Ask a Favor, Please!

At least twice a month we get a phone call from a sales representative or manufacturer in an absolute panic because one of their accounts or prospective accounts has asked for a discount or special terms. They say, "What should I do? I can't drop-ship. I can't offer free testers or free fixtures. I don't want to make less profit from this account. tell me what to do!"

I'll tell you what to do: celebrate! This is a tough economy. The country is oversupplied and yet you've just been told that one of your accounts wants to buy your products. The problem is you're hearing "discount" when you should be hearing "desire." Retailers are in the business of buying product they can sell. By communicating their desire for a discount, they're communicating their desire for your products.

Now you're thinking: "Sure, they want my products, but doesn't that mean I'm going to make less profit? Won't this begin a downward spiral for my commissions, my profits, my company?"

The answer is no. Now pop the cork on your champagne, have a sip, and read on to understand why it's time to celebrate when buyers ask you for a discount and/or special terms.

Building a business is based, in a large part, on the ability to create, develop, and maintain positive relationships. However, unlike personal relationships, business relationships need not be altruistic. In fact, the opposite is usually true.

For instance, when my father-in-law asks me to help him clean out his gutters, my first thought is not to respond, "Sure Herb. But are you going to help me clean out my garage next weekend? If not, then I can't help you clean your gutters."

In a business relationship, however, each party must see to its own needs, as well as the needs of their partner. Now, we're not so idealistic that we believe in 100 percent "win-win" business dealings where both parties benefit equally. In most situations, one party will get more out of a deal than the other. But that doesn't mean it's not a good working relationship.

When my key account's buyer asks if they can have a 5 percent discount or some other special terms that will cost me money, I have absolutely no hesitation about asking them for a greater commitment to my product line. In fact, a buyer should expect to hear that from me, or I'm not doing my job as a sales representative or sales manager.

The key is understanding how to measure the impact of the buyer's requested discount, and develop counter-requests and programs that will increase commitment, exposure, volume, assortment, and loyalty on the part of the buyer. That will return your initial profit reduction in a measurable manner, and within a reasonable and realistic time frame. Your goal is to come out of the situation with not just the same sales volume, but increased volume and increased profits. And that, in fact, is the same goal the retailer had in asking you for special terms in the first place. By each pursuing their self-interest, sales reps and buyers can forge a "win-win" relationship.

Take this example. Betty's Bug Hammock, a chain of six stores, has been buying your product line for three years. They started out with one store, and originally purchased ten items in your product line, producing $2,000 in sales the first year. If your gross profit rate at no discount is 50 percent, you're left with a $1,000 gross profit. Over the last 2 years, Betty's added five stores. They now buy 12 items, and still generate $2,000 per location for a total of $12,000 in purchases at the same 50 percent margin, which produces a $6,000 gross profit.

Now Betty comes to you asking for a 5 percent discount, which on $12,000 comes to $600 taken directly from your gross profit. If your gross profit margin goes down to 45 percent, how much more do you need in sales to recoup your $600 in lost profits?

The formula is very simple. Take the original gross dollar profit and divide it by the new gross profit margin [$6,000/.45 = $13,333.33]. This figure represents the purchases you now need from Betty, at minimum, to retain the same gross profit from the account. Of course, these numbers don't take into account variables such as the cost of carrying increased inventory to service greater sales, additional administration expenses to service Betty, or other incidental costs.

You have to figure out how to get Betty to increase her commitment to reach, if not exceed, that figure. You'll need to increase sales to Betty by 11.1 percent [$1,333.33], but it may take a 25 percent increase in the product assortment to achieve the 11 percent increase in sales. That would mean an increase from 12 items to 15. And that's the minimum target you have to shoot for in your counter proposal to Betty.

Explain that in return for extending a discount you need increased sales, and that you'd like to work with the storeowner to generate them. You might need a commitment from Betty to have your merchandise placed in a better area of the store. Or perhaps you can get a commitment to have your brand included in a regional advertising program. Then you will be seen as a partner in their business.

Remember, the owner's goal is also to increase volume, not just margin, and if you can do that it really will be a "win-win" situation.

So don't be afraid to offer that discount. And keep some champagne on ice for the celebration to come!