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Want to Sell More? Take the Cost Out and Reduce the Price

June 1, 2009
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In my early career, I spent a good many years in field sales and sales activities in the plumbing and HVAC industries. Maybe I was more lucky than smart but, back in those days, I sold more than the previous year(s) and made more money each consecutive year.  But this experience was early in my career and I made the decision to go back to graduate school and my philosophy of selling was forever changed. 

In my graduate program, I was fortunate to have as my instructors several renowned professors of industrial marketing. These men, unlike many of the academics today, had solid experience in industry before leaving and getting their PhD’s. As I loaded up on industrial marketing and operations coursework, I discovered one immutable fact.  Industrial companies that survived and won their markets had a common thread. That is they knew how to take cost out of the product, its application, and its supporting infrastructure and take the cost advantage to the marketplace.

From then on, my perspective on selling was dramatically changed. If sellers, in industrial settings, couldn’t demonstrate value by reducing cost for the customer, they were ineffective and part of the problem. To understand if your sellers know how to take costs out and demonstrate value ask them these questions:
  • What is life cycle costing and can you demonstrate it for several of our key products?
     
  • What are the most cost intensive parts of your customer’s businesses and can you help in reducing that cost, solve their pain, and get the order?  Give a presentation on how you’ve done this recently?
     
  • How can you reduce the costs of interaction between your employer (us) and the customer and take the cost savings to the market?

If you don’t get good answers to these questions then my estimate is that you are in for some trouble in the next decade and I’ll tell you why in the next section. 

The Decade of Low Cost or Order Lost

It is apparent to most wholesalers that the economic sluggishness we are in will last for a long time. Depending on the forecast, GDP growth is likely to be sub-par (2% per annum range) for several years. The attached link from Mohammed El-Erian, CEO of Pimco, says it well enough, and I include it here because I believe Mr. El Erian and Pimco to be one of the better pragmatic forecasters of the economic cycle.    (http://247wallst.com/2009/05/26/if-8-is-new-unemployment-benchmark-simulus-plans-have-failed)

Take a 2% economic growth and the heavy debt burden on citizens and businesses and you have a formula that is looking for the best deal for a long time. Consider that, in addition to the debt load and slow growth, other cost out changes will become prevalent and have a significant impact on industrial markets including:
  • Foreign made goods will take a larger share of the U.S. pie. These goods have a price advantage of more than 30% less than comparable goods made by domestic brands made in the same foreign countries. Three years ago, co-author Steve Griffith and I researched the trend of wholesalers buying foreign products and it was apparent to us then that there was absolutely no way that many domestic brands could float their infrastructure costs against these goods.
    Many of the marketing programs, association programs, sales programs, etc., provided by domestic brands were considered of low value. These tactics that accompany push selling and marketing are not used or seldom used by foreign brands and most wholesalers would take the price advantage over marketing and sales programs and association frills.

     
  • E-commerce for large customers is becoming a necessity. As long as a customer can find what they want, order it online, and get it picked, packed and shipped accurately, the need for sales assistance is greatly diminished. Smart wholesalers are moving more customers online, reducing redundant sales functions, and taking the cost advantage to the market or investing it in other technologies to drive future efficiencies.

     
  • Knowledge is growing among wholesalers that not all transactions make money and not all transaction types are worth processing. The field is called Transaction Economics and it finds that a significant part of operating expenses is drained by orders that don’t cover their processing costs. Wholesalers that recognize this, move the firm to economically viable transactions and mitigate loss on money losing transactions will have the ability to take a better price to the street as their cost platform is greatly reduced.  In short, they don’t waste operating expenses on stuff that doesn’t make money.

Our observation is that these events aren’t sales driven but they are important for long term profitability. So, we expect that the wholesale organization will fund disciplines such as supply chain management, I/T for e-commerce development and adoption, and knowledge workers to move the organization to understand transaction-based economics.

These events, properly adopted, will reduce the operating cost structure of distributors and, true to the lesson I learned two decades ago in industrial marketing, the low cost producer of sufficient quality will win. 

Where Selling Comes in and Goes Out

If your sales people aren’t tuned in to how they can change the Transaction Economics of their customers, get their customers to use e-commerce, or switch them to low cost global brands, then they aren’t in tune with the long-term cost reduction trends in industrial markets and they and your company will run the risk of losing in a slow growth, price sensitive distribution channel that still has too much capacity. If you can’t use your sellers strategically to support these trends, then we’re not all that convinced that they add value to the customer.

Four years ago, co-author Rich Vurva and I questioned end users who purchased their products from industrial wholesalers. If they had a 4% price reduction or a distributor sales person which would they prefer? At the time the average cost of an outside sales force to top line sales was 4%. The answer we got back is that, on average, 75% of industrial buyers would take the price reduction. That was four years ago when the economy was in relatively good shape.

Today, the need to reduce costs, including the sales force is better accepted. The problem, at least to us, is that many wholesalers still cling to the old models of filling the pipeline with sellers and picking up any order you can. This is evident in the “romper room” seminars for distributor sellers that talk about attitude, effectiveness processes, compensation plans, and account-based strategies. 

Most of this subject matter is old hat and the fact that associations push it and distributors buy it, to us, exemplifies an industry that needs severe change but doesn’t know what to change to. The traditional training and heuristics of sales forces and sales management won’t do well in the markets of the future. If your sellers aren’t plugged in to helping customers get cost out in the aforementioned ways, they run the risk of being obsolete and a strategic risk.

In summation, if you want to sell more, make sure your sellers are helping get costs out and giving the customer a better deal. Much of yesterday’s knowledge about attitude, compensation, and account management is Willy Lowman fare (Death of a Salesman) and “hail fellow, well met” may get you in the door but will likely lose the order as your cost is too high.

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