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Category : capital equipment sales

Launching a New Product or Service? Don’t Make This Common (and Costly) Mistake

I’ve seen this time and time again with my clients, regardless of size or industry. Someone has a “hunch” about a new product or service idea, and they rush in with guns blazing. Resources are allocated, lots of time is consumed, and a brand-new product or service is launched.

And then…crickets.

It seems, alas, that nobody is actually interested in purchasing your new product or service (or maybe you get a handful of takers, but far too few to boost your bottom line).

What went wrong? It’s all well and good to get excited about a new way to serve your customers, but it’s important to temper that enthusiasm with some good old-fashioned research.

And by “research” I don’t mean hopping onto Google. You can do that, but actually talking to prospective customers for this new product or service is a far better bet. And not just one or two (you know, the one or two existing customers who sparked this idea in the first place) but a whole bunch of them.

You’ll know you’re on to something if a lot of folks sound just as excited as you are, or maybe even more so. They’ll say things like:

  • “We would pay anything for that.”
  • “When can you have it ready?”
  • “How do we sign up?”

Don’t be fooled by semi-positive responses like these:

  • “Maybe we’ll look into it when it’s up and running.”
  • “I’ll think about it.”
  • “I suppose that might potentially be something we’re interested in.”

The bottom line is that customers (like the rest of us) would like to have all sorts of things – but you only want to spend your time and efforts on things they are actually willing to pay for.

An even better test, which is possible with certain products and services, is to see if people are willing to pay upfront – a deposit, say, or an early-bird price before development is complete. That way, you not only have some indisputable evidence that they are willing to pay for your idea – because they already have – but also some extra cash to help set it in motion.

What Professional Buyers are Really Thinking…In Their Own Words

Today, I’m pleased to give you a valuable behind-the-scenes glimpse into the minds of professional buyers.

I recently hired three former professional buyers from Fortune 1000 companies to speak frankly with me about what motivates supply-chain people, and the strategies and tactics they use with suppliers.

Here are some of their insights, along with actual quotes:

1) We’re motivated by money and promotions and we earn them, to a great degree, by getting price reductions.

“How much we can reduce your prices is frequently more important to us than the prices we pay.”

2) There is less competition than you think.

“We use prices from companies we would never buy from as leverage against companies we want to buy from.”

3) Your products aren’t commodities.

“We purposely use the word ‘commodity’ to make you believe that your products are the same as everyone else’s.”

4) We tell every supplier that their prices are too high, even when they’re not.

“I don’t expect to get the highest performance for the lowest price, but I always ask for it because sometimes I actually get it. I’m always surprised when this happens.”

5) We don’t stop asking for lower prices until you stop offering them.

“I wouldn’t feel like I was doing my job if I stopped asking for a lower price.”

6) You need to develop relationships with the users of your products…even when we tell you not to.

“We buy what they tell us to buy.”

7) We know that you base your prices on your costs. That’s why we ask to see your costs.

“We’ll tell you that your costs are too high and ask you to justify them. When you can’t, we’ll tell you to lower them. When that happens, your price comes down.”

8) We determine a target margin for your products before we talk to you about price.

“We look at our own margins, then determine what percentage of those margins we think you deserve.”

9) We have three major concerns when buying: delivery, price, and quality.

“If you can’t deliver to our requirements, we’re not going to buy from you.”

10) If you want a higher price, show us why we should pay it.

“In my opinion, the biggest problem sellers have in negotiations is that they can’t explain how their products are better and why they’re worth more than competitors’ products.”

Interesting stuff. None of the statements made by these ex-buyers surprised me, but it was refreshing to hear them actually say out loud what we’ve all been suspecting.

So, now that you’ve gotten this inside look into the minds of actual buyers, how can you best put this information to use in your negotiations?

  • Don’t assume that buyers are telling you the truth. (If you take away nothing else from this discussion, remember this one fact.)
  • Don’t reveal your costs; it’s none of their business and can only lead to lower prices.
  • Price your products and services on their unique value to customers instead of on your costs.
  • Learn to say no. You’ll save a lot of money by doing so.
  • Don’t “give away the farm” in the face of repeated requests for price reductions. It’s their job to keep asking and try to wear you down.
  • Your products are not commodities, and buyers know that, but it’s your job to highlight what makes them better than the competition.
  • Winning your customers’ loyalty goes a long way toward influencing buyers.

