack of quantity or periodically reviewing the results.  Years pass and they continually feed on our goodwill.  Again, a “trick of the trade” is used to pull the life’s blood from our organization.  Vampire killing tip number two; develop quotes that allow for periodic quantity reviews.

Not every vampire in our industry has a cubical down in the

Procurement Department.  Some of them dwell like invisible demons in the minds of our own folks.  When we substitute “nice guy” thoughts in place of business sense, they flourish.  Each and every time we give a really friendly small customer the same pricing as the gigantic user down the street – they put the bite on our bottom line.  Research by David Bauders of Strategic Pricing Associates demonstrates thousands of examples of this phenomenon.  Tiny customers are given sub-market pricing, strangely buying quantities of one or two at levels equal to or lower than your biggest customer who purchases hundreds at a time.  Drop by precious drop the life’s blood of your business is drained from your bottom line.  How much can this be?  These are tiny droplets – but the red cells add up.  David’s team has a track record of adding two points of added margin to distributor’s business.

A trip to the musty crypt of the undead reveals a menacing claw fiendishly refusing to die. 

This monster goes by the name of Free Service.  Let’s bravely explore the situation.  We sold the customer a system back in 2006.  Strangely, a decade later, we find ourselves mesmerized into believing post-sale service is our responsibility.  What’s worse, we think we’re obligated to do it for free.  In spite of expert advice to drive a stake through the beast’s black heart, the darn thing just won’t die.

The practice of free service is a time honored tradition in the electrical wholesaling world.  It is reinforced by some supply partners.  They would have you believe it’s the true duty of every red-blooded prey… I mean distributor.  And systems integrators, contractors and installers echoed the message like sound bouncing in Dracula’s tomb.  For some unholy reason, there’s not an issue with our service, as long as we never, ever charge for the privilege.

Distributors face a growing crisis as our margins are squeezed at exactly the same time as the demand for our services is increasing.  Add the factoid that many of our products are going down in price.  New technology requires even more configurability, and expertise to operate.  Additionally, demographic data eerily screams thousands of highly skilled baby boomers are opting for the sandy shores of some retirement communities.  Their replacements will require even more assistance from our trained people.  And that further complicates our position.

For years, our salespeople have expounded the extraordinary support available through their back-up teams

– specialists, application engineers, project managers and proactive expeditors.  In more than a couple of occasions, I have even heard these guys describe the point that “no sale is ever final” at their company.  Unknowingly they expose their necks and our profits to the hypodermic fangs of this monster.

During the last recession, many of our supply partners “pulled in the reins” by cutting or eliminating manufacturer supported post-sale service and support.  The first time they experienced a 47 minute hold time to have a question answered, customers by the dozens added us to their speed dial.  Still others demanded more from their local distributor when the other manufacturers instituted a fee-based extended support fee.  Either way, we found ourselves on the tooth. 

My own visits to the specialist room across distributor land show more of this highly paid sales resource tethered to their phones rather than out assist in in closing orders.  The problem is, many of them receive positive reinforcement from customer and supply partners alike for this work.  So many have lost sight of their true value, and the revenue creating tasks associated with sales generation.

The Wooden Stake

Bram Stoker gave us Count Dracula.  I can still remember the terror as my 12-year old eyes witnessed Bela Lugosi threatening everything good and pure in that 1931 scary movie classic.  As I left the theater that dark Friday the 13^th

night to trudge home with my little brother in tow, I recall the solace of understanding the proper methodology for dispatching a Dracula.  Allow me for a moment to don my very own Professor van Helsing hat and share a couple chapters on vampire killing.

Spend a little time at your next sales meeting talking about negotiation techniques.  A few years ago we worked with purchasing guru Malcolm Mills on a series of sales process improvement programs.  We discovered the guys on Malcolm’s side (purchasing) regularly attend classes covering negotiation strategies.  They don’t lie, but developing skills to mislead our sellers seems to be worth the investment to them.  Every time we stumble into one of their snares, it cost us money.  Insist your sellers answer the comment “your price is too high” with a powerful value statement.

Invest a little time in understanding your value to the customer.  Some of your day-to-day actions create thousands of dollars in real measurable value.  Don’t let Count Purchasing hypnotize you into believing “all our vendors can do that."  First, it’s probably not true.  More importantly, it doesn’t matter.  If you produce real measurable value – it adds to the customer’s bottom line.  You should be fairly compensated. 

