Experience has shown no matter where you set your minimum selling price, a sales representative sooner or later will ask you to lower it. The question is not whether you will be asked permission to discount. The question is when should you say yes. That’s why sales managers need to know how to calculate their minimum selling price.
What is Your Break Even Price?
Another term for your minimum selling price is your break even price. It is where the the price of your product equals the variable costs of your product. In this case, variable costs are defined as the cost of your actual product plus any variable commission the sales reps earn to sell it.
Anything above that break even price is considered gross profit and contributes to your fixed costs. Examples of fixed costs include rent and facilities expenses, insurance, utilities bills etc. In other words, any thing your company has to pay regardless whether you sell anything or not.
Sell enough products with a positive gross margin to cover all your fixed costs, and your company with have made a net profit. However, sell enough products a negative gross margin, however, and your company does not survive.
Not Every Sale is Profitable
One of the best examples of this is highlighted in an excellent article ‘Making Sales and Losing Money‘ by the Sales Wizard, Brian Jeffrey. The article highlights a case where a sales rep obtained his largest order to date. The problem was the company actually loses money on the sale!
Although this sounds incredible, it happens more often than you might think. That’s why every sales rep should know how to respond to price negotiation properly. It’s also why every sales manager should how to calculate their minimum selling price.
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The Minimum Selling Price is $1 More Than Your Break Even Price
The bottom line is your company's fixed costs must be paid whether you make the sale or not. Therefore, any time a discounted selling price contributes at least one dollar towards paying your fixed costs, it is considered profitable. As long as all of your variable costs are covered, including the cost of the goods sold plus any variable sales commissions, the discounted price can be accepted.
How to Calculate Your Minimum Selling Price
The Minimum Selling Price Calculation Worksheet is an Automated Sales Tool available from B2B Sales Connections. It will automatically calculate a product's minimum selling price to contribute at least one dollar towards the payment of fixed costs, given the cost of goods sold and the commissions to be paid on the sale. It is one of the many automated sales tools included in my sales management training book, Action Plan For Sales Management Success.
Granted, most managers would agree that making a sale for only a dollar is hardly worth the effort. As such, the spreadsheet also shows how much gross profit is being made if you sell the product at a certain price. That is very handy if you or your team has a gross profit component in your compensation plans. Most importantly, you will quickly and easily have the information you need to make the right business decision.
“… what I can tell anyone, is simply this – If you want to learn and understand sales, talk to Susan.”