Table of Contents
Praise
Title Page
Copyright Page
PREFACE
CHAPTER 1 - EMPLOYERS CAN FAIL OR GO BROKE—AND YOURS CAN, TOO
SO MOST BUSINESSES FAIL—WHAT’S THAT GOT TO DO WITH MAKING MY PRICES STICK?
IT MAY BE ILLEGAL TO BE CROOKED, BUT IT ISN’T ILLEGAL TO BE STUPID
CAUSES OF BUSINESS FAILURE
WHY COMPANIES CUT PRICE WHEN THEY GET INTO TROUBLE
CHAPTER 2 - BUT COMPETITION KEEPS CUTTING MY PRICE
CUSTOMERS ONLY BUY ON PRICE—OR DO THEY?
DO YOU BUY BECAUSE OF PRICE?
PRICE-BUYER! CAN HIM OR FIX HIM WHO WORKED FOR US WHO WAS A WE’D CAN ANY SALESPERSON
THE HOT STOVE PRINCIPLE
MOST SALESPEOPLE THINK PRICE IS MORE IMPORTANT THAN IT IS
WHAT HAPPENS WHEN YOU DON’T TALK PRICE?
CHAPTER 3 - DETERMINING YOUR COMPETITIVE ADVANTAGE
PRICE
QUALITY
DO YOU APPROVE OF SELLING?
CHAPTER 4 - SERVICE AS YOUR COMPETITIVE ADVANTAGE
WE ARE YOUR FULL-SERVICE BANK—WE ARE OPEN FROM 9:00 TO 5:00
SELLING SERVICE INSTEAD OF PRICE—OR EVEN QUALITY
THE BADLY FLAWED BETTER MOUSETRAP THEORY
DO YOU REALLY LIKE TO PROVIDE YOUR CUSTOMER GREAT SERVICE?
SALESPEOPLE SHOULD PERSONIFY CUSTOMER SERVICE
CHAPTER 5 - WHY YOU REALLY SHOULDN’T MESS WITH PRICE-BUYERS
DELIVERY—THE ULTIMATE COMPETITIVE ADVANTAGE
REASON 1 : THEY CAN’T GET IT
REASON 2: THEY CAN GET IT, BUT . . .
CHAPTER 6 - WHAT BUYERS AND CUSTOMERS REALLY NEED—HINT: IT ISN’T LOW PRICE
THEY NEED TWO OR MORE VENDORS
CUSTOMERS NEED ON-TIME DELIVERY
THEY LIKE THE IDEA THAT THEY’RE CUTTING A DEAL
THEY NEED RESPECT
THEY NEED HELP AND GUIDANCE ON COMPLEX PURCHASES
THEY NEED TO BUY WHAT THEY ARE TOLD TO BUY
THEY NEED TO GET WHAT THEY BUY—QUANTITY, QUALITY, TIMELINESS
THEY NEED TO MINIMIZE INVENTORY CARRYING COSTS WITHOUT JEOPARDIZING THEIR ...
THEY NEED TO BUY FROM A TECHNICALLY CURRENT AND FINANCIALLY SOUND VENDOR
THEY NEED MORE CERTAINTY ON A ITEMS (COMPARED TO B OR C ITEMS)
THEY NEED PRODUCTION/PERFORMANCE CAPABLE VENDORS
THEY NEED COURTESY, SPEED, AND TIMELY ACTION ON THE PART OF SALESPEOPLE IN ...
THEY NEED SPEED AND ACCURACY IN INVOICING AND ACCURATE COST INFORMATION
THEY NEED ORDER AND SALES SERVICE DEPARTMENT HELP
THEY NEED QUALITY TRANSPORTATION CARRIERS USED BY VENDORS
DELIVERY—YOU CAN’T SELL AT A HIGH PRICE WITHOUT IT
CHAPTER 7 - THINGS BUYERS WOULD LIKE BESIDES A LOW PRICE
AN EASY, “NO BRAINER” RELATIONSHIP
RELIABILITY AND DEPENDABILITY
PREDICTABILITY
REACTION TO THEIR NEEDS
SHORT DELIVERY TIMES
HELP AT REDUCING COSTS BY REALIZING SAVINGS
BREADTH AND DEPTH OF QUALITY
TOTAL PRODUCT OFFERINGS
KNOWLEDGE, COMPETENCE, AND FOLLOW-UP
WILLINGNESS TO “GO TO BAT” FOR THE CUSTOMER WHEN PROBLEMS ARISE
COMPLETE KNOWLEDGE OF YOUR PRODUCT OR SERVICE OFFERINGS
KNOWLEDGE OF YOUR PROSPECTS AND CUSTOMERS’ PRODUCTS AND SERVICES
PREPAREDNESS FOR SALES CALLS
REGULAR, PREDICTABLE SALES CALLS
TECHNICAL EDUCATION ABOUT WHAT THEY ARE BUYING, IF RELEVANT
INFREQUENT SHORT SHIPMENTS
EASE OF INTERPRETATION OF VENDOR PRICE LISTS AND QUOTES
EARLY NOTICE OF SHIPMENT OR PRODUCT PROBLEMS
ADVANCE WARNING OF DISCONTINUANCE OF ITEMS
UNDERSTANDABLE AND LEGIBLE SHIPPING DOCUMENTS
CHAPTER 8 - YOUR COMPETITORS’ DELIVERY PROBLEMS WILL GET YOU PROFITABLE SALES
THE ECONOMICS OF PRICING
VOLUME SWINGS ASSOCIATED WITH PRICE CUTTING: DETERMINING HOW MUCH MORE YOU MUST ...
IMPLICATIONS FOR THE REAL WORLD
CHAPTER 9 - YEAH, BUT I’LL MAKE MORE MONEY IF I CUT MY PRICE—AND I DON’T CARE ...
