Blender

The Grass isn’t always greener on the low-price side

Last week I blogged about the price objections encountered by sales people.

One of the points I was making was that sales people encounter price objections so often that it’s only natural for them to want the company they work for to lower the price, sweeten the deal, etc, to help them sell more of whatever they sell.

This is especially true because the number one thorn in the side of many salespeople is that someone else is always willing to do it for less, and clients aren’t afraid to remind you of this fact.

It pays to remember that the grass isn’t always greener on the other side. Have you ever considered what it’s like to be in sales for a low-price provider?

A real estate agent once remarked to me that “those flat fee agents are killing us”. She was referring to the influx of agents entering the market charging lower commissions than the leading brands such as Remax, Century 21, etc.

I wonder if she’d contemplated life as a flat fee agent.

-         little or no brand recognition

-         constant pressure on margins and expenses

-         constant pressure to sell more to compensate for a lower margins

-         no advertising budget

-         no budget for anything resembling advertising

It’s easy to think of the many ways that your low-price competition is killing you. While you’re at, think of the many ways you’re killing them, and then start focusing on those on your sales calls.

Paying too much, by choice (Hey Sales People – Cheer Up!)

The cry of the sales force is often to lower the price, offer a better rate, throw in a bonus etc etc. This is somewhat understandable, as every other client probably throws an objection about price on the table during any negotiation. (“Your competitor can do it for 5% less than you can…). This is especially true during tough economic times when companies are trying to squeeze every dollar they can.

The marketing and product folks protest these requests, because continuously lowering the price erodes margins, undercuts the company’s value proposition, and generally de-values the sales force (if the product is the cheapest on the market, why do I need a sales person to sell it?)

So if you’re a sales person frustrated with the price objections you continuously encounter, just think for a moment about all of the things you readily pay more for every day.

A personal example – I have all kinds of insurance through a full service broker. I could probably find a lower rate on my insurance if I cut out the middleman and purchased my insurance individually online from low cost, no service insurers.

But I don’t want to.

When I call my agent, they know who I am, answer my questions, and generally treat me pretty well. I think that if I ever made a claim, they’d actually be there for me – and that’s the point of insurance, right? That adds value for me. I’m paying too much for insurance, but I’m fine with it. In fact, I do it knowingly and willingly.

Think of all of the things you pay too much for:

• Gilette Fusion Razor Blades – 4 Blades? Do you really need 4 blades? My Dad shaves with a 1 blade Bic. 

• Oil Changes at the Car Dealer – More expensive than independent garages, but who really knows what goes on at Joe’s Garage?

• Tylenol - You can get generic pain killers for half the price, but when you really need your headache to go away, you reach for a Tylenol

• And the list goes on...

Price is the number 1 objection you face when you are trying to make a sale. If it helps, remember that the person making the objection readily overpays for a whole bunch of things in their personal and professional life, because they have a reason to. (Trust, Effectiveness, overall value...)

They’ll overpay you as well, if you’d just give them a reason to do it.

Rethinking the 80/20 Rule

A few years ago I wrote an article for MarketingProfs.com aimed at providing readers with a new way of looking at the 80/20 rule when it comes to segmenting clients based on volume.

My main argument was that companies should start looking below the line a little further. While it may be true that 80% of your volume is coming from 20% of your clients, it does not automatically follow that getting more business from the very valuable 20% would drive increased profitability. In fact, the most profitable customers in your database might not be in your top 20% today.

The article was subsequently featured in the Globe and Mail (Canada’s National Business Newspaper, for those reading south of the border).

I think the article is still very relevant today – I’ve pasted it below:

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Here's why tapping your top-volume clients for further growth doesn't always work.

In most marketing circles, the principle behind the 80/20 rule applies to the relationship between your revenue and your customers. That is, 80% of your business results are being driven by 20% of your clients, or pretty close to it.

It's considered easier and more cost effective to grow your business by increasing the business volume your existing clients do with you, as opposed to bearing the higher acquisition costs associated with hitting the open market and trying to grab the attention of clients who don't currently deal with your company.

It is no surprise, then, that many marketers are investing heavily in identifying and segmenting their "top 20%" with the intention of developing marketing campaigns and sales promotions just for this elite group of customers, with an eye to acquiring more of their business. After all, they are clearly heavy users of your company's product or service and are apparently willing to spend money with your company versus your competition.

However, such an approach overlooks the fact that many companies identify their top 20% of clients on a volume basis. This creates a phenomenon that I call the 80/20 Volume Paradox: While your top 20% of clients may be driving a big chunk of your business and displaying all of the signs that they represent a great target audience for your marketing efforts, they may not deliver a strong ROI on further business development efforts. Why? Two possibilities:

1. They're tapped out. There are only so many hotel stays or onsite computer consultants that a client can want or need. As a result, marketing efforts aimed at this group may produce only a minimal incremental lift in volume.
2. They're buying cheap. Of the incremental volume you succeed in generating from this group, it will likely be at a lower margin, as high-volume clients generally buy at a lower price. This is especially true in business-to-business relationships, where contracts are often structured to include significant volume discounts.

To address these shortcomings of some of the traditional approaches to driving business through your top volume clients, here are two fresh approaches to looking at your top clients that put a slightly different spin on the 80/20 rule.

Think margin, not volume

Instead of identifying the top 20% of your client base in terms of volume, use margin instead. Identify the top 20% of your clients as measured by total margin, and cross-reference that list against your previously identified top 20% by volume list. You may be surprised to find that the two lists are not quite the same.

Your top 20% by volume are probably already being rewarded with volume pricing and various discounts. As a result, you might find a gem or two on your top 20% by margin list—clients who are doing moderate volume with your company, but at higher prices and therefore higher margins. Get the same sales lift out of this higher-margin group and you'll add more to the bottom line than by pursuing your volume clients only.

As an added bonus, higher-margin clients doing less volume with you may not be "tapped out" and may have room to increase their demand for a product or service. And, they are still your clients, which means you can approach them with marketing programs and promotional offers while enjoying the low acquisition costs that come with knowing your target audience.

Think 90/30

Instead of identifying your top 20% by volume and targeting them, perhaps you should cast your net wider and target the next 10% of your clients based on volume. Instead of 80/20, shift your thinking to 90/30—driving 90% of your business from 30% of your clients.

Looking below the 20% line will uncover some clients where a great "share of wallet" opportunity may exist. In this group, you are more likely to find clients who are giving at least some of their business to your competition, representing a great opportunity for you to consolidate their purchases with just one company: yours.

You may also uncover clients not as likely to be receiving heavily discounted pricing with competitors, since their purchasing is more fragmented. This gives you the option of using some pricing leverage to build volume. (Of course, building volume at the client's current rate would clearly be preferable.)

This group of clients is also less likely to be tapped out—perhaps they can be encouraged to purchase more of the service you offer, or perhaps you can wrestle a higher share of wallet out of these clients buy getting some portion of their business that is currently going to a competitor.

It is important to understand who the clients are that are driving the majority of your business, and even more important to retain their business. However, growth within your client base is often not as simple as identifying your top-volume clients and milking them for more revenue.

Don't be afraid to put a different spin on the 80/20 rule the next time you analyze your client base. You may find that turning down the volume focus will allow you to identify other good marketing opportunities among your clients.