August, 2009

Beware the Lowball

Are we behaving like a suicidal industry?

By Bill Lee

Sales organizations that live by the sword often die by the sword. In other words, when a company is so desperate for business that they become overly aggressive with their pricing, they are likely to lower the gross margin in the entire trade area and have little new business to show for their efforts.

Contractors are not stupid. Contractors know what the market is for building materials, especially key commodities, so when a salesperson walks in the door tossing around low-ball prices, the contractor immediately knows that the salesperson is trying to “buy” his business.

Don’t get me wrong. I’m not saying that this tactic doesn’t sometimes work, but in most cases, the low-ball pricing tactic does not work. Why? Because most contractors—regardless of what they may tell you—buy from the supplier and the salesperson with whom they have a relationship, not the salesperson with the lowest price.

When a complete stranger walks in off the street firing off a series of prices that are too good to be true, the great majority of contractors will thank him for stopping by, but ask for a little time to think about his offer. And while he’s thinking about the offer, he telephones the supplier with whom he has a relationship and asks that supplier if they will keep him competitive with the low-ball prices he’s just been quoted.

How many suppliers will allow a competitor to buy a good customer from them?

My answer: “Not many.” Most suppliers will meet the low ball prices and take the gross margin hit that goes along with that decision.

You might ask yourself this question: What would you respond if one of your competitors used this same tactic with one of your largest and most loyal customers?

It’s at this point when the real damage is done. To retaliate, the odds are excellent that the competitor you just torpedoed with low-ball prices will identify one of your good customers and quote some equally ridiculously low prices of their own, which you in turn decide to meet to avoid losing your loyal customer’s business.

This scene or scenes much like it are playing out all over North America. It makes one wonder if we aren’t behaving like a suicidal industry; that is, let’s make sure no one makes a profit.

A More Professional Approach

I believe it is a reflection on a salesperson’s professionalism when he or she has nothing more to offer a prospect than a cheap price. The way to win the heart and mind of a professional contractor is to offer solutions that solve his most pressing business problems, solutions that will help him make more money and solutions that will help him be more successful.

If price were the determining factor, the company in the community that has the lowest cost of doing business and in the best position to sell at the lowest prices and still earn a small profit would have 100% of the business in the market.

Intellectually, we all know that organizations that allow their salespeople to use price as a marketing tool are shooting themselves in the foot. So make sure that your sales team is trained how to earn an order that is priced at a fair price that allows the company can earn a fair profit.

THERE ARE THREE WAYS TO GET THINGS DONE:

GOOD � FAST � CHEAP

You can pick any two of the three:

IF YOU WANT IT GOOD AND FAST, IT WON’T BE CHEAP.

IF YOU WANT IT GOOD AND CHEAP, IT WON’T BE FAST.

IF YOU WANT IT FAST AND CHEAP, IT WON’T BE GOOD.

BILL LEE has nearly 40 years of experience in the construction supply industry. A consultant and seminar leader, he is the author of two books: Gross Margin and 30 Ways Managers Shoot Themselves in the Foot. www.BillLeeOnLine.com, 800.277.7888.