Dear David: The cost of negotiations

Home Columns Dear David: The cost of negotiations

May 22/29, 2017: Volume 31, Issue 25

By David Romano

 

Dear David:
I recently had a discussion with my sales associates about the current mindset of consumers regarding negotiations and the true cost of discounting. They got defensive and said the ability to negotiate is an important tool to closing sales. I disagree but need some advice or data to counter. Can you help?

Dear Owner,
The most common stories about negotiations seem to center around sitting in front of a car salesman dickering over the price of a new vehicle. Millennials—which will soon become your largest customer base—are used to purchasing everything from music to groceries online and are changing that decades-old model. To accommodate this new type of buyer, more companies are embracing fixed pricing.

Last year Costco struck a deal with General Motor dealerships to sell 465,000 cars at fixed prices. Electric carmaker Tesla has made a practice of it, and other brands like Subaru and Lexus are experimenting with it in certain locations.

One reason is that instead of just dealing with a salesperson, millennials tend to research purchases online, visiting an average of 25 sites. That means they’ve largely made up their minds before they arrive on the lot. If this is happening at car dealerships, one must assume the same can be said for those looking to purchase flooring.

These buyers aren’t looking for a salesman; they’re looking for a customer advocate. The job of your sales team is to build rapport, establish trust, understand the features and benefits of each product and sell on value, not price.

When I owned a flooring company, I’d ask my sales staff: Do you think this customer is going to pay your rent/mortgage this month? Do you think they are going to buy you groceries for the next few months? Are they going to invite you over for dinner and the holidays?

When they’d say no, I’d ask, “Then why are you so willing to give up some of your commission to someone who doesn’t understand your sacrifice and doesn’t care?” I instructed them to stop relying on negotiating and sell on the merit of the product.

According to data from my company Benchmarkinc, the average flooring retailer generates just over $2,600,000 in sales. That company sells products at a margin just under 36%, with an average transaction around $2,200 and closes its opportunities at a rate of nearly 35%. Benchmarkinc is also able to analyze the effect certain practices have on business. Following are the results of allowing sales associates to negotiate: gross profit is 0.4% lower, average transaction is $35 lower and close rate is 0.5% lower.

Those numbers may look small, but the compounding effect is quite large. Based on the numbers above, the average number of opportunities is 3,376. If you take those 3,376 opportunities and close just 0.5% more you would have an additional 17 transactions, totaling 1,199. With an average sale of $2,235 ($2,200 + $35) you would generate $2,679,765 in sales. If you take that $2,679,765 and multiply by the 0.5% increase in gross profit you would have an additional $13,398 in gross profit dollars. For an average store generating $2.6 million in sales the effect is just over $13,000.

You can do the same exercise using an individual sales associate’s numbers and show him how much money he has lost by giving things away at a discount. When your sales team realize how much money they give away to complete strangers, I’m sure they will change their approach to negotiating.

 

 

 

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