Emeritus Professor of Finance Elroy Dimson of the London Business School once said, “There are many more things that can happen than will happen. This is the essence of risk.” With today’s uncertainty, risk avoidance has become probably the biggest obstacle in convincing customers to purchase new offerings. In many environments, perceived job security seems to have disappeared for many individuals at all levels. Instead of reaching out for success, many individuals are focused on avoiding failure. With this mindset, there is a natural tendency to focus on all of the bad things or undesirable outcomes that can occur. Therein lies a major problem for a sales rep, how to convince the customer that the rewards of purchasing their offering will outweigh the risks of doing nothing.
A strong case can be made that risk cannot be eliminated, but if the perceived risks can be transferred from the customer to the vendor, the customer may be more willing to commit to the new offering. Clearly, ignoring risks during the sales cycle will not make them disappear in the customer’s mind. Opening discussion of the risks, item by item, quantifying both their likelihood of occurrence and the impacts if they occur is an excellent place to start. Using the often-cited analogy, risk is the elephant in the room that cannot be ignored. As Professor Dimson said, there are more things that can happen than will happen. Openly discussing the likelihood and impact will help to add a sense of reality to the discussion. Broaching this subject may be very difficult for a sales rep who will naturally focus on the positive features and benefits of their offering and will attempt to avoid any negative connotations. Realistically, the customer will not have the same focus and may feel that the sales rep is unrealistic and has their head in the proverbial sand.
A frank discussion of the good path when everything occurs as planned is a good starting point for the discussion. Next, acknowledging that issues may occur, determining where and when they are most likely to occur, and suggesting what can be done to avoid or mitigate their impacts should then be discussed. Customers are realistic; they expect that not everything will be perfect. Working with them on potential recovery plans and clearly convincing them that you will be in the boat with them and together will jointly address issues as they are uncovered is critical. Aside from promissory statements, there may be some actions that can be taken to actually mitigate the risk. Many of these items can have economic impacts on the vendor but will reduce the potential impact on the customer. A factor that is often not considered is the lost opportunity cost associated with a non-sale. If the customer cannot cross the risk threshold and the sale is lost, the sales rep will need to pursue other opportunities. If this is the case, how much elapsed time was lost? How many dollars were lost associated with the sales process? Does the loss have an impact on other prospects who heard of the loss? Is the long-term relationship with the lost prospect damaged? The costs associated with all of these factors could easily be significantly higher than if a sale with a lower margin was made. The lower margin might be a result of a sale at a lower price, smaller quantities, or with extended terms than were originally desired. Unfortunately, in hindsight during a loss analysis review, these issues come up with the comment, “If only we had…” Other activities that can help to transfer the risk are:
- Suggest the customer agree to a conditional sale in which the offering is sold but with the provision that the sale can be reversed if issues arise. The article in this collection “A Trial Blink Test” discusses the differences and advantages of a conditional sale over a field trial.
- Suggest a slower or smaller purchase and roll out. Offer the same pricing as a large sale to avoid penalizing the customer for the purchase of the lower volume.
- Suggest the use of “B Stock” or last year’s model, or items in inventory at reduced pricing with an upgrade plan that can be initiated at a later date.
- Suggest that your company take on tasks such as installation and training that would normally be performed by the customer in order to reduce costs or customer resource commitments.
- Suggest a shared service or product arrangement with others if such an arrangement is possible.
- Suggest a reduced cost or refund if certain market conditions occur. Yes, this will require a revenue reversal if it occurs.
Although all of the above suggestions have negative revenue implications, their impact must be compared to the impacts of no sale. Although the suggestions cannot be implemented for every customer in every case, considering these arrangements as incremental sales that provide incremental margin contribution may relieve the uneasiness associated with these factors.
The basic question that needs to be answered is simple. By assuming some of the customer’s risk, the incremental sales potential is more valuable to the company than not closing the sale.
