How to Stop Losing Money in Sales Negotiations

Price setting, as we’ve discussed in other posts, can be challenging, especially when we know that actual prices are determined during the negotiation between the client and the sales rep. To mitigate the difference and make sure you are getting on or above market price, I suggest two things: analyzing your negotiation data and learning how to train sales reps to negotiate. Let me illustrate with a story.

Analyzing Negotiation Data 

In the mid-2000s, I worked for a company in a complex, high-volume environment who needed help managing their price-setting process. I advocated bringing in the price optimization tool Zilliant to help us. But one of the biggest pushbacks from leadership was the argument that because our salespeople negotiated every transaction based on “market pricing,” we didn’t need to invest in a tool to help with pricing. Their perspective was that we should set the price and let the salespeople negotiate to the “right” market levels for that time and moment. 

At first glance, that idea sounded reasonable. But the more I thought about it, the more it did not make sense. How could a sales rep selling 100K+ SKUs know what the market price was? And how were they discerning their pricing discounts?

To answer these questions, I decided to analyze our existing sales negotiation data. Specifically, the categories of products sold, the volume, and the deviation from list price over a period. What I found were clusters of discounts at whole numbers, similar to the illustration below. That was a red flag. Why would market pricing always result in whole numbers? In a business built on basis points, literally every penny counted. This meant we were losing money when we discounted in whole numbers.  

Next, I cut the data by sales rep and looked at their behavior over time for multiple product categories and multiple customers. What I discovered was over 50% of the sales reps had the same negotiating behavior across multiple product categories. If the sales team exhibited the same behaviors without any regard to the product or offer, then I knew the benefits could be attributed to the Zilliant pilot.

We kept the pilot blind to sales to ensure no abnormal effect on negotiation behaviors. We applied the test on 20% of the business and used the other 80% as the control group. After running optimization on the 20% for 4 weeks, we did a pre vs post comparison and then took the difference of the two groups (20% and 80%) to get the final lift number. 

Training Sales Reps How to Negotiate 

Through the pilot, we were able to achieve a swing of 65 basis points in profitability. While a success, I often think back to that time and wonder how much more profitability we could have achieved if we also focused on proper negotiation training.   

Not all negotiations are bad. They can be good indicators of what is happening in the market. For example, there may be an issue with the offer, like poor freight pricing. Or, there could be an issue resulting in longer delivery times that the sales reps are compensating for with discounts. Maybe the pricing is not aligned with the value delivered in certain segments.  

Negotiations could also indicate a potential price war from an undisciplined competitor. We can harvest all these inputs from a negotiation analysis only if the negotiation was market-driven and not a personal behavior. If the sales reps are not trained properly, then the data is too dirty to draw any of these conclusions. When trained properly, the sales reps can understand buyers’ needs and values better and serve them in a more effective way. By understanding their drivers, sales reps can leverage Give-Gets and good-better-best options to properly price according to what the buyer values most.