Learn the art and science of pricing process.  With tens of thousands of SKUs and thousands of customers, it’s simply too complex to be left to a spreadsheet or manually developed system.  According to our research, a scientifically driven pricing system is the best investment in the distribution business.  If you haven’t already explored the options, sign up for one of Strategic Pricing Associates’ many free seminars.  Even if you do something now, learn about the state-of-the-art in Pricing.

Brainstorm with your salespeople.  Should house accounts be allowed to attend training sessions for free?  Set a policy for time spent with “C” level customers.  Think about this, if a customer generates $2,000 in Gross Margin dollars a year, does it make business sense for your in-house experts to spend a day with this account?  I don’t think so  But it happens; sometimes with good reason.  Could we recoup a portion of the cost?  We need to do something.

Before you venture out into the deafening darkness, before

stepping into the chill of the misty midnight air, beware.  This time the vampires aren’t just a figment of ancient folktale.  They’re real and ready to feed.  Did I mention I have “Holy Water” for sale?

Targeting Accounts - A Specialist’s Role

I attended a day long distributor planning session, a sales meeting that ended with a “round-robin” planning session.  Vendor salespeople and Distributor Specialists were assigned

tables around the perimeter of the meeting room.  Salespeople spent a few minutes at each table talking about existing opportunities and future targets.  After eavesdropping, I noticed salespeople discussing accounts where they felt additional actions could push the selling process forward. 

Soon after the meeting, it hit me like a ton of bricks. Salespeople knew their assigned accounts but didn’t fully understand the targeting process.  At the end of the day, nearly every salesperson listed the same three or four accounts as their targets – the same accounts and contacts were given for a diverse group of products and technologies.  Later, I asked a couple of salespeople and their managers to define “target” – the results were interesting:
·         “A target account is a new account”
·         “exploratory” 
·         a target should be “one of my top 5 accounts.”

All answers came from the same sales team, same management, attending the same meeting.

Vendor salespeople were no different.  When asked for a “target” for their new product line, one district manager rattled off:  Forest Products, Mining, Food Processing, and Automotive Industry.  Why was this particularly bothersome?  The nearest Forest and Mining businesses were thousands of miles away.   To a salesperson thinking about targets, this sends two messages, “My vendor doesn’t even know a target for my territory” and “this product may not deserve my selling time.” 

Proper targeting is the key to successfully launching new products.  Human nature drives a desire to produce fast results.  Dr. Robert Atkins, inventor of the Atkins Diet, stressed the need for an initial quick success in weight loss to drive future behavior over a long period of time.  Dr. Shinichi Suzuki discovered that children who experienced quick success in music were more likely to continue their

studies, even once practice became routine.  Specialists can drive a result by “stacking the deck” for early success.  This creates the initial one or two wins that build long term success.  Since you are responsible for getting the new products into your company’s sales pipeline, time invested early thinking about targets pays important dividends. 

For each new product answer the following questions:

Which customer types would best benefit from the product?

This should be answered in as specifically as possible.  A bad example would be General Motors – a good answer would be the painting department of a large metal assembly company (General Motors) where explosive paint fumes create the need for tools with special arc proof coating.  This opens the door to thoughts about a number of different companies where the environment is similar.  Vendor partners and nationally based organizations like to use SIC codes to make these decisions.  Unfortunately, the SIC registry is not an exact science.  I suggest you put your personal knowledge and your team’s knowledge, to work in developing a short list.

Who at these companies is most likely to understand the impact of the benefit?

Hopefully your salesperson has multiple account contacts.  Careful thought should be given to selecting the right contact.  If your product has a safety feature, showing it to a maintenance person may prove to be disastrous.  She may judge your product based on it being difficult to use rather than the importance of added safety.  This is as important as selecting the client company.

Do you (or the vendor salespeople) know of companies experiencing success in some other part of the country/territory?  What drove their success?

Nothing can jump start the success of a new product like an introduction to the local plant of a company that has already experienced success.  Before adding these people to your list, it is important to know a few details.  What were the situations leading to the use?  What went well?  What was learned?  How well has this been publicized to the company in general?   Make contact with the key decision maker at the remote location.  Call for these details to make the success story more valid for local users.

