Companies often respond to declining margin by tightening discount approvals or running negotiation training. Yet value can be lost much earlier through weak preparation, insufficient discovery and concessions for which the customer gives nothing in return. According to Sales & Marketing Management, McKinsey estimates that a one-percent decline in realized price can cost a typical S&P 1500 company about eight percent of operating profit. Protecting margin therefore begins before the price discussion.
When a deal ends with lower margin than the company planned, attention usually turns to the final round of negotiation. Finance tightens discount limits and salespeople receive another course on price negotiation. But part of the value may have disappeared weeks earlier.
Sales & Marketing Management points out that negotiation does not begin when the customer asks for a discount. It is already taking place during the first discussions about scope, deadlines, services, terms and expectations.
If a salesperson promises faster delivery, an additional service or a special term without receiving anything in return, the company has already made a concession. The price on the proposal may not have changed at all.
The article cites a McKinsey estimate that a one-percent deterioration in realized price can reduce operating profit by about eight percent for a typical S&P 1500 company. According to the same source, recovering a five-percent price decline would require an 18.7-percent increase in volume.
The first tool for protecting margin is therefore preparation. Before negotiations, the salesperson needs to know which terms are expensive for the company and which can be offered relatively cheaply. They also need to understand what has high value for the customer.
The second is high-quality discovery. If the salesperson does not uncover the economic impact of the customer’s problem, the only thing left to defend the price is a list of product features. Price then naturally gains more weight.
The third rule is to trade rather than make unilateral concessions. If the customer asks for something, the salesperson should consider what they will receive in return: a longer contract, higher volume, a faster decision, different payment terms or a reduced scope.
When analyzing lost margin, a manager should therefore not look only at the final discount. They need to review the entire deal and identify the moment when the company began giving away value without receiving value in return.
Margin protection is, in this sense, a sales discipline rather than an administrative ban on discounts. If a salesperson understands the value of individual terms and can trade them, the company does not have to escalate every negotiation to a manager.
KEY TERMS
- Realized price: The actual price achieved after all discounts, concessions and other commercial terms.
- Concession: A change in terms in the customer’s favor that has economic value for the supplier.
- Return value: A concession or commitment received from the customer in exchange for changing the offer.
- Margin protection: Managing price and terms so the deal preserves the planned economic value.