Sales, Marketing and Pricing Strategies For the New Economy

Sales, Marketing and Pricing Strategies For the New Economy

Buy Now!This week, veteran Vistage speaker, R. Sam Bowers is speaking to my groups.  Here is an interview he conducted with Vistage about his presentation:

R. Sam Bowers  contends that the world of selling has changed radically and that companies that intend to survive had better change with it.  Bowers describes how we’ve moved from a world where goods and services are sold to a world where they are bought. “Stop selling and start negotiating,” he says. “Stop defending price and start defending profit. Stop giving customers things they don’t want, don’t need and aren’t willing to pay for, in the hopes they won’t ask you to lower price.”

Imagine a world where you have to line up at the door, take a number and actually pay for the privilege of trying to open an account with a potential customer. That probably hasn’t happened yet, but many companies, especially the huge retailers, may be headed in that direction.

Now imagine a world where, before you can close a deal with customers, they ask you to open your books, go over each line item, and take out any and all costs not directly related to doing business with them. After doing so, they will tell you how much they’re willing to pay for your product or service.

That world, says Vistage speaker Sam Bowers , is already here. And like it or not, you had better get used to doing business a lot differently than you have in the past.

Over the past decade R. Sam Bowers has delivered more than 400 Vistage presentations. Wherever he goes, his message — that the world of selling has changed radically and companies who intend to survive had better change with it — sparks lively debate among Vistage members. Whether they agree or disagree with him, Bowers never fails to get members thinking about the critical role of the sales process in today’s world.

We managed to catch Bowers in between airplanes for an in-depth interview. Here are his thoughts on the new world of selling and its implications for Vistage member companies:

Vistage: Vistage members who hear your presentation tend to either wholeheartedly embrace your message or reject it out of hand. What is it about your Vistage talk that provokes such extreme reactions?

Bowers: Much of what I have to say goes against the grain of what most of us have been taught to believe about selling. Any time you challenge the status quo, you’re going to get some pushback.

Vistage: Does it bother you when Vistage members vociferously challenge you?

Bowers: Not at all, as long as they attack the message and not me personally. In fact, that’s what the Vistage process is all about– putting ideas on the table and having everyone share their different perspectives. I never set out to prove that I’m right and you’re wrong. As a Vistage speaker, my job is simply to report on what I see happening in the world of sales and offer some ideas on how to deal with it. Vistage members can take what I say and use it — or not use it — as they see fit.

Vistage: So, what is this message that’s causing such a ruckus?

Bowers: Here’s my basic premise: I believe that new technologies and, in particular, the Internet, have radically and fundamentally changed the way companies buy and sell products. As a result, we have moved from a world where goods and services are sold to a world where they are bought. This shift requires a totally different approach to managing the sales function.

Vistage: How so?

Bowers: For starters, companies have to stop selling and let the customer buy.

Vistage: What do you mean by that?

Bowers: Selling is an “old economy” activity. It involves spending a lot of time, money and resources trying to find customers and then convince them how special and different you are. It relies on the old approach that says if you add enough value, customers not only won’t ask you to lower price, they will gladly pay a premium for your products and services.

When customers are buying (as opposed to being sold to), you don’t have to hunt them down because they have already found you. They’ve already researched your product or service — either through the Internet or their engineering or purchasing departments — and have identified at least two or three alternative vendors whom they consider just as good as you. They know exactly what they want and how much they’re willing to pay for it. At that point, the only thing left to compete on is price. Your job becomes finding out what the customer wants, how much they want, what they’re willing to pay for it and how much of that you can give them and still make money on the deal.

Vistage: Can’t you still convince these customers that you offer a unique, value-added solution?

Bowers: No, the customer who finds you first has already taken you off the value-added shelf and put you on the commodity shelf. And once you’re on the commodity shelf, you can’t go back. When customers know who you are and what you do, and they have one or more vendors they consider just as good as you, you’re no longer unique and special. The primary issue becomes meeting the customer’s specs at the lowest price. That’s a very different world than the one most of us grew up in.

Vistage: What’s driving this shift from selling to buying?

Bowers: Two factors: easy access to knowledge; and relentless pressure to cut costs and operate more efficiently.

Vistage: Tell us more about that.

Bowers: In a traditional selling relationship, the salesperson is in charge because he/she has all the knowledge. When you have the knowledge, you can effectively position yourself as a value-added solution and charge a premium for it. However, over time the customer begins to understand what you do and how you do it, and you gradually become a commodity. This process is inevitable and irreversible. Once you become a commodity in the eyes of your customers, you can never reclaim the value-added position.

