All dealers want to increase profits. Many want to do this by raising margins. They complain about salespeople who contribute to volume but not to margins. Can dealers raise margins?

In most cases, no. Let's face it--margins are pretty much where they are going to be.

Who sets margins? The dealer doesn't. The salesperson doesn't.

Margins are set by the market and the competition. Neither will allow margins to float much higher.

The trick is going to be holding margins.

I believe margins will come down rather than go up. Dealers must find ways to keep margins where they are for as long as they can.

Manufacturers are not likely to help. While they want dealers to make profits, they don't want them to do so by raising margins because this can adversely affect their market share.

Who allows it?

Dealers complain about salespeople who give away margins and who sell the dealer harder than they sell the customer. However, dealers have the ability to decline any deal. When they do not exercise this authority, they become co-conspirators with the salespeople in reducing margins.

Dealers should instead train salespeople how to hold margins and why some deals are acceptable and why others are not. They should tie compensation to profits. Many already do, but there are often no real consequences for a salesperson who sells below acceptable margins.

I understand why dealers allow salespeople to take deals with lower margins. They need the business and they need the cash flow, and there are even times when it makes good business sense.

Dealers should make sure salespeople understand this. This should be a continuous training regimen.

The Trader versus the Salesperson

Here is a scenario I paint for salespeople.

   You have just traded in apiece of equipment for $8,000. You spend
   $2,000 to refurbish it. The going price for this piece is $20,000.
   Not you, of course, but other salespeople--how much do you think
   other salespeople would want to sell this piece for?

Salespeople respond that other salespeople would probably sell the piece for between $11,000 and $11,500 because they can get pretty good margins quickly. If it were them, of course, they would sell it for $20,000.

What is the difference between $11,000 and $20,000? It is the difference between a trader and a salesperson.

The trader knows what something costs him and he sells it to the first person who makes him a profit. The salesperson sells something for what it is worth--regardless of what it costs.

Good traders have no set margins. They make very little on some transactions and huge amounts on others.

If you're going to be a trader, you had better be very good at it or you can lose your shirt even while you continue to sell above cost. If you're going to be a good salesperson, cost should not dictate your selling price.

There are a lot of traders in the Ag industry, and there are some not that good.

The Washout Margin

When salespeople sell at a reasonable margin they feel good about themselves. Then the first trade gets sold and the second trade and so on. Once the whole deal has washed out, do a calculation.

Add all income from sales. Add all expenses related to those sales. Include commissions, interest, repair costs, advertising, and, yes, even time value of money. Divide the income by the expenses and you have the washout margin. Is it what you expected?

Many dealers tell me they sell a trade for what it cost them. If they do, depending on when the trade is sold, they will lose money on that trade and reduce their initial margin.

This makes a strong case for dealers to add profit to every piece traded in before the salesperson can sell it. This sets a minimum acceptable selling price. As long as it does not exceed market value, it does not have to match the competition's price.

The price can be higher as long as there is reasonable justification for the higher price. Salespeople tell me they very seldom find two used pieces that are exactly alike.

Negotiate this!

In a recent study, I observed salespeople in action in ten different stores. With only two exceptions, these salespeople needed to learn how to negotiate. They thought they were good salespeople, but they gave away too much.

I watched one salesperson continue giving things away even when he had the signed order and check. When I asked why, he said they were such nice people.

There went another piece of the margin.

What's a Dealer To Do?

First, make sure you hire salespeople and not traders. Second, train them on used equipment values and business selling. Third, teach them to negotiate. Finally, show them, by example, how to take a long view of selling.

Do these four things and you will swing the odds in your favor when margins start going down. You might even be the last one forced to drop your margins.

Ezine

Frank Lee covers this subject and others in his Monthly Ezine for Managers, a free newsletter sent via email to thousands of sales managers and salespeople in 16 countries. To receive the newsletter, simply email me at franklee@sales-academy.com and put "Subscribe" in the message line.