Pricing effectively (3 part blog series)
Pricing Profitably
Doubtless you have all heard the story about the Salesperson Who Quit. No? There once was an Accountant named Art Trueblood who told a Salesperson Johnny Quick to stop selling product to a particular customer because they were losing money. “It costs us more money to sell the product to your customer so STOP selling or I will stop paying your commissions!” Meanwhile, all the company’s sales reports were showing Johnny as the Top Performer in the company. The General Manager Don Wilson did not like the Accountant due to his being “overly negative and critical” always talking about how the company is “on a sinking ship”. Meanwhile the Business Owner was earning travel rewards to all the PGA golf courses in the SouthWest and staying abreast on sales performance from the convenience of his cell phone and golf cart. All the latest sales reports were automatically emailed each morning for the previous day. He even had an intelligently designed AI push notification that he paid his consultant $5000 for a sales ranking report by most Gross Sales per Salesperson and least Gross Sales. One day the Business Owner was in an unusually good mood after shooting his best round of golf in over a month. To his amazement, he saw Johnny’s amazing Gross Sales figures and texted Don Wilson to promote Johnny for his record-breaking high sales. That month the company could not afford to pay all their bills so the owner decided to penalize the sales Staff by withholding their commissions. Needless to say Johnny quit – being completely disillusioned by “how on earth his Boss could fire him when he just broke the record for the most sales?”
Funny right? What a dysfunctional bunch! While the names are made up to protect those who in real life were players in this story, the real story is not very far off. However, there are some profound lessons coming out of this mess. Consider these facts:
Who is the culprit? Johnny? Johnny is not the problem. He may or may not be a good salesperson, we will never know if it was the price that allowed him to sell so much or if he had super-human sales powers. One thing is clear: he was simply working toward the goals given to him. Was the Owner the culprit? The Owner’s main fault was missing the financial statements last quarter and being too focused on his product. The Accountant is just doing his job counting the beans. And the General Manager was being skeptical about the negative Accountant who was overly focused on the cost side of the business. Since they were not over budget on anything, he decided to push harder on sales as well. No, all these people had problems but they were not the culprit. The real problem child here that could end up sued is someone who is only barely referred to in this story: the consultant. Back when he was asked by the Owner to give him a report showing him how the business is performing so he can stay in touch when travelling, the trusted consultant designed a report that showed Gross Sales ranked from best to least Salesperson. Without thinking about the ramifications of selling unprofitably, the Owner signed a check that day when he saw the nice graphics show up on his cell phone and recalled they just survived a recent software upgrade. He was too far removed from the details of what his consultant was providing for his business. He had been meaning to schedule time with the consultant to learn more about this graphically pleasing report, but this conflicted with his vacation. After all, this was a well-deserved break after all the countless hours he had put into engineering the latest product that was going to keep him and his other 40 employees relevant for the next decade.
Too often, the cost of sales are reported in a manner in which the company cannot clearly see things. This leaves it up to the cost analysis or bill of materials or purchase order to understand the true profit. Then, when new pricing takes into account all these costs, who is to make sure it is enforced when writing sales orders? To make matters worse, many accounting systems do not prevent end users from the ability to override the price in the sales order.