Once you have this information and the opportunity presents itself, Specialists can gain buy-in from the salesperson.  Discuss your ideas for quick successes.  Whenever possible, overlay your choices with her own top accounts.  It is easier to sell more to existing accounts.  When you are finished with the initial process you should have the following information:

• Target Account names: No more than 6
• The right contact: By name or Title
• Proper collateral materials: Literature, demos, samples, joint call dates
• A few specific bullet points to use in selling the product: Remember salespeople have dozens of accounts
• A mutually agreed upon time frame for initial contact

Targets need to be revisited.  After the salesperson’s first

customer meeting, the Specialist can help fine tune the Targeting process by discussing the high and low points of the call.  If new collateral is needed, it can quickly be brokered to the salesperson.  If the demo didn’t go smoothly, a personal tutorial will rebuild confidence and drive better demos at the next Target.  If this meeting produces major discoveries, i.e. the competition has the same thing at 10% lower price, adjustments can be made for the entire sales organization. 

Targeting accelerates business growth, but is this worth the effort?  Here is a parting thought; new research indicates that organizations who are great at targeting are 47% more effective than those with average targeting skills.  Specialists are uniquely qualified to make an impact!  Good luck and happy targeting.

A Few Thoughts on The Reactionary Sales Model

Talk to any sales manager and they will tell you they want their team to be proactive.  Proactive as in sales calls, targeting, prospecting and product introductions.  Planning and setting detailed customer-centric goals is also viewed as proactive.  Sales managers preach proactivity.  Detailed studies of distributor salespeople, however, reveal a lot of folks who are anything but proactive.  In spite of the directives from their managers, a lot of these guys seem happy in their roles.

Defining Reactionary Sales…

A good many knowledge-based distributor salespeople have quietly slipped into what I call the reactionary sales model.  Here is the premise of their system:

·         The seller becomes engaged with the customer.  Sometimes this is an inherited relationship, other times, it builds gradually over time as the seller proves their worth as a provider of sound advice, support and technical assistance. The seller builds a level of trust and becomes one of those called in to assist in problem solving and solution building.

·         The seller becomes available on demand.  The deeper the relationship, the more available the seller becomes as a source of advice and assistance. It is not uncommon for sellers working in this mode to drop whatever proactive plans they may have developed to run to their customer’s location at a moment’s notice.  This activity is typically rewarded emotionally with appreciative words and with a regular stream of orders.

·         The seller develops deep loyalties with customers.   As loyalty builds, the customer begins moving business to the salesperson’s company and business grows.

Sounds pretty good so far….

But there is more, maybe even vindication.  A recent study of engineers in the OEM side of our business reveals much about the way our industry sells.  Three things are made clear in the study:

1.      Engineers prefer to request information – “don’t call us we’ll call you”.

2.      Once a salesperson is established as a source of information – they call often.

3.      Local and Regional Distributors are viewed as better sources of information than National Chains (something we have always known but didn’t have the data to prove.)

But there are problems…

The story doesn’t end with “they all lived happily ever after” because there are some issues standing in the way of great business.  While time and the nature of this post don’t lend themselves for a detailed study, we should touch on the issues.

·         This model takes time.  Engaging with customers, proving yourself and building trust take time; probably measured in years.  How long can a salesperson wait for business to come? 

·         Distributors lose customers by attrition.  Depending on the expert, between five and ten percent of our customers drop off each year.  We’re not speaking of business lost to competitors; instead customers go out of business, are purchased by another organization or move to another location.  When this happens, it takes a long time for a reactive guy to replenish their customer base.

·         Reactive salespeople are slow to introduce new products and technologies.  When salespeople operate in the reactive mode, they wait for the customer to request information.  Since the customer has someone else providing assistance with the new line of technology, the time to introduce new products is painfully slow (years.)

·         Reactive salespeople struggle to justify which account receives their high quality reactive service.  Oftentimes, reactive salespeople peak out early.  One of the main causes is they run out of time.  This level of service takes time.  If they don’t “justify” their time against customer potential or business volumes, they get consumed by helping accounts which cannot provide the necessary volume to fuel their business.  Since the emotional reward can be high from small accounts, who thank them profusely for their assistance, they struggle to prioritize their time. 

