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Exposing salespeople to costs

by Sreeram S. & Saurabh Malhan

“It is, therefore, not to be entered into unadvisedly, but reverently, discreetly and in the fear of God”.

Excerpt from the Christian wedding prayer ceremony

The ongoing movement towards transparency and empowerment might tempt B2B firms to convert their salespeople into “margin owners”. This move, they hope, would imbue a sense of ownership and energise salespeople but it is fraught with risk. Exposing a front-line salesperson to the costs of the wares being sold by her may not be wise and should be considered very carefully.

While there are situations where costs may be disclosed to salespeople albeit with sufficient safeguards, these would be in the minority, especially in B2B sales. There are several reasons why it may not be beneficial for firms to let their salespeople know of costs. This article will explore these reasons and also describe a few circumstances under which costs could be shared with salespeople.

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Beware of false knowledge; it is more dangerous than ignorance.”

George Bernard Shaw

The fallacy of cost

The first reason to not disclose cost information to a salesperson is that cost is a very difficult number to pin down. The fact that cost is a moving number is something that many firms choose to gloss over. At the simplest level, it is nigh impossible to ascertain the right cost of a good that has been manufactured or a service that has been rendered. This is because the cost of manufacturing the good is a function of the costs of procurement of the underlying material and the cost of labour and overheads. Many of these costs vary based on the production quantity which, in turn, varies based on sales. And sales may vary based on the price at which the product is sold. So, this circular and fallacious logic, which is explained in textbooks, underlies the commonly used cost-plus pricing method.

Firms using methods like activity-based costing are simply estimating the cost involved in producing a good or service. Ultimately, they are hoping that the goods sold will yield profits. So, arming salespeople with incorrect cost information could be counterproductive and the ill-effects not immediately apparent. Also, there is a chance that salespeople would spend more time finding loopholes in the calculation of costs to get approvals for discounts rather than scouting for more business.

Prevalence of value-based pricing

In several B2B firms, there is no list price for the items sold. The same product could be sold at different prices to different customers.Most prices are negotiated and several factors explicated later in this article come into play.

This practice is limited in the B2C world because of consumer protection laws against price discrimination. This is seen in the MRP (maximum retail price) regime in India. However, even this is not strictly true since there are discounts at the point of sale and something called the MOP (market operating or offer price) in case of the B2C world.

One of the authors recalls an instance when he was making a presentation to a customer and was talking up the informative website of his firm which had all the details and documents that a customer could require. And the customer remarked, in jest, that it had all the details except the most important one — the price. But it was not a complaint since even the customer did not expect the author’s firm to publish the prices.

Many B2B firms simply leave a note on their websites — prices upon request. There are several reasons for it. One could be the fact that customers may have different willingness to pay (WTP) based on their differing levels of urgency and the importance of the product. Another reason could be that some salespeople who communicate value better end up enhancing the value of the offering during the sales process. Yet another reason could be that customers have no way of estimating the costs of the product being sold or even meaningfully comparing competing offers.

Most pricing experts and marketing consultants, thus, advocate the use of value-based pricing which relies on price discrimination based on urgency or criticality for customers. B2B firms also adopt a segmented approach to try to ascertain true potential and the value that can be derived from the offering by different segments. This approach coupled with differential prices increases value capture in the form of higher margins for seller firms. Salespeople are thus expected to increase the WTP by communicating the value in the form of product benefits, response times, service support, warranties and other intangibles. Hence, exposing salesperson to cost information might become a roadblock for them to sell value and increase the customer’s WTP.

The impact of the knowledge of cost

Given the lack of published prices and prevalence of value-based pricing, the knowledge of cost may influence the salesperson in interesting ways. Firstly, while in a negotiation a salesperson could mentally keep the cost as a floor price. And thus, might be tempted to not add a hefty margin to quickly close the deal. Secondly, watching a deal slipping away, the salesperson may counter with a low-ball offer, reasoning that getting the customer is better than losing all the work done thus far (the sunk cost fallacy).

This soon becomes a race to the bottom as selling may start happening only on price. Offering a lower price becomes a path of least resistance to the salesperson. Salespeople are no longer creatively finding ways to increase the value in the mind of the customer. There is little motivation to find ways to creatively position and differentiate the product, or to offer a stocking arrangement to improve delivery, or pondering the brand positioning in the mind of the customer.

Also, from a customer’s perspective when responding to a salesperson, it is far easier to attribute the loss of an order to price than cite other reasons. Citing other reasons might require more effort from the customer to justify the decision to the salesperson. And thus price becomes a face-saving excuse for all concerned.

Consequently, the price cannot be increased since the entire battle is now won or lost on low prices. Also, information on discounts or caving in on price negotiations may travel through the grapevine to other customers who will also drive a hard bargain. This might negatively impact the brand of the firm.

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Conditions where salespeople may be exposed to cost

While the above discussion makes an argument for not divulging cost details to salespeople, there may be cases where it may benefit the firm to make this information available to sales people.

Inverting the situations above might help arrive at conditions where the cost information could be shared. A firm which is reasonably confident about its cost calculations could think about giving margin targets in addition to revenue targets. In certain cases, it may be possible to apply weights to revenue based on the underlying margin of the offering. So, revenue brought in at zero margin could get a lower weight in the salesperson’s evaluation. These weights could be adjusted or eliminated in situations where market share or revenue are of paramount importance to the firm.

In sales situations where bundling is an active option, salespeople, if made margin owners, can work closely with customers to find the right mix and bundle the products to create a win-win deal.

When acquiring a large or strategic customer, certain leeway could be given to the salesperson. And if pricing is the point of contention, then the salesperson should be involved to brainstorm and find ways to make the relationship profitable despite an initial low price. This process can also empower the salesperson and the sales team with more knowledge and guidance when acquiring such customers in the future.

In conclusion

As can be inferred from the above discussion, disclosing the costs of products and services to the salespeople selling them may not be optimal for many organisations. Significant monetary losses could accrue over a longer-term. There are also conditions in which this advice may not be applicable.

There are no easy solutions here but perhaps a defensible way forward could begin by formulating a policy around disclosing cost details to salespeople. This policy could then be laid in front of the C-suite to review and concur. It may also be worthwhile informing salespeople about the policy and the reasoning behind it; at least a cliff notes version of it. Most salespeople would prefer not to read long policy documents. Knowledge of cost details could be limited to certain functions in the firm and salespeople could be given a minimum floor price for bringing in orders. The costs data could be used to drive internal projects (like assessing customer value and product profitability) and make profit projections.

Like a batsman heading out to face the stern test of a fifth-day pitch or a fighter pilot heading out for a dog fight, there is some merit in keeping the salesperson’s mind uncluttered when heading out to meet customers. A lot of thoughts crowd the mind of the salesperson — possible customer objections, fear of rejections amongst others. Adding the complexity of costs to this already cluttered mind may be counterproductive. A free-flowing and confident salesperson may be the strongest asset that a firm can have in the field.

Disclaimer: The views expressed here are in the authors’ personal capacities and do not represent those of people, institutions or organisations that the authors may be associated with in professional or personal capacities.

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