In the old economy, the shift from value-added to commodity status could take months or even years. Today, thanks to information technologies and improved purchasing practices, it happens very quickly. In many cases it happens before you even come in contact with the customers. At the same time, global competition is forcing companies to operate leaner and meaner than ever, and one of the best ways to cut costs and boost productivity is to buy more effectively. Going forward, companies that can buy better than others will have a major competitive advantage.

Vistage: How should companies go about selling in that kind of environment?

Bowers: First and foremost, stop selling and start negotiating. By that I mean stop defending price and start defending profit. When you get a request for a proposal or someone asks you to submit a bid or price quote, don’t send in an expensive salesperson to try to convince the prospect how unique and special you are. All that does is drive up your selling costs and make it harder to compete on price. Instead, send in a trained negotiator who is prepared to walk away if you can’t make money on the deal.

In addition, stop giving customers things they don’t want, don’t need and aren’t willing to pay for in the hopes that they won’t ask you to lower price. Instead, start taking items off the table until you can lower your price to the point where the customer is willing to pay and you can still make money. Don’t ever take a deal at a loss thinking that the customer will allow you to raise price once you demonstrate how special you are. It won’t happen!

Vistage: What else should companies do?

Bowers: Get rid of gross margin as a measure of a transaction profit. Instead, look at net profit for each and every transaction and use that figure as one of your key negotiating tools. In order to do that, you must become very good at cost accounting.

Strive to make your fixed costs more variable, especially as they relate to direct sales techniques as a method of marketing.  Look at the cost of cold calls, travel, entertainment, collateral and other expenses used to locate customers who are buying.  Reallocate these very expensive dollars to marketing — whether it is via the Internet, advertising, direct mail, etc. — to make sure you get on prospects’ “short” list.  In a world where customers are buying, direct selling calls are the most inefficient way to market.

Become a world-class buyer. Do the same thing to your vendors that your customers are doing to you. Ask to see their books and demand that they take out all costs not associated with doing business with you. However, do not attempt this strategy unless you have another equally good vendor waiting to get your business.

Finally, focus on building branding and name awareness through more cost-efficient marketing techniques so that you get you on more short lists.

Vistage: What’s a short list?

Bowers: In most cases, today’s customers aren’t willing to pay for quality in excess of spec. Instead, they want “good-enough” quality, meaning that it meets their specs, at the lowest price. Your marketing efforts should focus on getting on a prospect’s short list — the handful of vendors they will consider doing business with — so that you at least have a chance to compete for the deal.

Vistage: What if you do all this and customers still ask you to lower price?

Bowers: That’s the whole point of my talk. Customers will keep demanding lower prices no matter what you do. That’s simply the world we live in. The key to success lies in being prepared to lower price before your customers ask you to do so. That way, when customers demand lower prices, you can move with them and still make money.

Vistage: How do you do that?

Bowers: By continually innovating to lower your cost structure. In the old economy, innovation allowed you to raise prices and charge a premium until your competitors caught up. In today’s markets, innovation allows you to lower prices when customers demand it. More important, it enables you to lower your cost structure ahead of competitors, thereby gaining a significant competitive advantage. If you don’t have the resources to constantly innovate, become a fast follower. Today’s customers don’t care who got there first, only who has the necessary quality at the lowest price.

Vistage: You make it sound like customers are in total control.

Bowers: Not true. The buyer sets the price, but you control how you manage your business and how you respond to the market. Continual cost-cutting through productivity improvements allows you to keep up with — and hopefully stay ahead of — pricing pressures. More important, they put you in a strong negotiating position in regards to your customers. When customers demand lower price, don’t automatically give in. Instead, use your ability to lower price to negotiate something in return.

For example, when a customer asks you to lower price, respond with, “We can give you that price, but we need a commitment to X volume level over the next two years.” Or, “We can meet that price if you pay cash up front.” Your negotiating position will vary according to the customer and the size of the deal. But when asked to lower price, always ask for something of value in return.

Part II:  Innovative Sales Strategies to Meet the Challenge of the New “Purchasing Economy”

Vistage: Some within the Vistage community have labeled you the “anti-value added.” Where did that moniker come from?

Bowers (laughing): Just about everyone who’s heard my Vistage talk and disagreed with it — and there’s plenty of those folks out there. Seriously, though, this is one area where my message sometimes gets misconstrued. I am not against value-added. In fact, I firmly believe companies must have it in order to compete. My point is to stop giving it away for free (in the hopes that customers will allow you to raise price) and start charging for it. To make money in today’s world, you need to think like a general contractor.

Vistage: How so?