WHAT HAPPENS IF YOU RAISE YOUR PRICE?
YEAH, BUT I’M NOT GOING TO MAKE AS MUCH
WHY GO BROKE TIRED?
NOBODY CAN MAKE ANY MONEY WORKING AT EL CHEAPOS
WE WERE BUSY RIGHT UP TO THE LAST DAY
I STILL SAY I’D MAKE MORE MONEY SELLING AT THE LOWER PRICE
CASE STUDY IN PRICING STRATEGIES
CHAPTER 10 - HOW TO FACE A COMPETITOR’S PRICE CUTS
CHAPTER 11 - THE TWO CARDINAL SINS OF SELLING
INVITING CUSTOMERS TO BEAT YOU UP ON PRICE
ADVERBS AND ADJECTIVES
NOUNS AND PRONOUNS
DEALING WITH TRAINED, SOPHISTICATED PROSPECTS, BUYERS, AND CUSTOMERS
THREE INVIOLATE RULES OF SELLING AT PREMIUM PRICES
CHAPTER 12 - BUYERS MAKE GOOD LIARS . . . IF YOU LET THEM
INTIMIDATION
DENIGRATION
PROSPECTS KNOW THE DIFFERENCES
CUSTOMERS CARE ABOUT THOSE DIFFERENCES
HOW TO TELL WHEN THE PROSPECT IS LYING
WHERE IS THE PROSPECT LOOKING?
THEY GET PERSONAL AND USE OPINION VERBS
CUSTOMERS WILL USE THE SUBJUNCTIVE MODE OF SPEAKING
CHAPTER 13 - HOW TO “HANG IN THERE” UNDER INTENSE PRESSURE TO CUT YOUR PRICE
THE “SO . . .” RESPONSE
THE “WHY NOT?” RESPONSE
THE FIRST “CAN’T GET IT”
THE SECOND “CAN’T GET IT”
THE PROSPECT DOESN’T WANT TO GET IT
“KEEP ON SELLING” STRATEGY
TESTIMONIAL OR CORROBORATION SELLING
LOOK HURT
CHAPTER 14 - INDICATORS THAT YOU ARE UNDERPRICING
IF PEOPLE DON’T WANT TO COME OUT TO THE BALLGAME AND WATCH IT, I CAN’T STOP THEM
MUCH CAN BE OBSERVED BY JUST WATCHING
IF YOU EVER MAKE A PRICING ERROR, YOU SHOULD MAKE IT ON THE HIGH SIDE
CHAPTER 15 - INDICATORS THAT YOU ARE OVERPRICING
BUT I REALLY THINK MY PRICES ARE TOO HIGH
CHAPTER 16 - HOW PROSPECTS WILL ATTEMPT TO GET YOU TO CUT YOUR PRICE
LEARN THE TRICKS AND COMBAT THEM
CHAPTER 17 - HOW TO FINALIZE A TRANSACTION WHEN YOU’RE FACED WITH PRICE RESISTANCE
DEALING WITH RESISTANCE
SALES TECHNIQUES TO USE WITH A PRICE-BUYER
LEARN TO USE STOPPERS
CHAPTER 18 - GENERAL GUIDELINES ON HOW TO PRICE
WHAT YOU SELL (OR YOUR BUSINESS) IS IN A WELL-ESTABLISHED MARKET THAT HAS NOT ...
THERE ARE TOO MANY SIMILAR OR IDENTICAL PRODUCTS IN YOUR MARKET
YOU OWN THE MARKET
IT DOESN’T COST MUCH TO SELL YOUR PRODUCT OR SERVICE
YOU GET A LOT OF HELP WITH THE ADVERTISING AND PROMOTION OF YOUR PRODUCTS OR SERVICES
THERE APPEARS TO BE A BASIC DEMAND FOR YOUR PRODUCT THAT IS PROBABLY GOING TO ...
YOU CAN SPIN OUT ADDITIONAL BUSINESS OPPORTUNITIES BY SELLING ONE PRODUCT AT A ...
YOUR CUSTOMERS KNOW WHAT IT COSTS YOU TO PROVIDE YOUR PRODUCT OR SERVICE
WHEN TO PRICE HIGH AND WHEN TO PRICE LOW
INTENSIVE MARKET COVERAGE VERSUS SELECTIVE MARKET COVERAGE
LARGE MARKET SHARE VERSUS SMALL MARKET SHARE
LOW PROMOTIONAL COSTS VERSUS HIGH PROMOTIONAL COSTS
COMMODITY PRODUCTS VERSUS ESOTERIC/EXOTIC PRODUCTS
MASS-PRODUCED PRODUCTS VERSUS CUSTOM-MADE PRODUCTS
CAPITAL-INTENSIVE PRODUCTS VERSUS LABOR-INTENSIVE PRODUCTS
SINGLE-USE PRODUCT VERSUS MULTIPLE-USE PRODUCT
SHORT PRODUCT LIFE VERSUS LONG PRODUCT LIFE
SLOW PRODUCT OBSOLESCENCE VERSUS FAST PRODUCT OBSOLESCENCE
LOW SERVICE NEEDS VERSUS HIGH SERVICE NEEDS
SLOW TECHNOLOGICAL CHANGE VERSUS RAPID TECHNOLOGICAL CHANGE
SHORT DISTRIBUTION CHANNELS VERSUS LONG DISTRIBUTION CHANNELS
FAST INVENTORY TURNOVER VERSUS SLOW INVENTORY TURNOVER
PROSPECTS FOR LONG-TERM PROFITABILITY VERSUS SHORT-TERM PROFITABILITY
LIKELIHOOD OF SPIN-OUT BUSINESS VERSUS ONE-TIME SALE
LARGE MARKET POTENTIAL VERSUS SMALL MARKET POTENTIAL
INSIGNIFICANT CUSTOMER BENEFITS VERSUS SIGNIFICANT CUSTOMER BENEFITS
BUSINESS-TO-BUSINESS MARKET VERSUS HOUSEHOLD CONSUMER MARKET
LIKELIHOOD OF FUTURE TIE-IN SALES VERSUS NO TIE-IN SALES
NEED FOR LARGE PARTS INVENTORY VERSUS NO PARTS NEEDED
HIGH LEVEL OF TRAINING VERSUS MINIMAL TRAINING REQUIRED FOR PRODUCT USE
GENERIC PARTS REQUIREMENTS VERSUS SPECIALIZED PARTS REQUIREMENTS
EASE OF NEW PRODUCT ENTRENCHMENT VERSUS EASE OF PRODUCT DUPLICATION IN THE MARKETPLACE
RAPID QUALITY ASSESSMENT VERSUS LENGTHY DETERMINATION OF QUALITY
LOW PRODUCT LIABILITY RISK VERSUS HIGH PRODUCT LIABILITY RISK
CONCLUSION
CHAPTER 19 - FINAL THOUGHTS ON SELLING AT PRICES HIGHER THAN YOUR COMPETITORS
LATE DELIVERIES
PARTIAL DELIVERIES
DESTRUCTIVE PRICING
CANCELING OR DELAYING ORDERS
REQUIRING “ADD-ONS” OR RENEGOTIATING ORDERS
SUPPLYING DEFECTIVE PRODUCTS OR PARTS OR UNQUALIFIED PEOPLE
ASSERTING QUICK PAYMENT SCHEDULES
SUBSTITUTING MATERIALS, PARTS, SUPPLIES, OR PEOPLE
HIGH PERSONNEL TURNOVER
LABOR RELATIONS PROBLEMS
A POOR REPUTATION RELATIVE TO ETHICS AND INTEGRITY
IN CONCLUSION: SOME BASIC GUIDELINES
SUMMARY
APPENDIX - THE PREMIUM PRICE SELLER’S READY REFERENCE GUIDE
NOTES
ABOUT THE AUTHORS
INDEX
Praise for How to Sell at Margins Higher than Your Competitors: Winning Every Sale at Full Price, Rate, or Fee
