In a McKinsey study of the S&P 1,500 on the impact of pricing, they discovered that getting a 1% price increase, everything else remaining the same, will increase operating profit by an average of 8% to 10%.
For most companies, that is a huge number and a reason why top management puts so much pressure on the sales organization to defend their pricing. By doing a more effective job of selling a company’s value and discounting less, salespeople can have a major impact on profitability. McKinsey goes on to say that a 1% discount will conversely drop operating profit by 8%. And, if a salesperson provides a 5% discount, it takes 18.7% additional sales volume to make up for the loss in profitability (based on operating income margins). That means it takes a lot more effort to produce the same results.
Here is what every salesperson needs to know and most do not: when you drop your price by 1%, 100% of it hits the bottom.
Let’s say you have a $50,000 sale to a customer, and the salesperson believes they need to drop the price by 1% (1% of $50,000 is only $500). That doesn’t seem unreasonable to secure the business.
The bad news is that for a $1 billion revenue company, if every salesperson did this, profit before taxes would decrease by $10,000,000!
The really bad news is that sales teams often give that up 1% multiple different ways (pricing, terms, deliverables and conditions). And it’s not because they mean to do it, but rather there is a lack of financial understanding of the net affect on the company. Your salespeople are your last line of defense for margin protection. You must change the mindset of your sales team.