Right Pricing...Or why no one really wins if the price is too low!
We all love a bit of a discount don't we? Whether it's buying a new TV, a phone or a car for ourselves or procuring a service or product for our business...but can the price be too low?
The price negotiation...
I'm pretty sure we've all faced this situation or something similar.
We've discussed a scenario with a prospective customer, we've proposed a solution and we've been told that we need to reduce our price if we want the order...
We may then be tempted to either:
- Look at an alternative, cheaper solution or;
- Reduce our price.
Both can be dangerous!
The Cheaper Alternative: A lose-lose tail...
Long ago we were selling I.T. solutions. One of our sales executives at the time was trying to secure a project to supply computers and software to a prospective customer. The branded computers of the time were above what the customer was willing to pay for so, to attempt to get the deal and still make some profit on the transaction, cheaper compatible machines were supplied built with off-the-shelf components.
What followed after they were installed, were days of trying to get the system to work as the customer wanted. This caused frustration on both sides. They were losing production in their business and we were losing money thanks to our technicians frequently attending on-site and being unable to charge this to the customer as maintenance and support services.
In my view no one really "won" there. The customer lost valuable time in their business and we lost money trying to make the solution work.
Lowering The Price...
I heard a quote a long time ago that, in price wars, "there is always someone who's willing to go out of business faster than you!"
Discounting our price sets a dangerous precedent. We can easily begin to doubt our worth, and our belief in our value begins to waver.
Add to that it's just very hard to make any profit if we are not making a realistic margin on what we sell.
Aside: Low price can work as an overarching strategy, but we'll deal with that elsewhere.
So What's The Right Price?
Simply put: a fair one! What's fair? One that makes sense to the customer and allows the supplier to make a reasonable profit.
To make sense to the customer, they have to be assured that what they are getting is of value to them. Meaning it solves a problem well enough for them to invest in the solution. Meanwhile the supplier must make a reasonable profit to remain in business and support that customer in the future.
The key to this exchange is clear value demonstration.
When we present a solution, at the very least we have to know three key things:
1) The cost of the problem (in money terms).
How is the customer suffering in the absence of our solution and what is that costing them. This has to be represented in money as that's what they'll be paying you in return.
2) The value of the solution (in money terms).
What is the promised benefit from what you will provide.
3) The level of investment the customer should reasonably be asked to pay to achieve the benefits you are promising.
Unless these are clear the customer really only sees two things: a (frequently long) description of how good we claim the solution is ... and the price!
Moreover, the chances are pretty high that that's all they are presented with from a competitor too! As these two descriptions are often similar, they are going to base the decision on the one thing they can quantify...the price!
What to do now?
Consider a proposal you are about to send and stop. Look at it and see if it contains ambiguous statements like quality, value, service, support, best-in-class...etc. These are all category words and phrases and have very little meaning on their own these days unless they are quantified in terms that the customer can understand.
See the three keys above. Start putting an end to cutting your prices. And start really helping your customers get what they need.