I recently read an amazing book, Sales Insanity by Cannon Thomas, and it’s a mind-blowing compilation of actual sales blunders made by real people in real businesses being real stupid. Every salesperson and business leader must read this excerpt but who is Cannon Thomas… really? It’s not his real name and I managed to uncover his identity and then obtain his permission to share some of the insanity in this post. He is one of the best sales consultants on the planet. Enjoy gobsmacking true story and if you think you know who he really is, send me an InMail and I’ll confirm.
An industrial distributor hired me along with a team of consultants to help identify ways to increase its profitability. The company was eking out the slightest profit, but it was headed toward losses that it could not endure. Its executive team knew that there was profitability hiding somewhere in the company, because its similarly structured competitors were performing much better in the same economic environment. They were confident that the operations side of their business was running efficiently and that their missing profits could be found in the sales force. We subsequently sent our search party into the field to test their hypothesis.
We began by interviewing the company’s salespeople. Among other things, we asked each seller, “Who are your very best customers?” Not surprisingly, the salespeople immediately responded with a list of their very biggest customers—the customers that generated the most revenue for the company. And from their perspective, these were their best customers, because they yielded the most money in commissions. The incentives of the sellers were based on achieving revenue targets, not achieving profits. Therefore, bigger was better.
We also asked the salespeople who they thought were their most profitable customers. Again, they listed their biggest customers by revenue. We asked, “Don’t your big customers negotiate lower prices with you, because of the volume of products they buy?” “Of course the pricing with those customers is a little bit lower,” the sellers all responded, “but the absolute dollar amounts of the profits must be high despite the lower margins.” Except that they weren’t.
At the same time, we were conducting the interviews, we were also busy calculating the actual profitability for each of the company’s customers. It turned out that in addition to negotiating lower prices, the sellers’ biggest customers were also the slowest to pay their invoices. And they returned a lot of products. And they demanded the most customer service. And they received volume rebates. When all of the costs to sell and service them were taken into account, the company was making a profit on just 14 of its 50 biggest customers. It was losing money on 72% of its ‘best’ customers. That’s where the company’s profits were hiding.
In itself, this didn’t shock me. The salespeople had no knowledge of the actual profitability of the products they were selling, and their financial incentives clearly inspired them to close any deal no matter how low the price. What did surprising to me, though, was the vehemence with which they defended their price discounting practices.
Every salesperson in the company had large customers that were sucking money out of this company. We pointed out that they were essentially paying these customers for the privilege of selling them products, and if they were to stop selling to 36 of their 50 biggest-volume customers, their company would actually be more profitable. We suggested that they needed to raise their prices to these profit-sucking customers, or else we would be forced to fire them—their customers, not the salespeople.
But to a person, they defended their pricing tactics as what they had to do in order to ‘get the business.’ In fact, they claimed that getting this business was the privilege they had earned over decades by developing great personal friendships with their customers. These customers were generous enough to give them the ‘last look’ at each potential deal, so they could beat the lowest price that their competitors had to offer.
Again, we pointed out that this was a bad strategy, but the salespeople were steadfast that they were simply meeting the ‘market price’ established by their competition. If they didn’t sell the products to the customer at the ‘market price,’ then their competitors would win the business. To which we responded, “Great. Let your competitors win the business. Let them pay the customers to buy their products. Then your competitors will be the first to go bankrupt, not you.”
Alas, no amount of reasoning could convince these salespeople that selling products at a loss was a losing proposition. They were convinced that they should continue to ‘get the business’ at the ‘market price’ by leveraging their ‘friendships’ to get the ‘last look’ at every deal. No wonder their competition was performing more profitably than they were. The competitors’ salespeople were smart enough to say no to the worst deals.
Gratefully, this story had a happy ending. The executives realized that the sales force’s financial incentives were not aligned with the company’s. They cleverly redesigned the compensation plans to reward profitable customer relationships, not just big ones. Within a year, the distributor’s profits were on the rise, and they continued to grow substantially for several more years.
As these changes were taking place, I liked to imagine the amazed reactions of the competitors’ sellers as my client’s salespeople began to walk away from bad deals. The competitors must have marveled at their good fortune. Suddenly they were getting the last look at all the deals they’d previously lost to my client. They were able to win the business, and win it at the market price. Their revenues were surely on the way up. But their profitability was on the way down.
The Good Ideas
Good Idea 1: Bigger Isn’t Necessarily Better
There is an intuitive appeal to bigger customers. And all things being equal, they tend to be better for you, too. But not always. Sometimes your biggest customers might also be your worst, because they’re either less profitable, less strategic, or just more annoying. Be sure to understand the type of customers you want, and then do what you can to attract and retain those. You don’t need every customer, just the ones that are good for your company.
Good Idea 2: Beware the ‘Market Price’
The ‘market price’ is a customer euphemism for the lowest price that anyone has ever spoken aloud. Don’t lead a race to the bottom just because someone tells you a lower price exists. You shouldn’t have to give away your products—they deserve a price that reflects the true value you provide to your customers. If your customers won’t buy at a price that you want to sell, then politely walk away. Let ‘the market’ have the business instead.
Good Idea 3: You Might Have to Fire a Customer
Salespeople spend most of their energy trying to acquire and grow customers, so it’s almost unthinkable to purposefully end an active customer relationship. But like any relationship, some customers who start out as a dream will end up a nightmare. If they’re a bad customer to you, hopefully, they’ll be an even worse customer to your competitor. Let them be just that.
Thanks Cannon Thomas… whoever you are! Priceless. You can buy the book on Amazon here. Over to you the reader. What pricing blunders have you witnessed? Let me know in the comments. Who do you think Cannon Thomas is… really? Could he be Anthony Iannarino or maybe Mike Weinberg? Maybe Jeb Blount or Lee Bartlett? Let me know your guess by sending me an InMail.
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Tony Hughes is ranked as the #1 influencer on professional selling in Asia-Pacific and is a keynote speaker and best selling author. This article was originally published on LinkedIn where you can also follow Tony’s award-winning blog. Also, visit Tony’s keynote speaker website at www.TonyHughes.com.au or his sales methodology website at http://www.rsvpselling.com/.