Excerpt from “The Next Generation of Pricing Strategy” by David Roller, Lighthouse Press, Inc.; Copyright © 2009. David Roller is the founder and President of Profit2, a consultancy focused on helping distributors and their suppliers increase profits through margin optimization.

Every piece of mail I get today seems to start with a cheery greeting something along the lines of … “Today’s Economy is Bad”… or “Sales and Profits Are Down.”

Sometimes after I get through reading the mail, I’m almost convinced there’s no tomorrow and business conditions are irredeemable. While reading that kind of mail is tough, most of us don’t spend a lot of our day reading the mail. We offset the negativity with a broader perspective gained by working with the people in our organization.

Think about how your sales people spend their day and the perspective they gain…

How much time do they spend listening to tales of business despair coming from your customers? What effect does this continual diet of gloom have on how they price your products? Buyers have always been your sales persons primary pricing coach. As any smart buyer will tell you; “job one” is to work the price down through an artful combination of stories about their pressures, your competitors pricing and assurances they would prefer to do business with you, if only…

In good times, buyers can provoke anxiety; in lean times, they can drive fear and a rush to drop all your prices.

Your best sales people take this in stride, but what about the average sales person? Most sales people will overreact. The result; they cut your prices across the board. Price cuts are made not only on competitive items where you have to react to market conditions, but also on incidental items or sales where you may be the only supplier with inventory. Here’s a fact from our practice, 70% of the price reductions made by your sales people this year will be on items your customers buy once or twice a year. On average, your customers will spend less than $250 on each of these items…all year.

How do you counteract the fear?

Executives assume they can overcome these conditions through pay plans designed to maximize gross profits. This approach is the “greed is stronger than fear” school of management. While a good compensation plan is an essential element in building margin, it’s like a one legged stool, especially during lean times.

The most powerful margin improvement tool you can deploy is perspective. Your company’s transaction data can pave the path to provide pricing guidance for every sale your sales people make.

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