Why cutting prices is like cutting your throat
It’s the oldest sales tactic in the world…
Before making your next price cut in the face of selling resistance, the question to ask is not “Does it work?” but “Can you live with the offer?”
Here’s a pop quiz: You, as the seller, look for closure. You ask the prospect to commit and they don’t. What is your first response?
Well, if you’re like most people in a selling situation, whether you’re the contract salesperson or the CEO, your first response to people who don’t buy, for whatever reason, is to say, ” Would you buy if…?”, and the “if” is always a variant of “…if the price were lower?”
And he asks almost before asking them WHY they won’t buy.
And it’s not just when they tell you they’re not going to buy you. Many people in sales mentally calculate the discount in their profit calculations and start discounting even before they try to close the deal. In almost every sales job I’ve worked in, people faced with a quarter-end crisis to “do the numbers” start playing the discount game. In many industries, it has become common practice give away all profitsand many customers are trained to expect it
The problem is, people don’t usually ‘don’t buy’ because their price is too high.
If you’ve gone to the trouble of establishing the real thing about your product or service, you and your potential customer already know that the value far outweighs the price you’re asking. (If not, you might as well go back and rethink the math.)
So if they say “no” or just don’t say “yes,” it means they’re either experienced buyers hoping you’ll drop your price spontaneously, or they just don’t see a compelling enough value…yet.
Lowering your prices will almost never lead to new sales if they didn’t plan to buy in the first place. and the effect on your earnings can be devastating. Follow these numbers:
Let’s say you sell a product for $100. Its cost is $70. That means you have a thirty percent margin: your profit is $30. Now, to make a sale, you are “forced” to reduce your price by twenty percent. Your new selling price is $80. All things being equal, your profit is now $10, instead of $30. That means a 20% price reduction will cost you 66% of your profit.
TWO THIRDS OF YOUR PROFITS for a 20% price reduction!
Cut your price much further and your profit quickly drops to zero. Or low.
And that’s not even the worst.
Once you lower prices, they tend to stay low. That $100 widget you just sold for $80… Well, I’m sorry to say, but now it’s an $80 widget.
Even more damaging, your like-minded competitors will almost definitely lower their prices, and you, my friend, are in a price war. To win in this scenario, you need a lot of money to maintain a losing position for the entire time.
So for these three reasons: thin profit margins, permanently low prices, and the devastation of a price war, it’s a bad idea to lower prices to buy businesses.regardless of the economic climate.
What can you do instead?
The two main strategies are to clarify and quantify value and to bundle products or services to maintain higher prices.
Here is an interesting example. One of my clients, a software company, had a potential customer who didn’t want to buy the typical software maintenance contract. They felt that 18% per year was too expensive and wanted to pay ad hoc instead.
My client knew this was a bad idea. Customers without maintenance contracts are usually the worst. Why? Because they know it’s going to cost them every time they pick up the phone to ask for help, so they try not to. So they don’t get the right level of service, they don’t know how to use the product, and they don’t get the results they paid for in the first place.
And even though it’s their fault for skimping, they point fingers at you and badmouth your company.
Following my advice, my client offered the prospect a four-year non-cancelable maintenance contract and gave them the first year free. And although it was a 25 percent reduction in the total purchase price, it never lowered the price per year, and in fact guaranteed more than the prospect’s original commitment.
In addition, my client insured that client for a full four years, during which time he hopes to sell additional products and services to him.
Price cutting is the “lazy man’s” answer when it’s hard to make sales. Unfortunately, it may not increase total revenue and result in drastically reduced profits on sales that are made. The result often includes permanently reduced prices and margins, and even a price war, which has disastrous consequences for all but the deep-pocketed players.
Sell the value instead. Take time to find out what your prospect is trying to achieve and make sure your product or service helps them achieve it. Then establish the measurable financial impact and sell them. Either bundle, bundle, or opt for the long-term, multi-year commitment.
There are other approaches that not only maintain price levels, but even support higher levels. Visit our website for more information.
©Paul Lemberg. All rights reserved