Why Group Emails Can Be Your Secret Negotiations Weapon

It’s to your advantage to deal with actual product users rather than professional purchasers, whenever possible. This can be tricky, as purchasing employees try to ensure that all or most communications go through purchasing. But there are ways around this.

I always recommend that my clients use email to document every conversation with purchasing, and then send that email to everyone involved in the negotiation at both the seller and buyer companies.

As a best practice, send a well-written, fact-filled email once a week (or more often, if warranted) to all the key people involved in the negotiation. This can include:

  • customer executives
  • users of your products
  • your own management team

These emails should document any agreements and commitments made by both sides during the previous week and may contain everything from direct quotes from purchasing people to slips in the product delivery schedule (due to negotiations that never seem to end).

You might also include any threats made by purchasing representatives.

Shedding some daylight on the threats, pressure, name-calling, outrageous demands, etc. by purchasing tends to reduce this bad behavior.

If purchasing balks at the idea of these emails (and they will), I tell my clients to respond matter-of-factly that management insists on keeping everyone informed and up to date, with all relevant details fully documented. Doing this will also motivate all parties to behave with civility and honesty, and to keep the rhetoric to a minimum.

Even if you are fortunate enough to be dealing with professional, courteous, well-behaved purchasing people (lucky you!), it’s still very helpful to have this kind of real-time reporting and documentation going on. Written records are your friend.

Are Your Salespeople Reluctant To Sell High-Margin Products?

One of my clients is having an issue with his salespeople: They are reluctant to sell a certain product at the recommended price because the product’s gross margin is 80%.

And why is that a problem, you may ask? The salespeople firmly believe that:

  1. Any product with a gross margin above 50% is priced too high
  2. Gross margins above 50% should be reduced to this level or lower – with the difference passed along to customers in the form of lower prices
  3. The cost to build certain products “should be lower”
  4. Customers shouldn’t have to pay a high price just because labor and materials costs are high

How the scenario plays out

Here’s one way the scenario can play out: The client builds an equipment upgrade. Not only does the upgrade last three times longer than the previous version, it also dramatically enhances the performance of the equipment.

A typical customer who uses the upgrade will realize a yield improvement of 1%, translating to $1M or more in additional revenue each year.

The company priced the upgrade at $25,000, which represents only 2.5% of the marginal annual value to customers. Even if the upgrade were priced at $100,000, it would still be a bargain relative to what customers are getting in return.

But at $25,000, the gross margin is 80%: Way too much, according to these salespeople.

What are your salespeople thinking?

It’s interesting, when you think about it. The salespeople share – or should share – responsibility for running a profitable business. And they should know that higher-margin product sales are needed to offset lower-margin product sales.

But the reality is that many of them don’t know this. They feel an allegiance to their customers and erroneously believe it is part of their job to secure the lowest possible price for them.

Training, not termination, is the solution

It might be tempting to just go ahead and fire salespeople who think this way, but training is a better solution to the problem (not to mention the fact that my client would need to fire nearly a third of his sales force!).

You must actively teach salespeople to think about prices and margins within the context of total customer profitability.

Selling to a customer who contributes only 20% gross margin, for example, is probably a money-losing proposition for the seller. This is low by almost any standard, and after deducting selling and administrative costs, the seller is probably losing money on this customer – or breaking even at best.

For this reason, selling the 80% gross margin part for full price to this customer is the right thing to do. This particular customer is not nearly profitable enough to warrant a discount. In fact, you probably need to sell products with an even higher margin to this customer in order to bring profitability up to a reasonable level.

This lesson should be included in your sales training to help prevent the unhelpful mindset of “We can’t charge the customer more than twice our cost.”

What to do if they just don’t get it

When a salesperson complains about high prices and/or excessive gross margins, ask what kind of profit his or her customer is contributing to your company.

If the answer is less than 30% gross margin, or 10% contributed profit, ask how lowering prices will help to increase profits.  Finally, ask what specifically the salesperson is doing to increase gross margins and contributed profit.

If blank stares or nervous giggles are the only responses you get to these questions, it’s time to put on your teacher hat and review the lesson on total customer profitability.

And if the salesperson still doesn’t get it? At that point, steering him or her toward a different career (either within your organization or elsewhere) is probably the best course of action for all involved.