The two giants in their fields have collaborated to produce a straightforward, no-nonsense blueprint for anyone involved in the selling process. And make no mistake about it, any interaction you have with a client or patient is a “sale.” The only question is whether you’ll have to settle for a cut rate fee or get the fee that you really deserve. You must read this book.
—Nathan Wei, MD
Arthritis and Osteoporosis Center of Maryland
A revolutionary manual for improving and protecting your margins. Steinmetz and Brooks combine to give us this unique playbook that will allow us to WIN. Business and sales professionals will continue to reference the teachings and tools to perfect their game.
An absolute must-read for business leaders and sales professionals. Steinmetz and Brooks combine practical, real-world illustrations with great visual teaching techniques to provide a road map for selling at higher margins than the competition.
Larry Steinmetz and Bill Brooks combine their talents and years of practical experience to give your business the edge over the competition. It contains the recipe for protecting your margins and is so practical that you will find it at your right hand much more than on your bookshelf.
—Joseph Neidig
Vice President of Human Resources and
Administration
Red Spot Paint and Varnish Co., Inc.
The chapter “Why You Really Shouldn’t Mess with Price-Buyers” alone justifies the cost (and time) for this book.
—Mike Pierson
President
Beckwith & Kuffel, Inc.
In my industry, the low price provider is king—but thanks to the hard work of Dr. Steinmetz and Bill Brooks, I’ve never even had to consider cutting my company’s prices. Instead, we’ve broken away from the pack as “the only choice” regardless of price. No matter what you sell or who you sell it to, you owe it to yourself to read this book!
—James A. Canale
CEO and President
Net2 Technology Group, Inc.
This book is the definitive work on full-margin selling for executives, sales managers, and salespeople alike. It is, undoubtedly, the ultimate source for selling at full price, fee, or margin.
—Jim Taylor
CEO
Thomas Group
Finally, a book that allows salespeople to understand the impact of “cutting prices” and how to increase sales margins! This is a must-read book for all sales personnel, especially those who want to “make it up in volume.”
—Robin Wall
Vice President of Sales
Dearing Compressor & Pump Co.
A practical handbook for CEOs, general managers, and sales managers struggling with how to meet competition in the marketplace and at the same time preserve the profit margin required not only to stay in business, but prosper over the long term.
—Edward E. Newcomer
Chairman of the Board
E. E. Newcomer Enterprises, Inc.
We constantly preach the importance of margins as we have far greater potential to positively influence that outcome, than gross sales revenue itself. A few points on the top line translate to huge gains on the bottom line. Bill Brooks’ insights to help us get there have made a huge difference.
—James MacDonald
President
R. F. MacDonald Co.
This book reminds us to consider customer relationships in the context of a marathon, not a sprint. It shares our company’s philosophy that building partnerships with customers and offering great service is vital to success. It’s not just about winning customers . . . but keeping them for the long haul.
—Chuck Burns
Area Vice President
First Citizens Bank
PREFACE
This is the thirteenth book I’ve written. Every time I write a book, I wait until it’s almost time for page proofs before I write the preface because I like to reflect on what the book really is about in order to say a few succinct statements about the book for the prospective reader.
For this particular book, I am especially mindful of something I wrote in the preface to my first book in 1992. I wrote:
The perspective I got for this preface came from a vacation I took just a week ago. I happened to read a piece of advertising literature of a small (albeit international) manufacturing company in one of the better-known ski resort towns in Colorado. The first paragraph of that company’s literature proudly boasts: ‘We are not just running a business, but living a lifestyle.’ I’m sure the people who are running that company are proud of that statement; genuinely believe that one need not be too serious about running their business—that if you produce a good product, the product will sell itself and one need not worry about the vulgar details of operating a business in a business-like fashion. Another interesting part of this manufacturer’s literature is that the enclosure with this literature compared this company’s prices with competitors’ prices and—you guessed it—this company’s prices were lower than their competitors’. That’s right. They allegedly have a superior product and, furthermore, can sell it at a price lower than their competitors’ and (surely?) make money doing that.
