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The post-pandemic rise in inflation is something that businesses haven’t seen in almost forty years. Many are ill-equipped to handle this change. Even as sales are increasing, margins are shrinking, which puts companies in a difficult position.
COVID has created a lot of inflation because of problems and delays in the supply chain. This makes it difficult for companies to meet client expectations.
Clients also see their production costs increasing, and almost all companies are struggling to maintain profitability in their business. In particular, what has been dubbed The Great Resignation also has an impact. Employees are quitting in droves or moving around more quickly between companies. Their expectations are going up, and salaries are following suit. It makes it harder for companies to keep employees, and this affects inflation as well.
Companies are always looking for ways to protect their margins, but sales reps don’t always make it easy. Many will easily grant a price reduction or will offer very little pushback when a client requests a discount or something that reduces margins. They will accept right away because they want to sign a client or keep an existing one.
But in the current business environment, sales representatives need to sell their value more than ever.
In this article, we will look at five strategies to help you maintain margins even when inflation is on the rise.
- Strategy 1: Match sales goals with your margins
- Strategy 2: Review accounts to determine price increases
- Strategy 3: Define a process to increase pricing
- Strategy 4: Offer extra value
- Strategy 5: Maintain healthy negotiation principles
- What about new clients?
- Your next step
Strategy 1: Match sales goals with your margins
As a sales leader, you should define sales objectives so margins are always top of mind for sales representatives. You must ensure that their compensation has a component related to profitability, otherwise, sales reps won’t take it into account. You can adapt margins according to product lines, clients, sectors, segments, or territory.
Many salespeople don’t know if the sale they make is profitable or not. They should be keenly aware of their profitability margins. However, you can’t reach a margin goal without compensating sales reps properly, so their compensation should be adapted accordingly. This means that their employment contract needs to reflect that expectation. Take the time to review current contracts to make sure that monthly or yearly commissions are based on the profitability of sales.
Strategy 2: Review accounts to determine price increases
At the start of the year (calendar or fiscal) your sales team should take time to review all their accounts to see which ones should see a price increase. This review should also look at critical accounts, where profitability has dropped in recent months.
Each sales rep should have a clear picture of the profitability of their respective accounts based on certain criteria (territory, industry, etc.). Having a clear view allows salespeople to better gauge whether they will meet margin goals established.
Strategy 3: Define a process to increase pricing
As part of an effective sales management system, you need to have a clear process that allows your sales team to raise prices. This process should allow each sales rep to communicate, negotiate, or give feedback on each account in terms of their profitability.
To define and implement such a process, you first need criteria that will allow each salesperson to identify accounts that require an increase in profitability. Criteria can be, for example, the average margin over the last five years, or accounts that deal with a specific product line. Those criteria help sales representatives quickly identify the accounts that require a discussion about price increases.
As a sales leader, you should prepare your representatives to have that discussion. Some of the topics to address with account representatives are:
- Stability. For each account, reinforce the stability by documenting the results they obtained so far by working with you. Those results can be quantitative and/or qualitative.
- Review prior decision process: Discuss the initial decision-making process. Remind the customers of the effort they put in the process of selecting the vendor (you).
- Risks and costs of change. Highlight how changing vendors incurs risk, requires going through the entire selection and onboarding process again, and how it might not be in their best interest.
- Competitive advantage: home in and focus discussions on your competitive advantage and differentiators.
As you gather the information for each account, centralize it in your CRM.
Once you have documented and presented this information to the client, only then do you discuss pricing. You want to ensure the client sees the value of maintaining the relationship before presenting any price increase.
Strategy 4: Offer extra value
When you present a price increase, plan to offer extra value to the client. It could be some kind of discount or an additional service that you provide without additional cost to your company.
The extra value you provide depends a lot on what you sell. For example, if you sell commodities and the sales process is primarily transactional, you could provide a discount on a complementary product that the clients rarely buy. It’s also a great way to introduce your clients to another aspect of your company.
If you sell equipment that require a service or maintenance contract, you can offer a discount on that service contract.
Similarly, if you sell software, you could give away a specific module that the client could perceive as valuable. But for you, as a company, there is no cost associated with the giveaway.
Other creative ways to provide value include expanding the length of a service contract, or protective pricing. When they buy a single-year contract, they can protect their pricing against inflation by buying a two-year contract instead. The net effect is that over time, the client pays less, but you don’t decrease your pricing.
The exact offer you propose is not important. The most important part is that it must be valuable for the client. If it’s only a nice-to-have that provides no additional value, it’s not a good idea for an offer.
Strategy 5: Maintain healthy negotiation principles
Negotiating price increases can be a tricky process. Although no single step will cause a sale to fall through, a combination of missteps can lead to failure. As a sales leader, you want your sales representatives to be aware of certain principles as they negotiate with clients.
- Each client is unique and should be treated differently. A strategy that works with one client will not always apply to another. So, each client needs a customized approach. The process is the same, but the final solution might be different for each account.
- Any price increase should have associated benefits. That benefit does not need to be a discount, but it could be a new feature that you provide for free to counterbalance the increase.
- Client contracts may already specify that there should be a yearly price increase, but that part of the agreement has been forgotten, or nobody ever acted on it. Before talking to a client, sales reps should always revisit the agreement.
- Upsell or cross-sell an account with other products. A bigger mix of products in a client’s solution reduces the effect of a price increase.
What about new clients?
The strategies we outlined above are geared toward existing clients. It’s the most important aspect of protecting margins in the face of increased inflation because the cost of keeping a customer is so much lower than the cost of acquisition.
But how do price increases affect new customers? Even though they don’t know your pricing, should you be using the same strategies with them?
Well first, there is a myth that customers talk with each other and exchange pricing information. When you sell to a new client, you don’t need to be shy about selling at a higher price point.
However, you still need to use a consultative selling approach to ensure that new clients see the value, and are willing to pay more or pay a premium to do business with you.
It’s essential that your salespeople don’t tell the client the value proposition. Instead, they should ask questions that make the client state the value you provide for them. The client will tell the sales reps why they should buy products or services from you for the first time.
The sales approach is critical, here. If salespeople are not consultative, they will face the same challenges, the same negotiations, and the same pressure to offer discounts as they would from existing clients.
Your next step
As a sales director or a sales VP, you need to make sure that your people hold firm on pricing. If they play the client’s game, it will affect your profitability. Preventing your sales team from falling into the client’s trap is a definite challenge. If sales reps play into the client’s hands, it is the responsibility of the person who validates quotes not to approve discounts, rebates, or special offers that affect the bottom line negatively.
If you’re feeling increased pressure in your business because of rising inflation, register today for our special webinar on “How B2B companies can get pricing and selling right as inflation rises.”