Bowers: General contractors make money by submitting the lowest bid on a building, exactly as the customer asked for it. Once they get the project, they start offering ideas on how to make a better building. Every modification the customer asks for requires a change order to the original proposal, and each change order carries a hefty fee. As the change orders pile up, so do the contractor’s profits.

Vistage: How does that translate to other types of businesses?

Bowers: When new prospects/customers approach your business, stop giving away the store in order to land the account. Instead, give the customer exactly what they’re asking for. Meet specs at the lowest cost in order to win the business, and then start selling added value and change orders.

To make money in a purchasing economy, turn your added-value cost centers into added-value profit centers. Unbundle all your added-value offerings as if each were a string on the bundle. Put a price on each value string, and give customers the option of adding value strings at additional cost. Make sure that every value string can stand on its own and generate a profit. When customers are no longer willing to pay for a particular value string, get rid of it.

Vistage: Many people say that your message is too extreme, that the notion of a purchasing economy has affected some industries — such as those who supply large manufacturers and big-box retailers — but that it doesn’t apply to most Vistage companies. How do you respond to that?

Bowers: First let me say that I didn’t make this stuff up. I’m simply reporting on what I’m seeing and — more important — what Vistage members are telling me is happening to them. Over the past several years, I’ve stood in front of close to 2,000 Vistage-member CEOs. More and more they’re telling me, “Sam, you hit the nail on the head. All the things we used to do — traditional sales techniques — just aren’t working anymore.” Obviously, not everyone agrees with what I have to say, but I estimate that eight out of every 10 Vistage members have experienced or are currently experiencing these pricing pressures to some extent.

Vistage: What about service companies? Do your ideas apply to them as well?

Bowers: Absolutely! In many cases, services have become more commoditized than manufacturing, although service people don’t want to admit it. They’ll say, “You can’t commoditize a service because it’s delivered by people.” I say all you have to do is look at the accounting industry to see otherwise. The Big 8 shrunk to the Big 5, and now it’s the Big 3. That didn’t happen because customers kept allowing them to raise prices. In fact, accounting firms have become so commoditized that they can no longer figure out how to make money in the audit practice, which is why they’re desperately trying to reposition themselves as consulting firms.

Look at other traditional service areas. Doctors have been commoditized by the HMOs and insurance companies. Lawyers have been commoditized by people putting their legal work out for bid and by Web sites that offer a variety of legal products and services. Folks, if it hasn’t happened to your industry yet, it’s only a matter of time.

Vistage: Who do you see as the big winners in the new economy?

Bowers: Today’s market leaders do three things very well. First, they take a very different approach to quality. They don’t tell the customer, “We’re better than what you want.” Instead, they say, “We’re as good as what you want but less expensive. Before you buy from the competition, at least give us a try.”

Second, they focus all their energy and creativity on cutting costs so low that no one else can compete on price. Look at Wal-Mart and Costco. They may not always have the lowest price on a particular item, but day in and day out they have consistently low prices across the board. In industry after industry, you see the same thing happening. Market leaders assume the position that no one can compete with them on price, and then use world-class buying practices and continuous productivity improvements to make it impossible to do so.

Third, today’s great companies employ very different selling strategies. They negotiate rather than sell. They defend profit rather than price. They charge for added value rather than giving it away for free. They innovate to lower price, not raise it. They organize around their customers buying as opposed to selling them. More than anything, they strive to stay ahead of the price curve, so that when customers demand lower prices, they can move with them and still make a profit.

Vistage: That doesn’t sound like nearly as much fun as the old way of selling.

Bowers: For a lot of people — especially those who have been around a few decades — it isn’t as much fun. Plus, it requires a very different skill set than many of us learned. I think that’s where a lot of the resistance and denial that I run into comes from.

Vistage: How so?

Bowers: In the old days, selling was all about building relationships and helping people solve problems. You were the expert, the holder of knowledge and wisdom and you could relieve people’s pain with your innovative solutions. The Internet economy has reduced many businesses to little more than order takers. In order to survive, all the energy and creativity in the organization has to shift to the cost-cutting and productivity side. For many people who grew up in a selling world, that’s not a lot of fun.

Vistage: What do you say to those people?

Bowers: Recognize that you can make money in a purchasing/Internet economy, it just requires a different skill set and a different way of approaching the sales function. If that doesn’t sound like fun to you, sell out now while the getting is good and find something else to do. Life’s too short to hate what you do for a living.

Vistage: What about Sam Bowers — are you still having fun?

Bowers: You bet! Even after 400 presentations I still love talking with Vistage groups. You can’t find a more dynamic, challenging audience, and Vistage members keep me in touch with the real world. I intend to keep doing this for as long as Vistage groups continue inviting me to speak.

 

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