Once you’ve read this book, you will appreciate the sarcasm in the above paragraph. I revisited that Colorado resort town just last week to check out how the business was doing. At no surprise to me, it has vanished without a trace. I pointed out in the original book that one cannot run a business successfully via a series of propitious accidents or in a cavalier manner. We make that point again in this book: Business is a game of margins, not a game of volume. Whether one is running a manufacturing company, a wholesale operation, a distributorship, a retail store, a construction company, a financial institution, or a professional service organization, all too many people operate these enterprises with the idea that one can sell at prices (fees, rates) lower than their competitors and still be successful. Oh, if it were only true—and that easy. That is not to say that one cannot have fun running a business or professional organization. Or that there is no time for a good quality lifestyle. But the basics of running a good (successful) business are not founded on a “fun first, the business (practice) will take care of itself ” attitude. Too much water has gone under the bridge throughout history proving the point that a serious, professional manner has to be established at the helm by those running the operation.
Fortunately, history gives us many lessons in the good and the bad practices that happen in running a business—admittedly, mostly bad, but there are also good examples. The common threads that underpin the good and successful examples are what we have chosen to present in this new version of my original book. We have expanded it in many ways. We have added chapters on things such as the cardinal sins of selling and how to tell when a customer is lying about having a sweeter deal “down the street.” I also added a chapter on how the salesperson can “hang in there” under intense pressure to cut the customer some kind of deal on the price. These additional chapters particularly enhance the book because, based on my experience consulting with companies and conducting more than 2,000 seminars on this subject since writing the first book, I have found these issues to be the more vexing problems for most salespeople. Fortunately, given the time period since publishing the first book, I have developed material that provides solutions to many of these problems.
The original book and this book are about how you sell things at prices higher than your competitors—not how to give things away. The organization of this book is much like the original book and essentially runs as follows: We start with FACTS—and the facts are that most companies do go broke and business is a game of margins, not a game of volume.
The second dimension of this book has to do with UNDERSTANDING. Selling at prices higher than your competitors requires an attitude and an understanding on the part of the salesperson. Some of that understanding includes the following: People (customers) don’t buy on price alone. Furthermore, there are five factors on which one can compete in selling a product or professional service, and price is only one of the five. Quality, service, sales capability, and ability to deliver the product or professional service to the customer, when they need it, where they want it, and on time are the other factors. Each of those remaining four is far more significant than price. Another bit of understanding is that buyers really need and like a lot of things—and low price isn’t necessarily one of them. Sales reps who intend to sell at prices higher than their competitors need to get inside the customer’s head and understand how their customers’ needs and likes can fit with their ability to command a higher price than competitors.
The third section of this book concerns REALITIES. Many business and professional people, as well as many salespeople, simply do not understand the economics of pricing. Most think they do; very few do. For example, have you ever asked a business or professional person or a salesperson how much additional volume of any product they have to sell (or service they have to provide) to make up for a price cut? Usually you’ll get some vague answer, or some wide range of answers like: “Twenty to forty percent more, I guess.” And, once in a while, you even get an honest answer such as, “Gee. I don’t know.” Business and professional people are their own worst enemies, as are sales representatives. They tend to blindly believe that somehow, someway, if they get price competitive (i. e., cut the price) that they will “make it up in volume.” This section of the book, devoted to the realities of the marketplace, is absolutely essential for the business or professional person to understand if he or she is to sell at prices higher than competitors.
It is difficult, if not impossible, to cut price and make it up in volume while, on the opposite end, it is often possible to raise price, lose volume, and make far more money. People who have attended the seminars that I do on “How to Make Your Prices Stick” and “How to Sell at Prices Higher than Your Competitors” have, over the years, related numerous testimonials concerning the fact that raising prices is not the end of the world. Doing so does not cause sales to plummet, and often simply means that the company or the professional organization just makes more money with less aggravation and heartache for those endeavoring to earn a living in that business.
The newer part of this book is the material I added on how the salesperson can avoid being victimized by the hard-charging, demanding price-buyer who puts the salesperson in as awkward a position as the buyer can in an effort to get the salesperson to cut the customer some kind of deal on the price (or other terms of the sale). Many salespeople don’t understand either what to do with an extremely demanding customer or how to tell when a customer is lying, fabricating, or not being 100% truthful with the salesperson about having “a sweeter deal down the street.” In my extensive experience in dealing with these problems as a seller of my own companies’ products and professional services and/or presented to me as a problem that a trainee needed help with, I have had the luxury of time to develop answers to these types of questions and issues. I make the particular point that one does not, as a salesperson, want to call a customer a liar. But customers do lie, or fabricate stories that are not fully true, in an effort to get a salesperson to shoot him/herself in the foot and unnecessarily cut the price or squander away the possible profitable side of the deal. This all new section of the book is an especially valuable addition to the manuscript.
The final and major portion of this book has to do with WHAT TO DO ABOUT IT. Thus, the bulk of this book addresses such things as how to handle price pressure, price resistance, and price competition. We spend a lot of time talking about how to face up to and handle price cutting by your competitors, as well as how to determine if it really is price that is the problem in the mind of the customer. We devote attention to understanding the basics of this statement: Your customer will tell you when your prices are too high—as well as tell you when your prices are too low. By analyzing those indicators of overpricing and underpricing which we develop, the sales rep can determine very accurately whether or not he/she should be able to realize a higher selling price in the marketplace.
