Pricing, Margins & Capital Equipment Sales Delusions

How Companies Sell

Common wisdom is that there are three ways to price something.

1. Cost plus margin
2. Market expectation
3. Based on the value it creates

Capital equipment companies normally sell based on technical features (the logical extension of cost plus - the components and labor to invent and assemble) or on market expectations (comparing themselves to competitors.)

Is it any wonder, then, that they're under pressure to discount? That buyers think of their machine price in terms of some approximation of what it costs to produce? Or in relation to competitors'?

After all, that's precisely what their marketing content and sales approaches coach buyers to do.

How Companies Say they Sell

Despite the obvious (selling on technical features or competitive differentiation), every capital equipment company I speak with insists that its marketing and sales emphasize the value that its machinery creates for customers' businesses.

There's an irreconcilable dissonance between how they actually sell and how they say they sell.

The Challenge of Consultative Sales

Why doesn't the pitter-patter match the chitter-chatter?

Because truly selling value depends on extraordinary sales skills in the area of consultative sales - the ability to ask questions that simultaneously establish authority and credibility while helping prospects properly self-diagnose, quantify the cost of the current situation, and articulate the compelling reasons why they need to change.

Very few salespeople have the breadth of business experience, savvy, questioning skills, familiarity with business finance, change management skills, and sales experience to do so.

Capital equipment companies focus inordinately on their machines. And they hire people who will do so in the sales process. That will never support value-based revenue.

Imagine if McKinsey priced its consulting work based on the cost of report binders and color copies, junior associate hourly rates to create slide decks, and research analyst hourly rates to gather data. It's comical to consider. They command high prices because of their impact - either direct or the value of their authority.

Or consider a software company calculating the marginal cost of spinning up another license and pricing their product that way.

And yet companies that bend steel can't usually seem to think of their product as anything other than the assembled aggregate of steel, rubber, plastic, wiring, and electronics.

Margin Compression

If they can't sell consultatively, they default to selling based on technical features or competitor comparison. And as soon as they do so, they place their machines in pricing buckets 1 or 2 above.

That often results in discounting. And if it's not discounted, that means there's margin that's been sacrificed.

Only when their machine is sold as a vehicle to achieve business outcomes and unlock value can they sell it at an optimized margin.

Decoding the Dissonance - A Simple Board Diagnostic

When a dissonance this profound exists between strategy (selling higher priced, high value) and execution, that's certainly something that the board of directors should understand.

In many cases, executive directors are the managers directing the flawed execution and therefore unable or unwilling to recognize the dissonance.

And directors are reminded that they may stick their noses in but must keep their fingers out.

So how can independent directors diagnose this situation? Simply asking what the pricing strategy and rationale are, and then comparing that to sales collateral and reviews of win/loss analyses will clearly illustrate a dissonance if one exists.

It's neither complicated nor intrusive. Yet it's a critical oversight function. To allow both to exist is to jeopardize both strategy and execution.

#B2BSales #IndependentDirectors #PricingStrategy #ConsultativeSales