How to hire salespeople who can sell value

We’ve all heard people complain that “our salespeople can’t sell value”. Sometimes, the fault lies in engineering because the value doesn’t exist, or with marketing because the value exists but hasn’t been explained very well. At other times, however, the value clearly exists, but it’s not being sold and properly paid for.

I have an opinion about this that I’ve formed over 25 years in marketing and sales, and it’s something you can potentially use to hire the right kind of sales people for your company:

The criteria and thought processes that salespeople use to purchase products and services for themselves, is frequently the same criteria and processes they’ll use when selling your products and services.

Specifically, salespeople who consider price the most important factor when purchasing products for themselves tend to offer greater discounts and lower prices to their customers when selling. Conversely, salespeople who recognize and pay for value-added products tend to be better equipped to sell the value of their employers’ products and services and capture higher prices.

Over my career, I’ve managed hundreds of salespeople. With only seven exceptions, the cheapest salespeople were the ones who gave their customers the lowest prices and largest discounts.  And the value-oriented salespeople almost always sold products and services at higher prices-sometimes much higher prices.

I’ll never forget a customer meeting during which one of our value-oriented sales people told the CEO of a billion dollar integrated circuit manufacturer that his (the sales persons’) job wasn’t to give his company’s products away, and that the CEO would expect his sales people to say the same thing to his customers’ when asked for an outrageous discount.

Anyone can sell products at deep discounts, and if your company is the cost and price leader, you can hire pretty much anyone to sell for you. In fact, you probably don’t need salespeople at all. On the other hand, if you’re a high-value provider, you should be interested in hiring people who can sell that value.

The next time you interview a person for a sales position, ask him or her the following questions:

  1. What criteria and process do you use when buying products and services for yourself?
  2. Give me some examples of high dollar purchases you’ve made, and how you decided what to buy.
  3. How do you typically respond when one of your customers asks for a deep discount?
  4. How much do you typically discount the products and services you sell? On what do you base the discount?
  5. In which of the following areas do you typically spend more time: negotiating with your customer, or negotiating with your own company?
  6. Walk me through a few examples of recent negotiations you’ve conducted and tell me what you were thinking during the process.
  7. How often do you sell at list price?
  8. What specifically do your products and company do better than any of your competitors? How much is that worth to customers, and why?

Asking these questions won’t guarantee you’ll hire the right person. But the answers will give you a sense of how the person sells and thinks, and may increase the odds that you’ll hire someone who is a good fit for your company, products and strategy.

One of the biggest wastes of marketing and sales resources is time and money spent pursuing the wrong customers and the wrong opportunities.

Do you ever wish your marketing and sales people would capture more profitable business: the kind that adds the requisite profitability and results in happier customers? Well, they can, if they:

  1. Define your company’s best prospects: companies that not only need your products and services, but can afford to pay for them as well
  2. Define the prospects that aren’t and may never be a match for your services and products because they can’t or won’t pay for them, and don’t need the unique attributes that make your products special
  3. Devote far more time and money pursuing the best prospects, and little or no time and money pursuing the worst prospects

Unfortunately, many companies have a hard time distinguishing between good and bad business. They believe that every prospect can be a customer, given enough sales time, presentations, and wining and dining, and that “giving up” on any prospect is like admitting defeat. This is a costly belief.

Any sale that will require significant effort, money and time to win should have to successfully pass through a number of “good business” filters, a few of which are listed here:

  1. What changes are driving the need to buy anything at all, let alone your product?
  2. Why is the prospect interested in your product or service? The real reasons, not some general, made up B.S. like “we want to go in a different direction”. The answer to this question is particularly important when dealing with a prospect that has been using “Brand X” for years and may only want a quote from you to use as leverage against Brand X to get a lower price.
  3. Is the opportunity really funded? If so, how much money has been approved, by whom, when is the money available to spend, and is the funding contingent on anything?
  4. Can the prospect really afford what you’re selling? A prospect that claims to have a budget of only $2M to buy a piece of equipment that typically sells for $3M is doing one of the following:
  • Pulling an old-school negotiating trick (“let’s throw an outrageous figure out there as an anchor and see how the sales person reacts”)
  • Demonstrating that he really can’t afford your product
  • Trying to establish that price is and will be the most important criteria when dealing with this prospect

No amount of negotiating is likely to close a gap this big, and the time and effort involved aren’t worth it. The best response to the prospects’ budget statement above isn’t “great, let us see what we can do to get you a better price”. No, the correct answer should be something along the lines of “this product is worth considerably more than $2M. If you’re only able to spend that amount, we won’t be able to work with you on this project. If you can increase your budget to $3M, we’re ready to talk with you further”.

