Six Steps to Combat Eroding Margins

It's worth repeating especially in a down economy....

Six Steps To Combat Eroding Margins

1. Analyze the lifetime value of each potential customer. Look at overall impact of making particular types of sales, and invest sales resources in only those that have the best chance of driving profit in the long term. In our experience, those customers most likely to be won over by price concessions rather than other factors tend to have the least long term value. The desire for rock bottom pricing doesn’t go away (so follow-up contracts don’t recoup upfront investment in winning this customer), and their focus on price is an indicator that they discount the unique value your firm can offer. It is your return on customer acquisition costs that matter, not the total number of customers. If the return for each customer is positive vs. the investment required to get them, your business will thrive.
2. Differentiate based on added value, not lower prices. Winning customer through deep discounts kills the customer’s value to you forever. Your customers expect you to be able to articulate your unique value.
3. Sell solutions to specific business problems, not technology. Selling solutions to business problems makes it easier to price by the business value of the solution, rather than the cost of the technological components that are part of the solution.
4. Provide discounting guidelines. Discounting works in the long term only when discounts are tied to corresponding changes in value delivered or costs. If a customer pushed for a discount, consider changing the offering so that it costs less to deliver, by taking out something that a customer doesn’t value. For example, delaying service delivery several weeks to better manage your capacity may lower your effective cost, justifying the discount.
5. Align sales incentives. In the end, a salesperson’s performance will follow their incentive structure, so make sure their bonus structure reinforces the above strategy. Consider a rolling 90-day sales view, rather than quarter to quarter. By constantly looking at the last 90 days, you can see performance trends. The end of a quarter becomes less ‘make or break’ for your salespeople, and there are fewer transactions in the short term that can hurt the long term.
6. Invest in sales training. To deploy this approach, salespeople must be taught to articulate the value of your company’s offering, and differentiate it from competition. The better the sales force can do this, the higher the win rate against competitors competing based on price. Most importantly, teach salespeople to respond to customer’s requests for price reductions by rearticulating value.

All of this is easy to say, but can be hard to do. Behaviors are deeply entrenched, and in a competitive bid situation it is hard to get past the mentality of winning the business regardless of long term cost. The steps above reduce the discounting-first mentality, and can lead to a more profitable customer base.