Does this scenario sound familiar?
Your team painstakingly creates a segmentation model and accurately calculates willingness to pay within each segment. You deliver those prices to the sales team in a way that’s impossible to misunderstand.
Then a salesperson is talking with a customer that is about to make a $10,000 purchase. The customer says, “Hey, how about a 5% discount for being so loyal all these years?” The sales rep does a quick calculation in their head and thinks, It’s only $500, it can’t possibly hurt the company. Plus, it only reduces my commission by $50.
“Sure!” they say enthusiastically. “That’s a tiny price to pay for a customer whose business we appreciate as much as yours.”
But what the salesperson isn’t considering is that this particular segment might have tight margins. If the company is making 20% profit on the sale, that’s $2,000. The $500 discount just reduced your margins by 25%. And if the margins are any tighter, the net result is even worse.
Afterwards, the pricing team is aghast. How could the sales rep do something so stupid? It was all spelled out for them so clearly!
And the salesperson thinks the pricing team is being ridiculous. It was just $500 for a company that makes millions. And after all, wasn’t it better to close the deal than to let it slip away?
Solving the over-discounting problem
One reason this happens is because the sales team just doesn’t understand the impact that discounts have on net income. As a pricing professional, you’re steeped in this knowledge. But sales teams often don’t spend that much time thinking about profit margins and long-term customer value. They might never have gone through that math.
One way to fix this issue is to take the team through the math step by step. Show them the impact that a 1% impact can have on profitability, and use some real-life examples to help the lesson hit home. And to reinforce the lesson, make sure your compensation strategy takes profitability into account.
We talk you through this approach in the webinar on Getting Control of Discounting. It explains how to put performance metrics and incentives in place that help eliminate this all-too-common scenario. And it includes tips to navigate the organizational dynamics and potential conflicts that might ensue.
Those conflicts are highly like to include some justifications from the sales team. Neutralizing the Sales Team’s Excuses dives deeper into how to handle these situations professionally and diplomatically.
There are, of course, lots of other reasons why over-discounting can happen. These webinars cover many of these other scenarios as well, and offer tips on how to overcome them.
Remember: the sales team are not your enemies. They just have a different objective and different mindset than the pricing team.
Once you start understanding why they think the way they do, it gets easier to help them understand your perspective. And that’s a good first step to help prevent over-discounting.
Sales reps are already doing a lot of mental math when they are calculating their potential commissions on sales. You just need them to do one more calculation where they figure out the true impact of a discount on margins. While this might be a common problem, it’s completely solvable. And those webinars can help you reduce the prevalence of discounts in your organization.
Getting Control of Discounting
In B2B, discounting tend to be the norm rather than the exception. How do we make sure the discounts are appropriate and warranted? And how do we do it without alienating the sales team?
Neutralizing the Sales Team's Excuses
When sales reps fail to do what's expected, it's human nature to offer "explanations" beyond personal failing or expedience. Learn how Pricing can address the top "reasons" for poor price execution in the field.
