The primary objective of every Sales Professional is to close business and generate revenues by 
presenting customers with an irresistible value proposition. Revenue is the lifeblood of any business and without it, there simply is no business.
This week, I am working with a group of highly skilled Sales Professionals as part of a continuing, year-long curriculum that is focused in developing their Business Acumen skills. From an instructional design perspective, we are building their Business Acumen skills so they can help present their solutions to their customer from the business perspective and not just the product perspective. This approach identifies smart, and profitable revenues which is critical to their success.
The concept of “profitable revenue” took up a major portion of our learning dialogue this morning because most Sales Professionals aren’t aware, nor are they compensated to focus on the difference between “regular” revenue, profitable revenue, and unprofitable revenue.
All Revenue is not the Same
All business organizations “report” revenue on their profit and loss statement which is also known as the “P&L.” The top line of the P&L is revenue which presents the sum of all products and service sold multiplied by the selling price. The profit of the business is determined by subtracting all the expenses of the business - ranging from the cost of goods sold to make the product / service, to Sales expenses (salaries and commissions), Marketing expenses, R&D expenses, and financing expenses such as interest on debt.
Many organizations create their annual budgets for their expenses based on the projected revenues of the Sales team. For example, in the high-tech industry a company with an innovation strategy may target 20% of revenues per year to be spent in their R&D budget.
Unfortunately, too many great sales people don’t have the business or financial acumen skills to understand that not all revenue is the same and that discounting and other cost concessions can have significant impacts on their company financial results and its ability to execute their strategies. For many reasons including the structures of sales compensation plans and sales systems, it’s easy to fall into the trap that “any deal is a good deal as long as it is generating revenue and cash” so giving discounts seems just like part of the process. That is flat out wrong and the best Sales Professionals in the world understand this and do whatever it takes to maintain pricing and position the business value of their solutions so they don’t have to discount.
Three Significant and Negative Impacts of Price Discounting
Reduces profitability which results in less resources for reinvesting and can lower stock value
The first and most direct negative impact of price discounting is that is reduces profit. Basically, every dollar discounted is reduced from the bottom-line profit. When bottom-line profit is reduced, there is less cash available to invest in the strategy of the business which impacts long-term results. Another significant impact of the discounting and reduction of profit is a potential lowering of the stock price. A company’s stock price is driven by revenue, revenue growth and profit, and if all three things are being reduced, then so will the stock price.
Reduces brand value and equity
Discounting can reduce the perception of the value of the brand and the brand equity. Strong brands can maintain premium prices based on their strength and equity. For example, Lego is one of the most recognized brands on the planet and they simply do not discount under any circumstances because they don’t want to diminish the brand equity they have built over the years.
Disrupting the budgeting could lead to cash shortages and increased debt
As I mentioned earlier, budgets are based on revenue forecasts. If a company believes it is going to generate $1,000,000 of revenue and has budgeted for a $100,000 profit, then imagine the business chaos if the sales team starts offering discounts and reduces the actual net revenue by 15%. All of a sudden, the revenues are $850,000, the expenses are $900,000, and now instead of generating any profit, the company has lost $50,000! The leadership team who didn’t expect a loss now has to borrow money to cover the loss and pay interest on the $50,000 debt.
In summary, being a Sales Professional means being a business professional and requires sound business judgement and decision making like any other function. Discounting reduces revenue which reduces the capital required to successfully run the business potentially putting the business at risk. It is up to every Sales Professional to stick to the strategy and present the value equation that enables customers to understand the strong value they get between the economic benefits of the solution relative to the cost. Ideally, that value equation is at least two times and hopefully more than ten! It just takes the business and financial acumen skills to talk the language of business and present the business impact through business dialogues.
