The Very Serious Effects of Lowering Your Price
XEROX TRAINS THEIR SALES REPRESENTATIVES
ON THE IMPORTANCE OF HOLDING FIRM ON THEIR PRICING STRUCTURE
A common problem with new, inexperienced sales people (and even tenured ones at times) is that they succumb to the pressures of the customer to lower their price, yet they are expected to deliver the same products at the same level of service. There isn’t a manager in the world who hasn’t seen a sales rep “cave” on price when they are in “Panic-Selling Mode” (badly needs a sale to make quota or to keep his or her job). But few sales reps, and sadly, even fewer managers, know what dropping the price really means to the company’s profitability.
Dropping prices to satisfy a customer only requires additional unit sales from somewhere else at higher levels of profitability in order to compensate (stay even) when sales representatives “Panic-Sell.”
Most Americans are poor with their math skills and some customers would have the salesman believe that dropping prices from 30% to 20% is only a 10% reduction. In reality it is a 33.3% reduction. There are very few manufacturers who would stay in business very long if they made it a habit of dropping their prices by 33.3% just because their customers told them to do so in order to get their business.
Every business person is aware of the incredible success story of the Xerox Corporation and their excellent training programs for their sales people (Xerox Professional Selling Skills). Their sales training programs are unparalleled and have been replicated by countless companies around the world. They teach their sales representatives from the outset that deep discounting undermines the profitability of the company, and that it can lead to disaster, including lay-offs of employees and cutbacks in benefits.
Like most good companies, Xerox bases their sales commission plan on gross profits, not on gross sales. They show their sales reps the chart below to demonstrate the serious dangers of dropping their prices. Although it was meant for the Xerox sales force, this chart is very applicable to any sales person selling any products or service. Virtually any company or any sales person could benefit from understanding what price and profitability really means to their organization
YOU MUST SELL MORE TO BREAK EVEN
To find the percentage of increase in unit sales you must make in order to earn the same gross profit for the company when you cut a price, follow the table from left to right and look in the column headed GROSS PROFIT IS. See the examples at the bottom of the table.
If You Cut
Your
Price |————–AND YOUR PRESENT GROSS PROFIT IS——————————|
|
5% |
10% |
15% |
20% |
25% |
30% |
35% |
40% |
|
|
1% |
25.0% |
11.1% |
7.1% |
5.3% |
4.2% |
3.4% |
2.9% |
2.6% |
|
2% |
66.6% |
25.0% |
15.4% |
11.1% |
8.7% |
7.1% |
6.1% |
5.3% |
|
3% |
150.0% |
42.8% |
25.0% |
17.6% |
13.6% |
11.1% |
9.4% |
8.1% |
|
4% |
400.0% |
66.6% |
36.4% |
25.0% |
19.0% |
15.4% |
12.9% |
11.1% |
|
5% |
100.0% |
50.0% |
33.3% |
25.0% |
20.0% |
16.7% |
14.3% |
|
|
6% |
150.0% |
66.7% |
42.9% |
31.6% |
25.0% |
20.7% |
17.6% |
|
|
7% |
233.3% |
87.5% |
53.8% |
38.9% |
30.4% |
25.0% |
21.2% |
|
|
8% |
400.0% |
114.3% |
66.7% |
47.1% |
36.4% |
29.6% |
25.0% |
|
|
9% |
1000.0% |
150.0% |
81.8% |
56.3% |
42.9% |
34.6% |
29.0% |
|
|
10% |
200.0% |
100.0% |
66.7% |
50.0% |
40.0% |
33.3% |
||
|
11% |
275.0% |
122.2% |
78.6% |
57.9% |
45.8% |
37.9% |
||
|
12% |
400.0% |
150.0% |
92.3% |
66.7% |
52.2% |
42.9% |
||
|
13% |
650.0% |
185.7% |
108.3% |
76.5% |
59.1% |
48.1% |
||
|
14% |
1400.0% |
233.3% |
127.3% |
87.5% |
66.7% |
53.8% |
||
|
15% |
300.0% |
150.0% |
100.0% |
75.0% |
60.0% |
|||
|
16% |
400.0% |
177.8% |
114.3% |
84.2% |
66.7% |
|||
|
17% |
566.7% |
212.5% |
130.8% |
94.4% |
73.9% |
|||
|
18% |
900.0% |
257.1% |
150.0% |
105.9% |
81.8% |
|||
|
19% |
1900.0% |
316.7% |
172.7% |
118.8% |
90.5% |
|||
|
20% |
400.0% |
200.0% |
133.3% |
100.0% |
||||
|
21% |
525.0% |
233.3% |
150.0% |
110.5% |
||||
|
22% |
733.3% |
275.0% |
169.2% |
122.2% |
||||
|
23% |
1115.0% |
328.6% |
191.7% |
135.3% |
||||
|
24% |
2400.0% |
400.0% |
218.2% |
150.9% |
||||
|
25% |
500.0% |
250.0% |
166.7% |
Example 1: If you cut your price by just 9% with a usual profit margin of only 10%, you must increase your unit sales by 1,000% to break even. In other words, if you ordinarily sell two units a month at the regular price with a 10% profit margin, and then decide to cut your price by 9%, you will have to sell 20 more units just to break even on profitability for your company!
Example 2: If you cut your price by 24% with a usual profit margin of 25%, you must increase your unit sales by 2,400% to break even. In other words, if you ordinarily sell two units a month at regular price with a 25% profit margin, and then decide to cut your price by 24%, you will have to sell 48 more units just to break even on profitability for your company!
STILL THINK IT’S A GOOD IDEA TO CUT YOUR PRICE? THINK AGAIN!