What is the impact of 10 percent price cut on your Profits?

Recently, I have noticed a number of b2b sales people and sales managers at these companies cutting prices on their products and services. Interesting pricing strategy in view of the reality of what it takes to make up the cut in gross margins.

The usually justification for the these “innocent” price cuts is the recession has made it difficult to sell at higher prices or we need to cover our costs during this low volume period of time or the internet has made it harder to sell without cutting our prices.

Interesting justifications with no basis of reality provided with these “excuses” for a lack of selling skills.

That is correct a lack of selling skills is driving more price cuts than real business logic. So what is the real issue here. There is a mindset running amok within our sales cultures. This mindset is “A Small Cut in our Price can be made up later!” Not. Wrong. Bad Info.

First, when you or your organization cuts your price for a product that say has a 35% gross margin (Price minus cost of goods sold equals gross margin. Then, what percentage is the gross margin from total sales or individual product price minus its cost as a percentage?) Say, the price cut is 10%. Here is the scary part – with a 10% price cut cuts your gross margin percentage drops by more than 20%. (as a percentage of its former level.)

Okay, let me cut to chase here. When you cut price 10% on a gross margin of 35% – YOU WILL HAVE TO DOUBLE YOUR SALES VOLUME TO MAKE UP YOUR ORIGINAL GROSS MARGIN. Yes, I’m shouting at you because this fact is so scary relative to your company staying in business. What am I implying here?

How do you Double Your Unit Sales in a Down or Flat Economy?

It is very difficult to double your volume of sales (units delivered) during a poor economic time period. And, yes, I have heard all the chatter about how everyone else is doing it. Well, my question to you is does it really matter if they choose to go out of business faster?

As a former turnaround consultant (putting company’s in financial crisis back on a stable financial track), I often saw first hand the perils of price cutting on the financial soundness of a company. You do not want any part of this activity.

The key is to take counter measures to the price cutting demands being placed upon you. This means you will need to get much better in your personal selling skills and negotiation skills to avoid or eliminate price cuts from your sales strategy.

Here is a short list of things you can do as a starting point for holding your price…

  • Make a list of the advantages your product provides. (ROI numbers are helpful here.)
  • Review your negotiation skills or take a course on negotiation (surprised at the number of sales people who have never taken a negotiation workshop, yet, at expected to negotiation everyday.)
  • What advantages are provided by your company? (Training, online access to information, great customer service and support, leading edge technology systems, excellent supply chain operations and fewer problems due to high quality production)
  • How well are you building business cases for your products during the sales process? (Using the Questioning Model of Selling, asking about business issues rather than handing out product flyers, listening to the customer about ALL their issues and concerns, connecting the dots – symptoms – to the real business issues – Problems, and focusing upon the customer rather than your products.)
  • Do you know the actual gross margins you are supplying to your organization? (Hard to understand your value to the organization until you know the true profit potential you are providing to your company. The more you provide the greater the return on their investment in you. No layoffs to the high profit generating sales people. If you are not covering the costs of your salary, guess what? You are at risk. Learn the numbers – not just the sales volume, look at the gross margins minus your salary and direct expenses to see if you returning a high percentage to the company.)
  • Look into your total product mix and see if you are moving the higher margin items? (it continues to alarm me regarding how many sales people ignore premium priced or high margin products. The reasons vary, yet seem to boil down to a lack of effort to move the higher priced items.)

This is an excellent start at looking into your sales results, particularly learning about the gross margins you are bringing to the table for your organization. The higher the total margin, the more valuable you become to the organization and the safer your job becomes. By the way, it does not hurt to share this information with your sales manager.

Just remember this important factor. When you cut a price be it 5% or 10% or even 20%, you are placing yourself in a serious hole. Your ability to drive a doubling or tripling of unit volume to offset this price cut is a daunting task for anyone – even in good times. Today’s economic condition reduces your probability of success in offsetting this cut in gross margins.

Hold the line on your prices and when you get really good at holding prices, think about increasing them. Yes, I know you think I’m crazy with that comment. However, if you are doing all the right sales process steps and being a business person who sells – then higher prices will come naturally.

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Voss Graham

Sr Business Advisor / CEO at InnerActive Consulting Group Inc
Your Knowledgeable Partner for Business Success and Achievement. Dedicated to helping others get to their next level of success. Award winning business advisor; coach to executives and business owners; Business Growth Strategist; and experienced using assessments for hiring & selection, evaluation of teams and improving communication. Voss is available as a Speaker for your conferences or company meetings contact him at 901-757-4434 or use the LinkedIn or Facebook direct messages.

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