In earlier posts in this series, we looked at why human nature causes you to underprice your proposals and favor sins of omission over sins of commission, even against our own economic interests.

Now we’ll look at some strategies for counteracting these problems and getting great sales results.

First, let’s look at another example from Kahneman’s book, Thinking, Fast and Slow:

Richard Thaler tells of a discussion about decision making he had with the top managers of the 25 divisions of a large company. He asked them to consider a risky option in which, with equal probabilities, they could lose a large amount of the capital they controlled or earn double that amount. None of the executives was willing to take such a dangerous gamble. Thaler then turned to the CEO of the company, who was also present, and asked for his opinion. Without hesitation, the CEO answered, “I would like all of them to accept their risks.” In the context of that conversation, it was natural for the CEO to adopt a broad frame that encompassed all 25 bets.

This fundamental tension between what is clearly optimal in the larger strategic sense (“broad framing” in psychological parlance) and what individuals tend to do in a tactical situation (“narrow framing”), has interested psychologists, executives, coaches, economists, and philosophers for centuries. We won’t resolve it in this post. But we can offer 3 tips for dealing with more effectively.

1. Establish a policy in advance

When you have to make decisions in the heat of the moment, emotion often overcomes logic. You can avoid rash discounting by establishing clear policies for how and when to discount. Companies usually do this with simple metrics like “sales reps can discount up to 10%, sales managers up to 20%, and beyond that you need executive approval.” What often happens is that you get clumping at 10% and 20%, indicating that your policies, not the markets, are setting prices. In addition, the very executives who are supposed to be guarding margin suddenly turn into Crazy Eddie (anyone remember him? Crazy discounts until they went out of business.) at the end of the quarter.

Here’s another way: Define a set of exchanges that customers can select in exchange for reduced pricing. For example, buying in bulk, ordering with long lead times, or accepting wider delivery windows can get you lower prices. This works well when buyers value these extra “features”. When they don’t, and they say “you’re a commodity, we can go down the street and get this cheaper”, you need to have a good response. If they are correct, you need to peel away your costs and be competitive with your commodity. If you are better (in a way that’s valuable to them), and they know it, hold firm. If you are better, but not in a way that they care about, figure out how to reduce the value you offer, or get out of that market. This structured discounting approach should cover most of your discount needs. For cases when reps want to discount further, establish a “discount budget” that the sales team can allocate as they see fit, but make it small enough that they need to carefully consider where they “spend” it.

Kahneman calls this kind of a response a “Risk Policy.”

2. Don’t punish smart risks (and a challenging corollary)

If you want people to take risks that are good for the company but potentially “bad” for them individually, don’t punish smart risk taking. If every bad outcome limits someone’s career, you will end up with a very risk averse organization. Of course, defining a “smart” risk is easier said than done, and often occurs afterwards, depending on the results.

An important corollary is that you need to give people enough chances that their results are not adversely affected by one bad outcome. For example, if everything in your quarterly comp plan rides on one deal, you may avoid risks beyond economic “logic”. If you have 10 deals that you hope to close by the end of the quarter, you can manage that portfolio more rationally.

If you’re overly dependent on one customer, one deal, or one project, you can’t spread the risk around.

3. Mitigate risks for the customer

Along with mitigating risks for your team, you can also mitigate risks for the customer. Often, risk is the real problem in sales, not pricing. (For a simple test, when you get a price objection, ask the prospect if they got the price they wanted, would they sign on the spot. Usually, they have some other objection around whether they believe they can realize the proposed benefits.)

In addition to traditional risk mitigation efforts like having fallback plans and breaking large projects into more manageable chunks, you may also have to reverse the natural psychology of the buyer, which assigns a higher potential regret to choosing the wrong solution (sin of commission) vs failing to act (sin of omission).

Some of this effort is the same as the steps you use internally to encourage smart risks, like working up the chain of command to an executive who has a broad enough frame to know that they need to take action. This is simply a different perspective on the “executive sponsor” in traditional sales methodologies, with a psychological underpinning for why that executive is important, and, if they don’t exist, why it may be impossible to close the deal.

Not stuck with 50,000 year old genes

Human psychology evolved to keep us alive. It’s short-sighted and not good at dealing with probabilities, subtleties, or long term results. However, using these tips, you can outsmart your own nature (and the nature of your sales team) to sell more, faster, and for higher profit.

Comments are closed.