Yet another very fundamental system of coping with price pressure in the marketplace is the material that we develop in this section on tricks used by those serving in the role of procurement officers, purchasing agents, or buyers in attempting to get the sales representative to cut his/her own price. From the feedback I have received from my seminar attendees, identifying these tricks has given salespeople strong support in foiling the attempt of buyers to get salespeople to cut their prices.
In this section of the book, we also discuss closing sales in the face of price resistance, as well as sales techniques to use in facing down price resistance. Finally, we address the question of “Stoppers”—the methods and techniques that sales reps use to stop customers from beating on them for additional price reductions.
All in all, I’m very pleased with the end result. I’ve been doing seminars on this subject for so many years I hate to think about when I started. In this book we have assembled a hard-nosed, let’s-face-life-with-reality look at how those companies and individuals who make a lot of money selling at high prices manage to do so. They don’t do it by cutting prices, fees, or rates. They do it by knowing the realities of selling at prices higher than one’s competitors. They face facts, they understand customer buying motives, they face the realities of the economics of selling products and services, and they know what to do about the customer who says, “Your prices (fees, rates) are too high.” Furthermore, they do not become duped by the overly aggressive or out-and-out unscrupulous customer. They face reality, work professionally, and have a good time running their business (or practice) AND enjoying life to its fullest because of their success.
I hope the reader will find this book every bit as productive as those who have heard me speak these words in public and private seminars—and I wonder what the people who worked for that manufacturer in the mountains in Colorado are doing now . . .
LAWRENCE L. STEINMETZ, PHD
Boulder, Colorado
In 1992, Larry Steinmetz graciously asked me to write the introduction to his original book on this topic. Not only was I thrilled to do so, but also I became hooked on his concepts and the breakthrough ideas that his book offered.
Now, more than 13 years later, I have had the privilege of co-authoring the newest, most up-to-date, cutting-edge version of those original ideas in this, its latest version.
This book is intended to deliver to you, the reader, ideas, strategies, tactics, and concepts not available anywhere else in the world. After selling for well over 35 years and speaking, training, and consulting with sales organizations for more than 27 of those years, I am fully convinced that the single biggest issue confronting most sales organizations and salespeople is how to defeat lower priced competitors. Period.
Whether you are a business owner, executive, sales executive, sales manager, or salesperson, this book has great value for you. Dr. Steinmetz and I approached this book with the premise that whether you sell tangible products, an intangible service, large or small ticket products, or anything in-between, there is great value for you within its covers.
Having said that, I invite you to prepare to learn things that can and will deliver great margins to your business. However, please be warned: The ideas you find here could revolutionize your business. They could also, however, cause you great concern as you examine some of your current pricing, selling, and business practices. However, if you face reality and take action, your entire career will be revolutionized. I guarantee it.
WILLIAM T. BROOKS, CSP, CPAE, CMC
Greensboro, North Carolina
CHAPTER 1
EMPLOYERS CAN FAIL OR GO BROKE—AND YOURS CAN, TOO
Our basic problem has been our 14 quarters of losses. And that’s because the price of the equipment we build has been less than the cost.
—Norman J. Ryker
It is, indeed, an unfortunate fact:
Most businesses fail. They start off, expand a lot or a little, and then they die. Statistically, 16 out of 17 businesses that start in the United States will fail and/or go out-of-business—most of them in the first two years of their existence. The average life expectancy of all businesses in the United States is estimated at 7.5 years. In fact, one of the headlines used to promote a series of highly successful business management seminars has been,
If your business is not 8 years old, the odds are it never will be! No less a business giant than Thomas J. Watson, the builder of IBM, in the very first paragraph of his book,
A Business and Its Beliefs,1 wrote:
Of the top twenty-five industrial corporations in the United States in 1900, only two remain in that select company today. One retains its original identity; the other is a merger of seven corporations on that original list. Two of those twenty-five failed. Three others merged and dropped behind. The remaining twelve have continued in business, but each has fallen substantially in its standing.
Figures like these help to remind us that corporations are expendable and that success, at best, is an impermanent achievement which can always slip out of hand.
Watson wrote that in the middle of the last century. As we enter a new century, the situation is potentially far worse.
It is a statistical reality that most businesses do sooner or later fail. For us to state that most businesses fail is just as true as it is for us to tell you that if you are not 80 years old, the odds are you never will be. The average life expectancy for people in our society is just short of 80 years: For women it’s just at 80 years and for men it’s 74 to 75. But on average, we will all be dead by the time we’re 80. And, on the average, most businesses will be dead before they are 8 years old.
SO MOST BUSINESSES FAIL—WHAT’S THAT GOT TO DO WITH MAKING MY PRICES STICK?
Most businesses end up in bankruptcy court and are liquidated or sold off because they aren’t making any money. But why should we talk about failure? This book is about success—about how to sell at a premium price and how to make a profit for yourself and your employer. Right? Not necessarily. However, we would argue strongly that one of the first things you need to recognize is that the fundamental problem in making your prices stick is that you’re competing with many people and businesses who are actually going broke. And when businesses start losing money, they cut their prices. In a desperate attempt to try to stay alive, they slash their prices because they’ve always been told that they can make it up in volume. They think if they can just sell more, then surely they will come out on top. But that doesn’t work. When was the last time you saw a business that had a going-out-of-business price increase?
Most people have no idea how many businesses actually do fail in the United States. It is estimated that there are 800,000 new businesses started in the United States each year, yet there are only about 11,000,000 businesses existing in the country at any given time. Let’s relate that number to another relevant statistic. According to the U.S. Census Bureau, there are approximately 293,000,000 Americans. That means that there is roughly one business for every 27 people. Roughly, only about 40 percent of our population work outside of the home. That means that we have approximately one business for every 11 people employed outside the home. Therefore, if we have 800,000 new businesses starting each year, and we have only 11,000,000 businesses, the failure rate has to be rather extensive. If it were not, we would eventually have more businesses than we have people to run them.
