Your Best Salesperson May Be Costing You a Fortune
Imagine you own a company that generates $8 million in annual sales. You have a team of capable salespeople, plenty of customers, and enough business to keep approximately 50 employees busy.
By almost any reasonable measure, you've built a successful company. There's just one problem: You're losing money.
That's exactly the situation one foundation repair and waterproofing contractor faced. And when a business consultant examined the company's sales operation, he discovered something that should make every business owner sit up and pay attention.
The company's salespeople had given away $353,000 in discounts in a single month. That's not a typo, and it's not an annual figure. It's one month's worth of discounts.
Now, here's where the story gets interesting.
The Salespeople Are Happy. The Customers Are Happy. The Owner Isn't.
The company has seven sales representatives who earn a flat 10% commission on their sales. They know how to sell, and they have every reason to close as many deals as possible.
But there's a serious flaw in the compensation plan. Whether a salesperson sells a job at full price or offers a substantial discount, the commission percentage remains the same.
Naturally, when a customer hesitates, a discount becomes an easy way to close the sale. The salesperson earns a commission, the customer feels like he got a bargain, and the company gets another contract.
Everybody wins, right? Not exactly.
The salesperson sacrifices a relatively small amount of commission when he discounts a job. But the company absorbs the entire reduction in revenue while most of the costs to perform the work remain unchanged.
Multiply that across seven salespeople and hundreds of contracts, and those seemingly harmless concessions become enormously expensive.
In this case, the company generates approximately $8 million in annual revenue yet reports a $300,000 net loss. The owner has a successful sales operation by one measure, but the financial results tell a very different story.
His salespeople know how to close deals. What they don't have is a compelling financial reason to protect the company's profits.
One Change Makes an Extraordinary Difference
After working with a consultant, the owner makes several important changes. He increases prices by 3%, restructures commissions to reward full-price sales, and begins to review financial results monthly.
Under the new commission plan, salespeople can earn 11% when they sell at full price. Discounts reduce their compensation, and excessive discounts can eliminate their commission on a particular sale.
Suddenly, the financial incentive changes. Instead of reaching for a discount whenever a prospect hesitates, salespeople have a reason to defend the value of what they sell.
And according to the consultant's published case study, the results are remarkable.
The company's reported close rate remains around 42% despite the price increase and new commission structure. In one subsequent month, its net profit margin reaches 16.6%, compared with a previous historical monthly peak of 2.87%.
The business ultimately reports approximately $393,000 in annual net profit after a prior-year loss of $300,000.
That's a substantial financial turnaround, and it occurs without the company having to generate additional sales volume to produce its initial improvement.
Now, I want you to consider something. What if your company could become substantially more profitable without a dramatic increase in sales?
A 10% Discount Can Cost You Far More Than 10%
Here's a simple example that illustrates why discounts deserve far more attention than they typically receive.
Suppose your company sells a product or service for $100,000. Your cost to deliver it is $70,000, which leaves $30,000 in gross profit.
Now suppose your salesperson offers a 10% discount to close the deal. The customer pays $90,000, but your costs remain $70,000.
Your gross profit falls from $30,000 to $20,000.
Your salesperson reduces the price by just 10%, but your company loses one-third of its gross profit on that sale.
And if your salespeople routinely offer discounts because they believe price is the easiest way to win business, the financial consequences can be staggering.
I'm not suggesting that discounts are always inappropriate. There are legitimate circumstances where a concession makes economic sense, particularly when it produces additional profitable business.
But there's a world of difference between a carefully considered pricing decision and a salesperson who offers discounts simply because he doesn't know how to persuade a prospect to pay full price.
Is Your Best Salesperson Really Your Most Profitable Salesperson?
Suppose your top salesperson generates $3 million annually, while another salesperson produces $2.5 million. Naturally, you're inclined to celebrate the person who brings in the most revenue.
But what if your top producer routinely discounts prices, offers costly concessions, and concentrates on deals that generate relatively little profit?
Meanwhile, your second salesperson sells at stronger margins, attracts customers who appreciate the value of your offer, and generates more gross profit despite lower revenue.
Which salesperson contributes more to your company's financial success?
It's a question worth asking because revenue tells you how much your salespeople sell. It doesn't necessarily tell you how much money they make for you.
After 40 years in marketing and sales, I've learned that a truly effective salesperson does more than persuade prospects to buy. He understands how to establish value, overcome objections, and give customers compelling reasons to choose his company without automatically sacrificing price.
And those abilities become particularly important when you sell expensive products or services where even a modest discount can represent thousands of dollars in lost profit.
Give Your Salespeople a Better Reason to Sell at Full Price
There's another lesson in the waterproofing company's experience that I don't want you to miss.
The owner doesn't solve the problem by firing his salespeople or demanding that they work harder. He changes the incentives and gives them a financial reason to protect the company's margins.
That's an important first step. But compensation alone doesn't give your salespeople the persuasive skills they need to justify premium prices.
If your sales team relies on discounts because prospects don't understand the value of your offer, you have a sales strategy problem as well as a compensation problem.
Your people need to understand what makes your product or service superior, why those differences matter to your customers, and how to communicate that value in a way that makes price less important.
They also need a sales process that helps them identify profitable prospects, establish the economic value of your offer, and address objections without immediately reaching for a lower price.
The objective isn't simply to convince your salespeople to stop offering discounts. It's to give them a compelling reason, and the persuasive ability, to sell more profitably.
How Much Profit Are Your Salespeople Giving Away?
I don't know how your company compensates its salespeople, how often they offer discounts, or whether your most productive representatives are also your most profitable.
But I do know that those questions deserve serious attention, especially if you sell high-value products or services.
Take a close look at your sales reports. Compare revenue with gross profit, examine the concessions your salespeople make, and determine whether your compensation structure rewards the results that matter most to you.
The owner of that waterproofing company discovers $353,000 in discounts in a single month. After changes to prices, commissions, and financial oversight, the company reports a dramatic improvement in profitability.
Those results come from one consultant's published account, and they aren't a guarantee that another business will achieve the same outcome. But the underlying lesson applies far beyond the foundation repair industry.
Your best salesperson shouldn't simply be the person who brings in the most revenue. Your best salesperson should be someone who helps your company earn the most profit.
And if you're not measuring that difference, you may have no idea how much money you're giving away.
Let's Make Every Sale More Profitable
You've invested considerable time and money in your products, your reputation, and your sales team. You deserve a sales strategy that helps you capture the full value of what your company provides.
At Conquest Marketing & Sales, we work with successful business owners who sell high-value products and services and want to increase profitable sales through stronger strategy, more persuasive sales arguments, and better market positioning.
You know your business. I bring 40 years of experience in marketing, sales, strategy, and persuasion. Let's discover how much more profit your company could earn from the sales opportunities you already have.
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Russell J. Martino is a marketing and sales strategist, direct-response copywriter, and author of Persuade. Profit. Repeat.