Sales People hate uncertainty, and other stories

 In Business decisions, Insights

What types of decision are hardest for sales people? What “thinking biases” can get in the way? Here are a few major types of financial decisions that get made in sales teams.

  • Decisions under uncertainty – especially around negotiations. Should we take this offer, or hold out for a better one? Should we be the first to put an offer on the table?
  • Decisions around future revenue – what will our sell-through-rate be next year?
  • Decisions about deals –what happens if we take something off the table?

These types of decision can be quite tough. Why?

People hate uncertainty.

Most people will pay a hefty premium to reduce risk from very small, say 1%, to 0% – this is what the entire insurance industry is built on. At the other end of the scale, people will offer a significant discount to move from 95% chance to 100%. For example, Nobel prize winning economist Daniel Kahneman showed that people can be willing to discount a deal by 20% to move from a 95% chance to a 100% chance, i.e. if I am offered the choice between a $100,000 deal with a 95% chance of coming off and a $80,000 deal with a 100% chance of coming off, most people choose the $80,000 deal. If you’re in sales, be mindful of the “bird in the hand” decision. Your best bet is actually to take a little more risk; over time it will pay off.

Who sets the price?

There is a very robust effect called anchoring that many of us know about, but few use to its full potential. An extreme version goes like this. I get 100 people to estimate a quantity they aren’t familiar with, let’s say the percentage of African countries which have more than 30 million people. Before they do this, I get them to write down the last 2 digits of their phone number. It turns out that for no logical reason, people with phone digits that are lower than 50 give a much lower answer to the African country question than people whose phone digits are higher than 50. In normal life, many things serve as anchors, especially what we paid last time. This anchoring effect forms the basis for all rate cards and negotiation starting positions. People like to negotiate from a position and adjust from there. The take-out for sales teams is that in most negotiations it is far better to be the first person to put a price and terms on the table, because you are providing the anchor.

Estimations about the future

Duke University analysed the predictions of CFOs of large corporations – they asked them to predict a range for the stock market that they were 80% confident it would fall within this time next year. Typically, they might state, “I’m 80% sure it will rise between +2% and +10%”. When they then looked at what actually happened, the stock market was outside their “80% range” a massive 67% of the time. This demonstrates professionals with enormous overconfidence about their own predictions.

When forecasting next year’s sales, most of us tend to overplay the impact of this year’s sales (i.e. add a %) and underplay the impact of external events such as competition, technology change, regulation, the economy. There is a paradox here, if you want to be accurate you need to be much less certain about your predictions and give wide ranges. But in most companies this will not win you any admirers: people prefer confident predictions.

Loss aversion

People hate a loss of $100 much more than they like a gain of $100. In fact, research shows that the feeling of losing $100 is twice as painful as the pleasure of gaining $100. When you are negotiating, you need to understand this principle: if you want to remove something from the offer that was already in last year’s deal, or had been proffered this year, be very careful. Chances are the other party will want something twice as valuable to offset their feelings of loss!

In summary

Salespeople need to understand the psychology of decision-making – for their own decisions; and for decisions they are trying to get others to make.

Posted by Rob Pyne