Maybe we should say that fortunately, half of those 800,000 businesses that start fail the first year. And that fortunately, half of the remaining half fail the second year. This means that roughly three out of four businesses that start fail in the first two years of their existence. And you need to keep that in mind when you come home from a hard day of selling, with your nose bloodied, and your knuckles skinned up, and you say to yourself, “We are getting killed; we are getting hammered out there. How can those guys sell at that price? If they can sell at that price, we can, too.”
Well, Mr. or Ms. Sales Professional, you have only part of that right. They can sell at that price—and go broke and you can, too! If you base your price on your competitor’s price—and they are going broke—you will, too. Typically, someone among your competition is going broke and usually is cutting prices on the way out. Owen Young, who is credited with having built General Electric, once said, “It’s not the crook we fear in modern business; rather it’s the honest guy who doesn’t know what he is doing.”
IT MAY BE ILLEGAL TO BE CROOKED, BUT IT ISN’T ILLEGAL TO BE STUPID
Whom would you rather compete against, a crook or an idiot? If you think about it, you’ll no doubt decide in favor of a crook. Have you ever seen a crook sell below cost? Have you ever heard anybody call the Mafia poor business people? You may not approve of the Mafia and their “business,” but you have never heard anybody say they don’t know how to make money. And lots of it!
Now, let’s address the idiots. Have you ever seen an idiot sell below cost? Which idiot? And on what day do you want to talk about? You see, Owen Young was right. Fundamentally, it is not the crook we fear in business, but rather it is the honest idiot. The people (or organizations) who don’t know what they are doing are the ones who foul up the works. And fundamentally, they are the ones giving away their products and services by cutting their prices.
CAUSES OF BUSINESS FAILURE
Typically, when a business does go bust, especially if it gets into enough trouble to file bankruptcy, three things occur:
1. They experience a period of declining gross margin;
2. Wages, as a percentage of sales, begin to increase; and
3. Sales volume begins to increase.
In this book—because we are dealing with the subject of how to make your prices stick—we are going to deal in depth with only two of those three things: declining gross margin and increasing sales volume. Wages are a whole different issue, deserving its own book.
Declining Gross Margin
A declining gross margin indicates that there is a pricing problem. The way to calculate gross margin (GM) is by subtracting the cost of goods sold (COGS) from sales:
The only way that gross margin (as a percentage of sales) can go down is if a business cuts its prices or fails to raise its prices when its costs rise. That’s it. Even though that can occur three different ways, the bottom line is the same: The sales price is too low relative to the cost of goods sold. These three ways are shown in the box titled, “The Three Ways Gross Margin Can Decline.”
Declining gross margin should inevitably send a signal to an organization that it is experiencing a pricing problem that will ultimately result in trouble. It clearly signals either an inability or an unwillingness to sell its products or services at a high enough price in comparison to the costs. Most organizations that file for bankruptcy due to operational reasons have had a clear history of declining gross margin for a significant time before they ever filed. They often will blame it on “cost increases,” but the real culprit is a declining gross margin: Their selling price was too low relative to their cost.
In fact, one of your authors recently had a conversation with the CEO of a firm that had to sell out before bankruptcy. And sell out he did. What did the former owner say? Here it is: “If I had increased price and cut capacity to half, we’d be in business today.” His error, which he now sees, was that he did the exact opposite.
Wages, as a Percentage of Sales, Begin to Increase
A second condition that normally prevails when any entity fails financially is that wages, as a percentage of sales, begin to increase. This normally occurs because the organization just has too many people on the payroll or too many people making too much money. There often are too many people sitting around on their hands, watching other people who are also sitting around on their hands. However, as we’ve suggested, that’s a subject that falls into another area of business management and not what we want to talk about here. However, for the decision-making executive, that is certainly an area that should be monitored constantly. Why is that? Because it often proves difficult to downsize a work force even if people don’t have anything to do. Executives must never allow wages as a percentage of sales to increase above a point where they have good profitability, or their organizations will likely go broke—even if they don’t have a problem in making prices stick.
The Three Ways Gross Margin Can Decline
a. If you
cut price $5 to sell something, situation A transpires:
Situation A
b. If you don’t cut price to get a sale, but
fail to raise price when your costs go up $5, situation B transpires:
Situation B
c. If you find your costs are going up $5 and raise your price only by the amount of your cost increase, situation C transpires:
Situation C
*Note: Your dollar gross margin stays at $35, but your gross margin as a percentage of your sales goes down from 35% to 33%. In short, raising your price the same dollar amount as your cost increase is a de facto price cut. You must raise your selling price the same percent as your percent increase in costs if you are to maintain your gross margin percent in the face of rising costs.
Sales Volume Increases
Surprisingly, most entities that go broke do it during a period of an increase in sales volume. This statement shocks most people (especially those involved with sales) because most everyone mistakenly believes that a business fails as a result of a lack of sales volume. The facts are, however, that business is not a game of volume. Business is always a game of margin. If a business doesn’t maintain gross margin at an adequate level, it is going to go bust, regardless of its sales volume. Cheap seats, cheap products or services, and giveaway prices really do have a way of attracting more and more customers. Have you ever seen a yard sale go wanting for customers? We don’t think so. Lots and lots of items for sale and all at very low prices.
Business Is a Game of Margin, Not Volume. Many large company leaders seem to sincerely believe, albeit blindly, that volume and market share are the secrets to business success. If that is the case, then why are multiple billion-dollar corporations filing bankruptcy every year in the United States? In the years between 2000 and 2004, 23 of the 40 biggest bankruptcies of all time occurred.
The year 2001 was a record year for big dollar bankruptcies—there were 257 major organizations that filed in the United States in that year alone. Since then, we’ve seen even more high-profile bankruptcy filings such as Enron, Kmart, and WorldCom—the record holder with assets worth more than $103 billion on the day before its default and credited with a bankruptcy worth $11 billion.
