John Connor couldn’t believe what he had just heard. It had been a long day that had included a four-hour drive along Interstate 37 on a steamy April morning in Texas. Connor, president of Quality Assessments Mystery Shoppers Inc., was meeting with the owner of six fast-food restaurants in Corpus Christi to pitch his firm’s service: sending undercover evaluators to assess employees’ customer service skills. The meeting had gone well so far. The prospect saw the need for third-party assessments and liked that Connor had a track record in food service. Connor had every reason to expect that he’d be able to strike a deal.
But then, the zinger. The prospect sat up in his seat, picked up a pencil, and looked Connor straight in the eye. “Before I can sign a contract, I’m going to need to know your costs – and see proof,” he said. “For all my vendors, I only allow a maximum of 10 percent profit margin.”
Uh-oh. “I thought, but did not say, ‘This guy is a lunatic,’” says Connor. Instead, Connor responded, in as dignified a manner as he could muster, that costs and payroll were matters internal to the company. He tried to steer the meeting back on track by stressing that his price was reasonable – in fact, aggressive – when compared to competitors. But the prospect was adamant. Show me the margin, the prospect said, or lose the business.
What happened to Connor is no anomaly. With business flat in many sectors, buyers are attempting to wrest more and more concessions from vendors – including asking salespeople to reveal their profit. They’re poring over a seller’s cost structure line by line, item by item, ready to pounce on any opportunity to drive costs out of the equation. With distressing frequency, they’re saying to the salesperson on the other side of the table, “Show me the margin.”
The idea leaves many sales pros sputtering. “This is confidential information, and I am really outraged that companies are mandating this,” says Susan P. Ascher, CEO of The Ascher Group, a Roseland, NJ, firm that provides human resource professionals for short-term projects. “When I go to my stockbroker, I wouldn’t dream of asking what margin they are making on me.” Pat Hughes, managing director of insurance brokerage W.P. Hughes in Hampton Falls, NH, puts it more succinctly: “What’s under the kimono is my business and nobody else’s.”
To be sure, transparency in pricing is common in many fields: bids for government agencies and construction projects, for example, are negotiated upon a “cost-plus” basis. Now, though, the practice is bleeding over into other industries. One reason is that “when times get tight, purchasing people think they have additional power,” says Jack Falvey, a sales trainer in Londonderry, NH, whose Website makingthenumbers.com delivers online daily sales tips. Plus, with joint ventures, strategic alliances and purchasing co-ops sharing numbers among members, there’s simply much more data out there for purchasers to wield. “We belong to a buying consortium that focuses on office supplies,” says Alex Brown, vice president of corporate supply development for Advances Micro Devices, a microchip manufacturer headquartered in Sunnyvale, CA. “If I pay $5 for a ream of paper, and the consortium gets it for $3.50, I know it’s volume-related. But I also know there’s someone out there who’s getting paper at a buck fifty less than me.”
Of course, pricing isn’t always as straightforward as that. As Thomas Nagle and Reed K. Holden point out in their excellent book The Strategy and Tactics of Pricing (Prentice Hall, 2002), there are literally hundreds of variables that go into the number you hang on your product or service. Your cost of raw materials, competition, seasonality, size of the target market, overhead, distribution channel and quantity are just a few. How much of that information do you really want to share with customers? John Connor of Quality Assessments Mystery Shoppers notes that he offers different pricing to different customers, based on how long they’ve been buying from him. “You’d be opening a real can of worms showing that to a prospect,” he notes.
So what’s a sales manager to do? Experts advise the following:
Decide whether you want to comply.
Believe it or not, there may be times when it can be advantageous to open your books. Scott Testa, COO of Mindbridge Software in Philadelphia, says his firm is encountering more and more requests these days for fuller financial disclosure. But it’s not because buyers want to nickel and dime him, he says. Rather, in the wake of so many highly publicized dot-com flops, customers want to assure themselves that their technology vendor will still be around in a couple of years. Testa is judicious about who he shares numbers with: generally only highly qualified prospects who fit his target market profile of medium-size companies with 100 to 5,000 employees.
