Bruce Merrifield, President — Merrifield Consulting
•competitive strategy •order fullfilment •distribution management best practices •sales practices •QPM •management strategies •sales management •sales management styles in distribution •distribution industry sales management •distribution industry intelligent pricing •cost-to-serve math •cost-to-serve in distribution
Wednesday, January 3, 2018—Whatever happened to the art of negotiation? In this video interview, Randy MacLean and Bruce Merrifield sit down to discuss how distributors have limited their salespeople's ability to negotiate and, in the process, either forced or incentivized them to negotiate on elements that can dramatically impact a sale's cost-to-serve (CTS).
"Negotiation has become something of a lost art in the distribution industry," Randy said. "Distributors changed the nature of how the sales force operates by bringing in a lot of restrictions and controls. This includes things like setting pricing, terms, and so on."
"The end result is that salespeople have lost their ability to negotiate in the traditional areas," Randy continued. "Because the salespeople still need something to offer customers, they wind up getting creative. They might volunteer last minute deliveries, to break shipments up, or to run multiple deliveries a day. All of these things drastically increase your CTS."
"And if you pay salespeople just on margin dollar, they don't see the service activity costs," Bruce added. "If you have trucks in the area, they might not see the harm in adding a few extra deliveries. They might not see the issue with providing these last minute orders or giving customers an extra 30 days on receivables."
"However, even if they do realize that it costs the company money, it often doesn't affect their compensation," Bruce continued. "They're winning margin dollars on these sales and aren't being held accountable for the CTS. We're effectively paying them to ignore or give away our cost-to-serve activity."
"Here's the real area where you want to negotiate," Randy said. "When a typical client starts using WayPoint Analytics, they find that 65% of their sales are unprofitable because the CTS is greater than the gross profit. If a salesperson can't negotiate on price, they give away CTS. However, if a salesperson only negotiates on price, your margins will gradually shrink over time. The solution is to blend these two ideas: Let the salespeople negotiate on price, but in return the customers have to help you work on improving the CTS."
"This process requires an understanding of CTS math," Randy continued. "Luckily, Bruce recently put together a wonderful CTS math course with iKlarity which can help you introduce this idea to your sales team and get their priorities straight."
"You also need to be able to go to the customer with very specific activity insights," Randy said. "For instance, you can ask them why they may have bought a AA battery 400 separate times."
"In many cases, you'll find that the distributor is shocked by these inefficiencies," Randy continued. "We had one distributor who sat down with a customer to explain that they wouldn't be breaking up multi-packs of items any more. The customer wasn't sure why the distributor had been doing it in the first place! The individual items had been coming in dirty – because they lacked the packaging – which was posing issues for them as well. This had been going on for years and was likely the result of somebody making a decision a long time ago for reasons nobody can remember."
By trading pricing discounts for improvements in CTS, you will often find yourself leaving the bargaining table with a significantly improved bottom line. It's a win-win scenario where your customer is getting a better price and you're making more money for it. This is the kind of negotiation that you should be encouraging your salespeople to conduct. By not cultivating this approach, you risk having salespeople get you the pricing you want at the cost of a far higher CTS, which often means that you're most likely losing money in the long run.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
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