In the world of pricing, results are more predictable than we might think. Recently a Fortune 500 marketing professional told me that his company had changed their sales compensation program from a margin-based focus to a volume-based focus.
I told him to expect his company’s sales to decline, the margins to drop even more. He looked at me, agape, and said “That’s exactly what happened.” How was I able to predict this result? More importantly, how can you develop this skill?
As much as I’d like to lay claim to genius status, it’s really a matter of having observed other companies’ forays into the realm of sales compensation. Based on these observations here’s what typically happens when a company shifts from a margin-based program to a volume-based program:
- Salespeople are quick to lower the price; they’re compensated on volume not profit margin.
- Lower prices create skepticism in the minds of buyers. Buyers ask themselves “If this product/service is really so good why did the salesperson cave so quickly on price?”
- Skepticism becomes uncertainty, uncertainty typically results in "no sale."
- No sale means the top line is dropping.
In those instances in which the salesperson is successful at closing the deal at a lower price, the sales are dropping because the price is lower and margins (which are a percentage of sales) is dropping even more quickly.
If, as a leader in your company, you’d like to avoid this kind of result, pay more attention to the results that other companies are getting whether they’re in your industry or not. In particular, pay attention to how changes in policy affect their top and bottom line results.
As you see trends developing, you’ll be able to reconstruct cause/effect relationships between the policies and strategies employed, their impact on customer behavior and the financial results the company experiences. That’s how you develop the ability to effectively predict the results of your own policy or strategy decisions.
Dale Furtwengler is a professional speaker, author and business consultant. His latest book, "Pricing for Profit," is dedicated to helping organizations break the bonds of industry pricing.