Karen Oman, president of Minneapolis accounting firm Certified Accounting Pros, also shares her firm’s markup on occasion. “We believe that the more our clients know about us, the better we look,” she says. “It’s one way we differentiate ourselves.”
Figure out whether you can refuse.
You’re in a better position to sidestep full financial disclosure without killing the sale if either of two conditions exist: 1) The buy is not a significant one for your customer. “Significant” is, of course, subjective, but it can refer to the dollar amount or the importance of your product or service to your customer’s core mission. A major hotel chain, for example, could spend upwards of a billion dollars annually on everything from housekeeping supplies to air conditioning systems. A $1 million contract would attract more scrutiny than one for $5,000. A contract to provide bedding, which is central to the customer experience, would be examined more closely than one to provide, say, baking pans for the kitchen. 2) Your product or service is truly unique or proprietary. In the semiconductor industry, for example, “there are so many places where you end up being the sole source from a technology standpoint, and there is no competition,” says Brown. In those instances, buyers would probably not press demands to open the books.
Don’t wimp out.
It’s uncomfortable to have a prospect ask for something you can’t fulfill. When sales professionals who have been trained in the consultative sell are presented with a customer problem, they naturally want to help solve that problem – even if they end up handing the prospect the scalpel with which to slice margins to bits.
Do your salespeople know how to react? According to Merit Gest, a principal of training firm Total Selling Solutions in Northbrook, IL, they need to keep three words in mind: “Don’t wimp out.”
“If your biggest client asks for concessions and the salesperson caves, what the salesperson is doing is training the client to continue to ask for more,” she notes. Salespeople need to understand that it’s never about the money, she adds – it’s always about something else. “If a prospect or client says it’s about the money, then we haven’t figured out the real reason somebody is making a buying decision.”
A salesperson’s best tactic is to turn the conversation back to needs. Try this script: “I’m a little confused. When we were initially talking, you said it was important to have x and y and z. And without those, you would have to compromise service to your customers, which you really didn’t want to do. But now we’re getting into conversation about margins, and that’s not really what this was all about. What did I miss?” You’ve now tossed the ball back into the prospect’s court and gotten him or her to reiterate the real motives behind the purchase.
“The salesperson has to have a conversation and find out the cost of NOT having your solution in place: equipment breakdowns, unhappy customers, or whatever,” says Gest. “If the pain of not having the solution in place is high enough, they’ll find the money to pay for it. That’s really the bottom line.”
Look at how your salespeople buy.
Over the years, Dave Kurlan, vice president of sales-training firm Objective Management Group Inc. in Westborough, MA, has developed an interesting hypothesis: How you buy is how you sell. Ask your salespeople to think back to the last major purchase they made. Maybe it was a ski vacation, a car or a home. Did they spend hours doing research online, comparing models and features and prices? Did they visit five stores? And even when they saw the perfect product, did they go home and sleep on it, just to make sure? Salespeople who nod their heads in agreement with this scenario will probably be sympathetic when their prospects want them to pony up the margin.
“If salespeople tend to price-shop and their prospects want to do that to them, they’ll generally understand – and drop the price or break open the financials,” says Kurlan. Recognizing and understanding their own motives as buyers can help salespeople resist identifying too closely with their prospects and sabotaging the deal.
Are you on the right playing field?
If you find yourself in a tug-of-war over margins, chances are you’ve landed squarely in the purchasing department. Get out, fast. Dave Kurlan suggests this response: “I spent x time talking to (person with decision-making authority). She specifically told me the company could spend x for this solution. She was thrilled with the solution we’ve provided. And our price is below the budget she has to spend.” Such an approach skillfully reminds the purchasing agent that the true decision maker wants the deal executed, period.
If a client truly insists that it’s “show me your margin” or nothing, you can always opt to walk away. That’s what John Connor of Quality Assessments Mystery Shoppers did. “Somebody like this is going to be a high-maintenance customer. He’s going to nickel and dime you to death with extra demands. I didn’t have any reservations about passing on his business.” To this day, he still doesn’t.