The Hanan Formula for High-Margin Sales at High Levels
Excerpt
Introduction: THE CONSULTATIVE SELLING MISSION
Consultative Selling is profit-improvement selling. It is selling
to high-level customer decision makers who are concerned
with profit—indeed, who are responsible for it, measured by it,
evaluated by it, and accountable for it. Consultative Selling is selling
at high margins so that you can share in the profits that you
improve. High margins to high-level decision makers: This is the
essence of Consultative Selling.
Since 1970, Consultative Selling has revolutionized key account
sales. It has helped customer businesses grow and supplier
businesses achieve new earnings along with them. Everywhere it is
practiced, Consultative Selling replaces the traditional adversarial
buyer-seller relationship with a win-win partnership in profit improvement.
This is no mean feat. To accomplish it, Consultative
Selling requires strategies that are totally divorced from vendor
selling. It means that you stop selling products and services and
start selling the impact that they can make on customer businesses.
Since this impact is primarily financial, selling consultatively
means selling new profit dollars—not enhanced performance benefits
or interactive systems, but the new profits they can add to each
customer's bottom line.
The single most critical difference between Consultative Selling
and vending is the way the two methods deal with price. Vendors
base their price on their costs. Margin is their way of asserting
their right to a ''fair price.'' Consultative sellers base their price on
their value. They consider margin to be their responsibility, not
their right. To them, it is the sellers' responsibility to add sufficient
value to customer businesses so that customers will be able to add
margin to the sellers in return.
In this sense, margin is a consultative seller's pay for performance.
The sale itself is no longer a transfer of a product or service
in exchange for a price. It becomes a value exchange. In exchange
for having their profits improved, customers trade off some of the
improvement as margin to the supplier.
A consultative seller's price is a function of the contribution
the seller makes to improve customer profits. The only way the
seller can maximize price is to maximize the value of the profits
that are improved. That requires the seller to stop selling products
because there is no longer any way to make margin by selling the
value of the seller's own assets. Margin can be made only by helping
customers make their own assets more valuable.
Consultative Selling is selling a dollar advantage, not a product
or process advantage. There is no way to compromise this mission.
Anything less is vending.
Vending is discount selling, giving away value to make a sale.
Discounting can take on many forms that go far beyond price cutting.
Each of them represents another giveaway of margin that
adds up to a hidden reduction in selling price:
• Multiyear contracts with built-in annual price cuts
• Zero inventory and just-in-time delivery
• Sharing in product development
• Free aftermarket services, such as training and maintenance
• Free upgrades
• Lease financing at below-market rates
Consultative Selling, on the other hand, is high-margin selling.
Full margins are the proof of value. When they are discounted,
that is proof that their value was not sold. The most frequent reasons
are that it was not known or that it could not be proved.
Performance values put into a product or service are validated
by the financial values that a customer gets out of them. Performance
values are important only insofar as they contribute to the
value of a customer's operations—either they add the value of new
or more profitable revenues or they help preserve that value by
reducing or avoiding costs that would otherwise subtract from it.
Discounting denies that superior value has been put in or that
superior value can be taken out—or, if it can, that it can be documented.
With each discounted sale, value is either denied or downgraded.
It is obvious how this deprives the seller of a proper
reward. Less apparent, perhaps, is how the seller's customers are
also deprived. Unless they know in advance what value to expect,
which means how much new profit they will earn and how soon
they will earn it, they cannot plan to put it to work at once. They
incur opportunity cost even though they add value, because they
cannot maximize that value. Their own growth is impaired along
with the growth of their supplier.
As long ago as the early 1970s, Bill Coors of the Adolph
Coors Company said that ''making the best beer we can make is
no longer enough'' of a value on which to base a premium price.
Making the customer best in some way or other would be necessary
to maintain the margins that were once easily justified by
product quality alone. In 1977, a company named Vydec was
finding it increasingly difficult even then to cost-justify its highquality,
high-priced information systems when it was competing
against the decreasing costs of competitive systems. Its managers
realized too late that hardware performance could no longer justify
a premium price. ''Future hardware will all look alike,'' they
admitted after the fact. ''The greatest values will be in training,
software, and system support. You will be able to almost give
away the hardware.''
COMPARING CONSULTATIVE SELLING TO VENDING
The differences between vending and Consultative Selling are
significant. They are differences of 180 degrees. Their languages
are different. Their mindsets are different. Their definitions of
product, price, performance, customer—yes, even of selling—are
different, as Figure I-1 shows. The main difference is in their ability
to produce profits on sales.
Consultative Selling takes a position about the sales process.
It says that there are two ways to sell. One is the way of outsiders,
which is the way that most suppliers approach their customers.
The customers' gatekeepers are their purchasing functions. At the
gate, vendors who hope to sell high come face to face with gatekeepers
who want to buy low. This is where sales cycles are born,
costs of sale begin to accumulate, and margins are sacrificed. For
every so-called coach, champion, or foxy politicizer who is cultivated
at the gate, suppliers' costs of sale are being extended, their
sales cycles stretched thin, and their eventual discounts deepened.
Meanwhile, consultative sellers beyond the gate are extending customer
budgets, stretching customer cash flow, and deepening their
eventual profits. In the same customer worlds, these two strategies
go on every day.
What separates them? They live by different rules:
• Vendor suppliers sell computers because they make them.
Consultative sellers may make computers, but they sell the
value they add by reducing a customer's downtime.
• Vendor suppliers sell packaging because they make it. Consultative
sellers may make packaging products, but they sell
the value they add by increasing customer revenues and reducing
shipping costs.
• Vendor suppliers sell wireless telephone systems because
they make them. Consultative sellers may make wireless
telephone systems, but they sell the value they add by allocating
manufacturing labor more cost-effectively.
No matter what vendor suppliers make, they sell it.
No matter what consultative sellers make, they sell the value
it adds.
The essential differences between Consultative Selling and
vending are made clear where value meets price at the point of
sale:
• Vendors sell to buyers who want to minimize the prices
they pay for operating assets. This requires vendors to sell
against their competitors. Consultative sellers sell to operating
managers who want to maximize the value they add
to their assets. This allows consultative sellers to sell by
comparing current customer outcomes to future outcomes
that they propose to competitively advantage.
• Buyers want to reduce two types of direct costs: their costs
of acquisition and their costs of ownership. Operating
managers want to reduce the opportunity costs of delay in
making their operations more competitive. This is why
buyers can wait for a lower price, while operating managers
cannot wait for an added value.
• Buyers want to help reduce their suppliers' internal operating
costs and share in the gains through reduced prices.
Customer operating managers want to reduce their own internal
costs and are willing to share the gains from improved
outcomes. This is why buyers try to control supplier
operations, while customer managers bring in consultative
sellers to help control their own operations.
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