By now the point should be clear, the reactive model works but does not align itself with the goals of most distributors.  Expansion into new product technologies is hampered and organic growth is slow (even if arguably steady.)

Improving the situation…

If your team is overloaded with reactive mode sellers, you must answer this lucky seven list of questions:

1.      How can we speed up the relationship process?  We’ve determined the reactive seller is good once a relationship is built.  But, they need help with jump starting the relationship.

2.      How can we help focus their efforts?  Most sellers don’t track their time, even though CRM Systems are good tools.  If we can help them understand the value of their time, they may refocus energies on accounts with greater potential.

3.      Can we develop tools for introducing new products?  Training is the new marketing.  Are you exploring all the opportunities to increase your training portfolio?

4.      Are add on products well understood?  If the salesperson is assisting the customer with a solution, do they understand the nuances of expanding the products by providing a bigger piece of the solution?

5.      Does the reactive seller know how to leverage existing contacts to expand their customer contact base?  Since the time to build trust and establish a relationship is long, we need to find ways to leverage the relationship.  Does the seller ask his contacts for referrals within their company?  Does the reactive guy understand the importance of knowing everyone within their account?

6.      Are negotiation tools part of the reactive seller’s skillset?  Long sales cycle… check.  High service… yep.  Products customized to the customer’s needs… inherently clear.  If the seller has not been trained on negotiation tactics, there is a very good chance you are missing out.  Research indicates negotiation training is not part of the distributor vocabulary.  I have seen SPASigma’s training and believe the reactive salesperson needs all of the advantages offered.

7.      Should a reactive seller be paid the same commission as a “rain making” sales guy?  This one is a lightning rod, but I am convinced there is a difference.  Plus, reactive sellers don’t bring the same level of value to the business. 

Finally….

I’ve made some pretty brash comments.  I am sure some will disagree.  If I’ve upset you, send me a note.  Heck, post it right hear for everyone to read.  I look forward to hearing back from you.  Who knows, you might receive the River Heights Consulting Grand Prize: a postcard from Iowa.

By the way… I made reference to SPASigma’s fabulous distributor-centric Negotiation Training.  Founded by Distributor Pricing Expert David Bauders of Strategic Pricing Associates.  David has helped 500 distributors grow their gross margin (typically around 2 points) through a scientific analysis of price sensitivity and customer type.  SPASigma moves the needle forward again.  There’s a five minute video at www.SPAsigma.com.  

Product Training or Sales Training?

When I ask the question “Do you have sales meetings?” most often the answer is to the

Without teaching about the
science of selling,
your meeting room
may as well be empty

affirmative.  Weekly, monthly, quarterly or something else is the standard answer.  But when it comes to content, a few follow up questions are often needed.  That’s when the truth comes out; distributor sales meetings are rarely about sales.  Oh, sometimes the numbers are reviewed.  Goals are generally discussed near the beginning and ending of each year.  And occasionally, distributors talk about the need for results on some supply-partner’s new product line.  Rarely, if ever, do distributor leaders actually talk about the science of selling.

Over the past few days, I have participated in over a half dozen conversations (phone, email and social media) on the topic of sales meetings.  Allow me to highlight.  In one conversation a manufacturer asked one of their top distributors if they did sales training.  Immediately and with great pride, the distributor manager launched into a conversation on the product technology training his team had covered over the past few months.  The manufacturer tried to steer the meeting back to selling skills with the mention of the Strategic Account course they recently put their team through, but the conversation immediately turned to product details. 

Just this morning I received the following message from a new LinkedIn.com connection: 

“I enjoyed the article you posted on selling.  I am always interested in what’s happening in distribution sales, as it is a pretty unique type of sales.  Most of the information I get is product based, so I always find it refreshing when I see something that addresses the type of selling I do.”

This is not an isolated situation.  Over the years I have heard this comment from distributors in the Industrial, Safety, Automation, Fluid Power, PT and Electrical markets, as well as the Irrigation, Automotive Parts, Sporting Goods and Motorcycle parts industries. 

Considering distribution is an industry which is primarily a “sales function” driven business, I believe this is both a threat and an opportunity. 

