Think About It… the e-book version

by Todd Youngblood

Applying the economic principle of Comparative Advantage to sales yields a surprisingly powerful insight. Using it, a rep can demonstrate that in virtually every situation, doing business makes hard, cold dollars and cents sense. It will, however, probably require a good bit more creativity, flexibility and thought than is familiar to you, your company and your customer. (But aren’t those the things that generate differentiation???)

Explaining the details of why Comparative Advantage has been universally embraced as valid by economists since 1817 would take a while. I’ll leave you to your own study habits to thoroughly understand why. For the moment, consider an example. The moral of the story by the way, is that your role as a sales rep is to continuously improve the financial health of your customer.

Let’s say you have a customer who as part of their current operations makes Widgets and executes Process X. Making Widgets and X, while not core competencies, are required. You are a sales rep for a distributor of Widgets that also happens to sell execution of Process X as a service.

You make a call and discover that this customer can both produce widgets and execute Process X at a lower cost than you can. Do you A) Walk away, or B) Get excited because it is obvious that you can improve their financial health? The answer, surprisingly, is B. Even though your cost for both is higher! Here’s the situation:

Note that the total, combined cost for both of you is $7,000. As rep, you propose working together, pooling resources to enhance the customer’s financial performance. (Remember, the rep’s job is to enhance financial performance for both the customer and the rep’s company. It’s NOT, as a traditional rep would believe, about selling widgets and X.) Here’s the after picture:
Total combined cost for the same 200 widgets and same 200 units of X is now $6,780, a 3.1% reduction. Since your customer is the low cost source of both, you would probably structure the deal in their favor. For example, let them keep the $120, 4% savings, while you keep the lesser $100, 2.5% savings.

Counter-intuitive? You bet! Their costs are lower than yours for both widgets and X, but look at the numbers… It’s a better deal for both of you to trade 156 units of your service for 100 units of their widgets. Period. Go ahead and substitute any combination of products and/or services you want. Instead of just two items, go ahead and make it three or four or more.

It’s about your comparative advantage, not your absolute advantage. In this worst case example, you are at an absolute disadvantage for both. You are 50% less efficient at Widget production and 25% less efficient at executing X. But, here’s the key point – you are comparatively better at X. In other words, you are relatively “less lousy” at X, so the trade-off makes money.

The keys to making this strategy work, as noted in the headline above, are creativity, flexibility and thought on the part of you, your customer and your company. It begins with uncovering appropriate pairs of production and/or process capabilities. It’s not anything like business as usual. It’s about “partnering” at a whole new level. It’s about differentiating yourself by putting more money in your customer’s pocket.

No matter what is in your catalogue or your customer’s catalogue – widgets, nuclear reactors, trip-to-the-moon services, whatever – you are both in the money making business. You ARE NOT in the widget, nuclear reactor or whatever business.