Value Added Partners.org

The high cost of low prices

Selling on price can be detrimental for a distributor. Customers leave them high-and-dry when the next lowest price rolls around, and there is always someone with a lower price.

Kevin Fitzpatrick, the sales manager for fictitious distributor Primo Industrial Supply, is frustrated with his salespeople. In spite of his best efforts, they continue to sell on price rather than on value. Their constant price slashing lowers his margin and cuts into Primo’s bottom line.

This is not an unusual problem. Selling on value takes more legwork:

salespeople need to document their value to show customers
salespeople must enter the factory floor to solve problems
salespeople must often work with suppliers to provide the best solution to end-users
salespeople require specific product knowledge to address possible process improvements

Industrial distributors often struggle to motivate their salespeople and help them understand the reasons behind selling value over price. Indeed, they must often sell the salesperson. Following are suggestions V-Mail subscribers offered when we asked them to respond to Fitzpatrick's dilemma.

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Robert Blackwood, the general manager of Portland, Ore.-based Plastic Machining Co., says incentives work well when trying to motivate salespeople. He says basing commissions on an escalation factor – for example, 15 percent margin = 1 percent commission, 20 percent margin = 2 percent commission – can work well for distributors.

“Salespeople who earn commission/bonus money on profit margins with an escalation factor are much more in tune with what the customer is willing to pay,” he says.

Air Hydro Power vice president and owner Tom McGuire says this is a great opportunity for people to be sold on the idea of selling value. One way to open their eyes is to open the books.

“Educate the sales force on how much money your company makes,” says McGuire. “It is not as must as they think. Be honest; show industry stats available from trade associations.”

In fact, the Industrial Supply Association publishes its Profit Report every year. To check industry averages, members can view the 2005 ISA Profit Report by clicking here.

Opening a salesperson’s mind is a common theme among distributors. Donald L. Chargin, president of Royal Supply, an Elryia, Ohio-based industrial distributor, says he would sit down with Fitzpatrick’s sellers in a workshop environment.

“I would conduct my Selling System Assessment, which is an account-by-account review by sales, gross profit percent, call frequency, product mix sold and not sold, technical support required per account, and so forth,” says Chargin.

While many distributors thought it best to educate the salespeople on what was best for the company, GHX Inc.’s Gary Schnur went in a different direction. The operations manager of the Houston-based industrial sealing product distributor says salespeople must understand what is in their best interest.

“Do Fitzpatrick's salespeople understand the negatives associated with price buying?” he asks. “People will always buy on price if they do not perceive any negative issues associated with doing so.”