The Importance of Protecting Margins
To my knowledge, there is not a single successful sales manager or salesperson who will not agree that profit margins on sales are important. But why are they so important? How do we protect margins, and most important of all: why and how do we improve margins?
What are margins really?
By definition, you cannot have any profit, nor any successful business without profitable margins. Unfortunately, many new salespeople, and some not so new, don’t understand how to calculate profit margins correctly. Most, however, understand the difference between the fact that a 30% margin on a $100 sale is 30$ versus a 30% profit on a $100 cost is $142.86. So I won’t belabour the point.
More than that, profit margins are the number one lagging indicator of a well-run, competitive company, likely in a profitable industry. Whether we like to admit it or not, some industries have room for higher profit margins than others. For an in-depth look into why, you would be hard-pressed to do better than look into Michael Porter’s 5 Forces. But in a nutshell, just like you will score more points in Basketball than in Soccer, you will earn more dollars in some industries over others. That being said, it is still true that profit margins are a lagging indicator of a well-run business.
To have strong profit margins, relative to your industry, it really takes a whole team. The product(s) and/or service(s) must be well designed, well-sourced, well positioned, well sold, well delivered, and often times well followed up on. We are only going to look closely at the impact of the sales portion of this equation today. The reason I call profit margins a lagging result is because inefficient or defective design, delivery, and follow-up/delivery can all kill profit margins before the salesperson ever has a chance. You only find out that these steps were done incorrectly or insufficiently when you learn what a customer is willing to pay for your products or services, versus your costs. So going forward we’ll assume that all these things are in place.
Why should a salesperson care about margins
There are two fundamental reasons why a sales manager and especially a salesperson should care about higher margins. First is obvious and can be as self-serving as it can be altruistic. If profits are not sufficiently high, you the salesperson cannot get paid, because the company made no profit to pay you. That’s the self-serving bit.
The altruistic bit is that by earning (I use the word ‘earn’ very intentionally) good margins you a) allow your company to continue to support your customers in the future b) keep and possibly create more jobs for the company you work for (even more job security for you) c) and this is assuming you sell something worthwhile and good for your customers, you can provide more and better products or services to your industry. I hope you’re as lucky as I am to be able to say that you do have a positive impact in your industry with what you sell.
More specifically on the bit about you, earning higher margins separates you from your peers and designates you as a true professional. There are many reasons why. A lesser salesperson with a lesser product or service has little to promote other than price. If the product isn’t very good, or delivery isn’t good or even basic market positioning is poor, then you have few levers to pull in negotiations other than price. If, however, the product or service is good and you give good service then you have more options like quantities, delivery or payment options, etc. Which leads to the most important thing: how do you protect margins and how do you increase them?
How to protect and improve margins
I hope it’s clear by now that we’re talking about products and services that truly are competing. If you are the only option for your customer then all you have to do is raise prices until something breaks and dial back a little. We’re not talking about that here because that’s not the reality for most people. So since most of us have to work hard to protect and improve margins let’s talk about it.
To protect margins the number one rule is to ask what can I do to win this business without changing my margins. I didn’t say without changing the price, but without changing margins. A well-run organization should know exactly what it costs to serve a customer, while at the same time understanding that competitors have a vote as well. I understand that sometimes a customer will say to you, rightly, that you’re offering the same thing (in their estimation or for their purposes) as your competitor but the competitor is x percent less expensive. You then have to decide what you will do, while understanding that every time you lower a price, you are sending a message to your customer and your competitor.
Lowering your price tells your customers that they should have pushed for a lower price, with or without the competitor's quote. You obviously had the room to do it, because you just did it. The worst thing a sales person can do is give an automatic 5% every time their asked; they will then ask every time. Lowering your price also sends a clear and dangerous message to your competitors. That message is received as some version of “I went in too high, and to win the business next time I will have to lower my price”. This is called a vicious cycle. A vicious cycle is exactly what it sounds like and the exact opposite of a virtuous cycle. A virtuous cycle is what we want to create. More on that later.
The proper way to respond to a request to lower your price based on an offer by a competitor is to look for a trade off. This is where knowing your company's costs of doing business come in. What does it take to pick and deliver an order? Ask for a higher quantity and use the efficiency to match or beat the price. What does it cost to do the job? Are there items or costs that can be cut to make the project cost work? How much does it cost when the customer pays in 60 days? You again can pass on the savings in the form of a price adjustment if they pay in 30 or less. And if all fails, maybe you need to walk away. Lose today to survive for a long time. No salesperson worth their salt wants to walk away from any sale ever. But it’s better than doing work or selling products for free or at a loss. Volunteer work is good, but you are not currently volunteering.
To raise margins is to work with a customer with the above-mentioned tactics and tools to develop the above-mentioned virtuous cycle that we need to create. By knowing your costs, all of them, and knowing what’s important to your customer, you can personalize deals that work best for your customer. And it goes both ways. Maybe your price stays 2% higher than your competitors but you allow them to pay in 90 days instead of 60.
Note: 3-D Negotiations by Harvard Law professors is an incredibly important book to really dive deep into creating deals that don’t just mean an even slice of the pie for both parties, but bigger slices of bigger pies. I can’t recommend this book enough.
The reason I call this the virtuous cycle is that by crafting better, more personalized, deals for your customers you tie them into the benefits for both of you. You will still be pestered by lower-quality competing salespeople trying to cut your price, but know and hold your line and you will win. When a customer sees that not only do you listen to their specific needs but provide your products or services tailored to their needs, they will only want to do more and more business with you but they will be much harder for competitors to win over because their standards are raised. It’s the essence of true sales competition and one of the main ways you actually build a customer relationship. Listening and acting.
Conclusion
I hope you now see not just the importance of margins, but how a good company all the way to the sales person can compete in intelligent and profitable ways. One last thing, by increasing your margins you separate yourself from your own in-house competition. Anyone can get a job when times are booming, but the good ones keep their jobs when times get difficult. In sales, you need to earn that. Protecting and improving margins is how you do it.
So never stop looking for new ways to win without touching your margins. Let your toolbox be full and also never stop looking for even the smallest of ways that you can differentiate. There is almost always some segment, some niche of your industry that you're well-suited to serve profitably. Sometimes these are in your face but hard to see. Other times they are in the air and need to be created from scratch. To me, this is the challenge and the joy of the sales profession, and I wish you the best of luck in yours.