How to Sell in a Period of Deflation

June 29th, 2009 by

By Pat Hinds

This past week while attending two marketing events, I had the opportunity to meet with several people who work for oil and gas producers. The feeling I got is that the oil & gas industry is in a period of contraction that has never been experienced like this before. One of the people that I met with is an employee at Encana; he put the current economic situation in perspective this way: in 2009, Encana has cut $1 billion dollars from its capital and operating budget and one of main drivers is to bring down the cost of doing projects. This action is resulting in a period of deflation in the energy sector. I did a Google search on the term “deflation” and a simple description of what is happening in the sector is listed below:

Deflation can occur because of a combination of four factors:

1. The supply of money goes down.
2. The supply of other goods goes up.
3. Demand for money goes up.
4. Demand for other goods goes down.

When a company takes a billion dollars out of the economy it takes a while for an organization who sells to this company to understand how it is going to impact their business. After six months in the new economic environment companies understand the impact; and the consensus is the market has shrunk faster and more dramatically they ever before. This dramatic reduction in deal flow has companies asking many questions; one of which is, “How do you sell products in a deflationary period?”

If we break down the definition of deflation into two parts, it helps us to understand what is happening in the market and can provide guidance on building a sales strategy.

Part 1 – Short Term Strategy: Reduce Excess Supply with Price Stimulation

1. The supply of money goes down.
2. The supply of other goods goes up.

Companies need to use existing inventory (excess supply) as a stimulus to get cash flowing; this could result in reduced profits and therefore, this needs to be factored into the cost of sale. This can be done by reducing the commission on product sales, removing bundled support or charging for it as a separate item. Secondly, a company can use the sale of excess inventory strategically to either improve their market share position within an existing account or capturing market share within an account that they currently do not have business with. This is a short term strategy that is only sustainable when you have excess inventory.

Part 2 – Long Term Strategy: Demand Creation with Solution Selling

3. Demand for money goes up.
4. Demand for other goods goes down.

Companies need to use investment in strategic selling to position new product sales when the demand within their customer base returns. When customers are back at the drawing board planning how they are going to move forward in the new economy, companies need to capitalize on this planning stage to position new products that align with the objective of the customer. They key is to determine accounts that are “strategic” and be willing to make a long term investment to improve market share as well as working with the customer in the planning stage.

http://economics.about.com/cs/inflation/a/deflation.htm
http://www.bizjournals.com/denver/stories/2008/12/08/daily49.html

Topics: Sales Consulting