Westpoint Stevens, once one of the largest home fashion manufacturers in the United States, filed for Chapter 11 protection before agreeing to be bought by an investor group, WL Ross & Co., which had already purchased failed textile companies Cone Mills and Burlington Industries. The Fleming Companies, which not only was a supplier to Kmart, but owned IGA and Piggly Wiggly grocery stores, filed for bankruptcy in 2003 with revenues of $15.6 billion.
Delta Air Lines filed a report with the Securities and Exchange Commission that it would likely incur a net loss for 2005, and as we go to press in October, the airline has filed for bankruptcy. (Like many airlines, Delta narrowly avoided bankruptcy once in 2004 when its pilots agreed to concessions.) The same day, Northwest Airlines also filed for bankruptcy protection, negatively affected by union troubles, an out-of-date “hub-and-spoke” model, and increasing fuel costs.
“As goes General Motors, so goes the nation,” was a famous expression of the 1960s. But as we write this, there is speculation in some very prestigious business journals that General Motors itself may be bankrupt by the year 2020 or before.
Even these few examples should provide a fairly graphic picture that business is, indeed, not just a game of volume and market share. A business must maintain an adequately high price against its costs (a high gross margin), or it is going to follow these well-known predecessors down the well-traveled path to bankruptcy court.
But We Can Make It Up in Volume. When businesses get into financial difficulty, it’s inevitably because some genius gets the bright idea that one can cut price and make it up in volume—to at least be “competitive.” Most people get that idea when they take a course in economics. In fact, if you have anything to do with selling or pricing, one of the worst things that may have ever happened to you was taking Econ 101 when you went to college.
Just to emphasize the point that the bulk of our population thinks that the only way to do business is to cut price and make it up in volume, consider what happened as a result of airline deregulation. Way back in 1978, then-President Jimmy Carter deregulated the airline industry. This meant that the airlines were free to charge any price they wanted. How many raised prices? Answer: None. How many kept the same prices? Answer: Virtually none. They all, in varying degrees, began to cut their prices. How many airlines have filed for bankruptcy since deregulation? Answer: Hundreds. And some predict that the twenty-first century will see a further culling of the airline industry so that just a few airlines survive.
It could be argued that the first airline to really figure this out was Southwest. Here was an airline that intelligently attacked key issues head-on and won. However, it took them a long time after deregulation to enter the scene and become competitive. Perhaps they learned from the losers. Some of the traditional airlines have (and are) going broke, because they are cloned knockoffs of the model. Southwest keeps labor costs down by hiring younger, non-union employees and sustains margin with a series of maneuvers that cut costs. For example, flying a limited number of aircraft models eliminates training redundancy, a huge parts inventory, specialized tools, and other costs. In addition, they eliminated the wasteful hub concept and, instead, fly from point to point. The result? They can sell cheaper seats, but keep labor costs in line, control other expenses, and still sell more seats. However, they are a minority player, and it took many years for someone to discover the formula. We cannot help but wonder what the future holds for them as costs, labor demands, and all the rest potentially escalate. There are other airlines merging and following suit as well—making the terrain even more competitive.
Some airlines that have filed for bankruptcy since deregulation include:
Air Florida Systems | Metro Airlines |
America West Airlines | Midway Airlines, Inc. |
Braniff International (twice) | Northwest Airlines |
Capitol Air, Inc. | Pan Am Corp. |
Conquest Industries, Inc. | People Express |
Continental Airlines (twice) | Provincetown Boston Airlines |
Crescent Airways Corp. | StatesWest Airlines, Inc |
Delta Airlines | Tower Air, Inc |
Eastern Air Lines, Inc. | Trans World Airlines (three times) |
Fine Air Services Corp. | UAL Corp. (United Airlines) |
Frontier Holdings (twice) | US Airways, Inc. |
HAL, Inc. | Vanguard Airlines |
Hawaiian Airlines, Inc. (twice) | Western Pacific Airlines |
Kitty Hawk, Inc. | |
The ability to fail creatively is widely documented. The depths have not as yet been plumbed as to the new, novel ways somebody is going to figure out how to mess up a business. But they all go back to one common pattern: They cut the price (to make it up in volume). If you think you can match (or sell below) your competitor’s prices, you need to understand that you will have an on-going, lifetime battle for survival that, sooner or later, you are going to lose.
WHY COMPANIES CUT PRICE WHEN THEY GET INTO TROUBLE
Perhaps you’ve heard the story of the industrious entrepreneurs who set out to make their fortune by buying watermelons for a buck each and selling them for $10 a dozen. And, like any good joke, it is readily adaptable to anything. Just change the subject—watermelons, exit signs, carpeting, hammers—and make the local meathead the butt of the joke. The way we originally heard it ran as follows:
There were these two guys from Texas who had a little money and an old pick-up truck. They heard they could buy these watermelons in Mexico for $1 each and they decided that they could sell them for $10 per dozen. So, they went to Mexico, loaded the truck with watermelons and headed toward Dallas, selling off these watermelons for that $10/dozen. They did a great business and sold out of watermelons before they even got halfway to Dallas. But, while sitting on the side of the road, counting their money, they noticed they were a little short of the amount they had started with. They wondered what the problem was since they had done a brisk business and it finally dawned on them—what they needed was a bigger truck.
Although you may have thought this was a new story, there is clear evidence that it has been around for over a century. Paul Nathan,
2 who wrote
How to Make Money in the Printing Business, published the following in 1900:
If there is any one thing in the business management of a printing office that particularly commands the utter disapproval of successful printers as being worse than other evils that beset the trade, it is the cutting of prices. The method of getting work by lowering the price has absolutely nothing to recommend it, and it is contrary to common sense. The practice is absolutely wrong in principle, and the reasoning advanced in its support, stripped of its verbiage, is the equivalent of that of the old apple-woman who bought apples at a cent each and was selling them at ten cents a dozen, and when asked how she could make any money at that replied: “By doing a very large business.”