If you are a long-time reader, you probably realize we cater to distributors who are knowledge-based and solution selling organizations.  Most of us pride ourselves on our product and application skills.  We add massive amounts of value to our customers, but the customer has to get to know us first.  Further, our industry is ever being squeezed to be more efficient.  For distributors, 60 percent of our budget is spent on our people and salespeople represent a large share of the outlay.  Developing, refining and growing selling skills serves to address both the speed of relationship and sales efficiency issues.

Why do we continue to ignore the sales skill part of the equation? 
Here are some possible answers:

• Managers believe their sales teams are already seasoned veterans and training would be a waste.

• The manager’s mistaken belief that professional sellers devote time to improving themselves through books, tapes, podcasts and online programs.  (My apologies and best regards to the one percent who actually do this stuff.)

• Salespeople resist training especially if they believe management will require changes in activities

• The “salesmen are born not made” theory which still persists despite research to the contrary.

• Cultural tradition – they didn’t have sales training back when I was a “rookie” and I turned out all right.  (Maybe you’ve heard me reference “dinosaurs” in previous entries.)

• A belief that sales training doesn’t work for our industry

• Training is expensive

We wrote this in an article published by “The Distribution

Center Magazine” a publication dedicated to the HVAC/R distribution industry:

“… people are our greatest asset.” Yet, according to research conducted by Jonathan Bein, Ph.D., of Real Results Marketing, only 22 percent of distributors have a learning management system.  Sadly, distributors struggle to fund skills-based training for their organization during tough times. 

This will sound strange coming from a guy who offers training for a fee, but I would much rather see distributors spend 20 minutes a week reinforcing sales or leadership training than put their teams through a two-day session without follow-up.  Training can be part of your culture for next to nothing.

Sales meetings with selling skills content can be part of your culture. Every month, hundreds of great ideas are published in trade publications and in online blogs.”  

Why not take 20 minutes from your sales meeting to discuss one sales related topic?  The sales manager can provide personal examples and challenge the team to try something for the next couple of weeks and report back to the group.

Keeping with this theme and using “The Distributor Channel” blog as a reference, here are a few topics to explore:

What do you know about your account? 

To have a real strategic plan for our accounts we need to take inventory of what we know now and what we should learn in the future. Our plan must revolve around positioning ourselves to really be solution providers. In some instances, this means understanding that providing solutions to the customer is a poor use of our resources.

Sales Question: How Long Do I Chase an Account?

After nearly a year of calling on a couple of major accounts, orders still weren’t flowing.  As our day wound to an end, he asked me point blank, “How long should I pursue an account before I give up and move on?”  Here are some thoughts for you to consider.

A Pricing Tale: Old Joe

From where I sit, standardized pricing, or whatever you want to call it, is destined for failure in our business. Our customers are tight with their money. They don’t want to pay more, they want to pay less.  This is a great introduction to using a pricing process.

The Gross Margin Equation - For the Record

This seems a bit silly, but I keep running into people who talk Gross Margin without really knowing the formula.  If you’re anything like me, this is a huge pet peeve.  BTW: this one is great for your suppliers too.  They clearly don’t teach this equation in most MBA programs.

A Challenge for my Friends…

Spend a little time thinking about the half dozen issues you, your coworkers or maybe your team have in the selling process.  It might be setting appointments, breaking past voicemail, getting customer time, establishing new accounts or a rash of other topics.  Jot them down and determine how you could introduce the subject into your next sales meeting. 

A Post Card from Iowa

Send me the ideas for your next sales meeting along with your address and I will send you a genuine post card from Iowa.  For one lucky reader who sends an idea, I will provide a customized PowerPoint covering your selected topic along with discussion points.  That's a minimum of 15 minutes of sales training for your team…

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...
	0%	15%	20%	25%	30%	35%	40%
5%		50.0%	33.3%	25.0%	20.0%	16.7%	14.3%
6%		66.7%	42.9%	31.6%	25.0%	20.7%	17.6%
8%		114.3%	66.7%	47.1%	36.4%	29.6%	25.0%
10%		200.0%	100.0%	66.7%	50.0%	40.0%	33.3%
12%		400.0%	150.0%	92.3%	66.7%	52.2%	42.9%
15%			300.0%	150.0%	100.0%	75.0%

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.