Every minute your people spend chasing bad business represents lost money and time that you can never recover. Even worse, those minutes represent lost opportunities to pursue better business.

Use your experience to determine who your best prospects are, and then apply all of your marketing and sales effort toward making those prospects your customers. In addition to making more money, you’ll enjoy more satisfying customer relationships in the process.

Sales Competencies

Recently I was asked for my thoughts on the competencies that every capital equipment salesperson should have. The following are what I consider most important:

  1. An understanding of the importance of profit
    In my mind, the number one priority for salespeople is to bring profitable business to their employer. Salespeople should know how their employer makes money; how prices affect margins (including how dramatically even a 1% difference in price affects net profit); and how profitability influences stock prices, bonuses, salaries, career growth, and available resources.
  2. Hardware, service, spare parts and product upgrades knowledge
    Salespeople should know the key competitive advantages and value propositions of every product and service they’re required to sell (marketing should develop these advantages so they’re clear, straightforward, and impossible-to-misunderstand). In addition, salespeople should know specifically how their products and processes help customers to achieve their objectives.
  3. Writing and presentation skills
    Every salesperson should be able to write a concise, coherent email or letter to a customer or a fellow employee. The salesperson should also be able to give a “why should I buy” presentation to a customer on relevant products, processes, services, spare parts, and system upgrades. The salesperson should also be able to clearly position (in the mind of the customer) his or her employers offerings relative to competitors’ offerings.
  4. How to successfully negotiate with aggressive, professionally-trained buyers who use PICOS and other profit-transfer methods.
    This competency should include more than how to conduct face-to-face negotiations. It should also cover the how, where and why aggressive tactics such as PICOS and its’ variations began; how customers are trained in its’ uses; what to expect in terms of customer behavior; how to develop a sales plan when approaching and conducting negotiations; how to keep the customers’ senior management informed of progress, delays and any misbehavior on the part of Purchasing people; and how to work successfully with individuals who employ these methods, without damaging relationships. 
  5. In-depth knowledge of the customers’ and competitors’ environment (and how to acquire that knowledge)
    This should include training salespeople on what to look for in publications like annual and quarterly reports;  how to find out about key changes in management; how to uncover the customers’ top priorities; current capacity utilization and potential changes in that utilization; customer profitability drivers; the process the customer uses to decide which products and services to buy, along with the people who make those decisions; and any specific pressures the decision makers are under from their customers, management, and investors. 
  6. How to establish and build relationships with customers
    The best salespeople in the company should train the rest in how to provide day-to-day support and superior execution on behalf of customers, over and above what competitors’ salespeople are providing, so that customers actually prefer to give your company more and more business.
  7. Sales and order process knowledge
    Salespeople should know how to establish exactly what the customer wants, and how to translate customer requirements into language, forms, etc. that the supplier understands and can work with; how to follow up to ensure that the product or service is moving through the manufacturing process on schedule; and how to prepare the customer if things don’t go according to plan.  
  8. How to manage sales time
    There will never be enough time to handle every demand on a salesperson, and certainly not enough time to do handle those demands equally well. Salespeople need to know how to rank the to-do’s on their plate; how to handle email and other dailies so they don’t become the “all dailies”; how to schedule and make regular progress on long-term initiatives; how to determine when “good enough” is; and how to decide what to do first thing on Monday morning.
  9. How to sell services
    Selling services (where typically no explicit need exists, resistance from the customer is common and demand has to be built carefully) is very different from selling hardware (where demand usually exists and the objective is to position your product favorably against one or more competitors).Many capital equipment salespeople (including me when I first started in sales) tend to view service as an afterthought. But with system margins under constant pressure, suppliers need to take every advantage of their ability to improve the performance of a customers’ installed base, and get paid well for doing it.
  10. Consultative and interpersonal skills
    Sales people need to know how to develop trust with people, and how to use that trust to deliver value to the customer through their knowledge of the business, products and services. They should know how to ask the right questions and discover real needs; how to work with customers as opposed to working for them; how to make customers feel comfortable; and how to offer and deliver real, provable value that solves real customer problems.

If you have questions, or would like to discuss these competencies further, please feel free to contact us at 650-862-0688 or at www.mahermarketing.com.

Thank you.

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