Limit the sales rep discount authority
The more limited the authority of the sales rep to grant discounts, the less discount are given. That’s a fact.
It is well documented that discount authorities are exploited to the full or almost full by sales reps. Yet, if this is the case, and discounts are too high, one should look at the authority limits before criticizing the sales reps.
Discounts may significantly impact the bottom line. Therefore, they are too important to be left to individual negotiation skills. Especially when you consider that the average purchaser participates in more negotiations every day than the average sales rep and, thus, builds far more experience. From an earnings perspective, it therefore makes good sense to establish permanent discount authority level with narrow ranges. One may want to have an escalation opportunity or two, but let the sales rep understand that he must fight before escalating.
Give the seller the full package
Clothes make the man the saying goes. And information makes good margins. The more information and tools the better ability to resist the discount pressure off in sales situations.
If the seller is not equipped with relevant margin information, the sale will be more likely to narrow down contributions.
Develop tables, which shows the seller the true button line effect of discounting 1%, 5%, 10%, etc. and how much extra volume will be required to offset the discount. Provide transparency with respect to the extent of discounts and free services that the customers already receiving, so that both the vendor and the customer understand why pain threshold is reached. Develop a ‘tit for tat‘ catalog. So if the customer asks for additional discounts, the seller will know what to ask for in return. Also, help the seller to focus discounts on products where you will gain strategic benefits, for instance products not currently being bought by the customer, products that are cheaper to produce or provide other benefits. The possibilities are endless.
Reduce contribution margins
‘Great’ contribution margins causes big discounts. We earn plenty, the sales rep thinks. So a few percentages extra to close the deal and move on does not matter. But it does. Especially if there are large fixed costs.
Therefore, it is wise to allocate as many of the fixed costs as possible to the products. Show and explain to sales rep that margins are modest and repeat it again and again. It reduces the sales reps, and ultimately, the customers’ expectations when it is repeated how little is earned.
In one case, for example, we brought down the perceived contribution margin of 46% to 31% by allocation indirect production costs to the products. A reduction in discounts soon showed when sales reps learned of the true contributions.
Challenge the discount history
Many customers receive discounts they are no longer entitled to. Do not be afraid to challenge this. Your customers have probably already done the same with their customers.
Some discounts have been given on the assumption of a certain business volume. Maybe the volume is no longer what it was or maybe it never got to the level assumed. Address this.
In the worst cases we have seen, ERP systems automatically awarded some historically agreed discounts that no one was aware of nor could explain. Obviously this is bad. Perhaps each of these is just small amounts, but together they can be a solid pool.