When a business gets into trouble, it has a cash-flow problem and a margin problem—not a profitability problem. For example, let’s consider the following:
Question: Do the vendors to your company care whether: (A) you’re profitable or (B) pay your bills?
Answer: (B) pay your bills.
Question: Do an organization’s employees care whether: (A) their employer is profitable or (B) meets its payroll?
Answer: (B) meets its payroll.
An organization gets into trouble when it can’t pay bills and/or can’t meet payroll. It has a cash-flow problem (or more correctly, a cash-trickle problem). This creates an intolerable situation for the organization. If the bills aren’t paid, it will be cut off from needed services and supplies; if payroll isn’t met, there will be no one to do the work. So, the first thing executives start worrying about is, “How can we get some cash? . . . How can we get that cash in the fastest way?” You guessed it. It has got to sell something! How to sell that something? Use the old standby: Cut the price. Unfortunately, cutting the price immediately creates the three danger signs that signal the organization may soon become a bankruptcy statistic: (1) gross margin goes down, (2) wages as a percentage of sales go up, and (3) sales volume begins to increase.
Gross margin must go down when prices are cut. But do most organizations cut wages when they cut prices? No. So then, wages as a percentage of sales go up—and sales go up because of the lower prices. Again, remember that those are the three conditions that virtually always prevail when an organization really gets itself in trouble and ends up filing bankruptcy or having to sell off or merge because it isn’t making any money.
Many salespeople have the feeling that when they’re out in the marketplace, the only way to sell and compete is to cut price when the competition starts cutting its price. They think, “Hey, we’re getting killed. We’re getting hammered. Our competitors are selling at a lower price than we are. They keep cutting price. We can’t compete on an unlevel playing field. And, if those guys can sell at that price, we can too.” So they go back to the boss, and say, “Hey, boss, we’re getting smashed out there. Those guys are selling at a lower price. And we need to do the same thing or we won’t ever be competitive.” Well, the bottom line is—If those guys can sell at that price and go broke—you can, too. Just because your competition is selling at a price or offering products or services at a price lower than you are, it doesn’t mean you can—or should even try to—meet their price, because most of that competition is going broke.
Maybe you still don’t believe that most businesses go broke. Perhaps you think it’s only the little start-up companies that lose it—not the big boys that “really know what they’re doing.” Do you think that big businesses don’t go broke? Let us give you another example. Inc. magazine, way back in May of 1988, reported that, “We should not expect that our large corporations somehow possess a corporate fountain of youth. We should not mourn the fact that, in the 11 years between 1970 and 1981, 29 percent of the 1970 Fortune 500 companies vanished as companies . . .”3 The article went on to say that the “ ‘vanishing rate’ of a Fortune 500 company is only two-and-a-half times less than the vanishing rate of a garage start-up today.” Did that continue? Let’s take a look.
Other notable bankruptcies ($100,000,000 or more in assets) in the early 2000s have included: Mirant Corporation; Spiegel, Inc.; Penn Traffic Company; NRG Energy, Inc.; Solutia, Inc.; Amerco; Alterra Healthcare Corporation; Pillowtex Corporation; Conseco, Inc.; Global Crossing, Ltd.; NTL, Inc.; Adelphia Communications Corporation; Genuity, Inc.; Exide Technologies, Inc.; Viasystems Group, Inc.; Consolidated Freightways Corp.; Roadhouse Grill, Inc.; President Casinos, Inc.; Archibald Candy Corporation; Florsheim Group, Inc.; TransTexas Gas Corp.; Jacobsons Stores, Inc.; Kasper A.S.L, Ltd.; Geneva Steel Holdings Group; Guilford Mills, Inc.; Formica Corporation; Oakwood Homes Corporation; Consolidated Freightways Corporation; Globalstar, LP; Highlands Insurance Group Inc.; Farmland Industries; National Steel Corporation; Budget Group Inc.; XO Communications; Today’s Man; Piccadilly Cafeterias; FAO, Inc.; iPCS Inc.; Neenah Foundry Company; Magellan Health Services; Congoleum Corporation; Eagle Food Centers Inc.; Cone Mills Corporation; Wherehouse Entertainment Inc.; . . . and the list goes on.
Notice that what we are talking about doesn’t just involve an isolated segment of the business world. Failure occurs in all avenues—big and small, established and start-up. But there is a commonality that exists—most failing companies believe they can cut their prices and make it up in volume, but they fail to consider what happens to their gross margin when they try to compete that way. As the quote at the start of this chapter says, “The cause of our losses is that the price of the equipment we build has been less than the cost.”
CHAPTER 2
BUT COMPETITION KEEPS CUTTING MY PRICE
No business opportunity is ever lost. If you fumble it, your competitor will find it.
—Business Quotes
Just because your competition cuts its price doesn’t mean that you can or should even expect to survive if you do the same thing. Why is that? Because if your competitor has more money to lose than you do, you will go broke first. The important thing to remember is that your competition does not cut your price; you cut your price. Your competitor may offer its product or service at a price lower than you offer yours; but you cut your own price. Pogo the Possum said it all years ago: “We have found the enemy and he is us.” If anything occurs that causes your price to go down, it’s a self-inflicted wound.
CUSTOMERS ONLY BUY ON PRICE—OR DO THEY?
Unfortunately, many businesses and salespeople operate under the false notion that people (and businesses) buy on price—and price alone. Nothing could be farther from the truth. Our research clearly shows that price is almost never the primary reason why anybody buys anything. In fact, if price were the only reason anybody bought anything, then only one seller—the one with the lowest price—would sell all there is to sell of that product. But that has never happened in the real world. So there must be some other reasons why customers buy from different sources.