Infocusselling’s Blog

October 7, 2008

Selling in Down Times

Selling In Down Times

“I’ve had to lower my price to keep sales going.” If there are comments I don’t want to hear a client make, this is at the top of the list. When you cut price, you cut profit. That may seem like one of those “no kidding” comments but let’s look at what really happens.

Let’s say you sell a $100 product with an out of pocket cost of $40 and an overhead allocation of $25, leaving a $35 contribution to profit. If you sell 100 units, you make $3,500. Not too bad. Now let’s say you drop the price 15% to $85 to “keep sales.” Same $40 out of pocket and $25 of overhead, but now you only make a $20 contribution to profit per unit. If you sell the same 100 units, you profit is now $2000—profit takes the entire hit of a price reduction. To make the same $3500, you now have to sell 175 units. Wow! A 75% increase in volume to make up reduced profit. Can you sell 75% more? Not likely—that’s a lot more than just keeping “sales going,” it’s a sales explosion.

Maybe you provide a service where your personal labor is the cost. Your typical project is $400 and takes you 5 hours at $80 per hour. If you complete 5 projects a week, 25 project hours, you are grossing $2000. Not too bad. But, if you decide to drop the price to $350 to “keep sales” you are now making $70 per hour and $1750 per week. But wait, were you working 25 hours before? More likely you were working 1 hour to get each sale, plus 15 minutes per project to bill and file away records after the project (total 1.25 hours), and another 15 administrative hours for a total of 46.25 hours.

To make the same $2000, you have to sell 5.7 projects a week, a sales increase of 14%. That doesn’t sound too bad, except that it is still an increase in unit count just to “keep” the same sales—and now you are working 28.5 project hours instead of 25. After your price drop, you now need 5.7 hours of sales time, plus 1.43 hours to bill and file, plus the same 15 administrative hours for a new week of 50.63 hours…an increase of 4.38 hours per week. No big deal? After a year, you have worked almost 228 additional hours—over five more weeks to make the same amount of income! So much for vacation.

Still want to cut that price? I doubt it. Is cutting your price a good idea to drive sales? Very seldom. When the economy is supposedly having tough times (some of us think the tough times are more a function of the media and election rhetoric, and there is proof to back that up), then you must focus on selling 1) to the right clients who will pay full price and/or 2) selling smaller projects at a higher margin or hourly rate so your profit per sales dollar or billable hour is higher. Is this possible? Sure. How? Go back to what people buy from you, your unfair advantage, and be intensely focused on selling only to those prospects who need the result you can deliver, and walk away from projects that will take too much time away from you finding and delivering high value products and services.

If you must sell at a lower dollar amount, take something out and raise your hourly rate. Remember that you cover your selling and administrative hours by what you generate in billable hours. Tell your prospect that “to meet that price, we can do this” and redefine “this” as less than your regular package where the reduction in hours is less than the reduction in price—reduce project hours by 20%  with a 15% decrease in sales amount which actually increases your profit margin. If the “this” is important to them, they will find those dollars. If you are selling a product, remove a feature and reduce the price only by the cost of the feature—leave any profit or margin in your selling price.

There’s an old joke about a farmer losing money each time he took his goods to the market, so he bought an extra cart so he could make it up on volume and then went bankrupt. You really can’t make it up on volume. Keep your margins, focus on selling to a narrower market, and don’t commit to working an extra month per year just to stay even.

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3 Comments »

  1. I couldn’t agree more. =)

    Comment by Amy Stark — November 1, 2008 @ 12:41 pm

  2. This is why I get so frustrated when one of my customers shows me a quote from my competition. In this quote, they are selling a promotional items that has been so discounted that I do not even see how they are making any money. . .or money to make it even worth the transaction (besides possible work in the future).

    Comment by kristieskreations — November 2, 2008 @ 7:43 pm

  3. You are right! But, sometimes our competitors are just wrong and sometimes they are, well, not smart. They are setting themselves up for future deep discounting because that client will remember that price and it will be hard to raise it later. If they do try, you are in good spot because now the client will be irritated. Another option is to tell your client “Yes, that’s a good price, in fact, so good, I would be surprised if it is first run or brand name product since I do know the out of pocket cost of the real thing. If it is the real thing, they must be pricing it to match how much they feel they add to the process of helping your company grow.” It’s a bit of a sideways shot but that’s OK. Raise just a bit of nervousness in the client that maybe the deal is too good to be true.

    Comment by INFOCUSSelling Team — November 2, 2008 @ 10:50 pm


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