Small businesses spend too much time obsessing about ways to reduce their price to be more competitive and not enough time communicating the value of their product or service to overcome pricing issues.
Focus on the Right Part of the Price Continuum
Price is not the only criterion that buyers use to make their purchases. If it were, we would all just buy the lowest-priced products. However, there are buyers at every price point up and down the price scale.
Recently, we remodeled our kitchen, and to punctuate that effort, we replaced the kitchen knife set we have used for 45 years with a new high-end set from Wusthof that costs infinitely more than what we could spend for a cheaper replacement set on Amazon. If all I needed was a knife to cut meat and vegetables, any knife would do. However, to match the quality of the kitchen remodeling, we desired a set of knives that would match that same quality level.
Rather than focusing on selling to the thick part of the consumer bell curve, where there is lots of competition and downward pricing pressure, most small businesses would be better served staking out their segment of the pricing continuum and focusing on providing the most value to consumers at that price point, ignoring the rest of the continuum. For example, if you sell budget-friendly new cars, don’t waste your time trying to sell one of your cars to someone who wants a Bentley.
The price continuum also applies to services. One of my clients owns a dry cleaner and started offering a pick-up and delivery service as an added service. A pick-up and delivery service would not appeal to me because I see dropping off my dry cleaning more as just a minor inconvenience, not worth the additional service charge. However, for my mother, who suffered from Age-Related Macular Degeneration (AMD) and could no longer drive, the option of a pick-up and delivery service solved a real problem for her. She was more than happy to pay for this additional service. As a business owner, don’t broaden your target client profile too much. It is best to focus on the market segment that has the greatest need and will value your solutions more than others.
Learn to Sell Better by Getting Feedback
It is recommended that for every deal you lose to the competition, you reach out to the prospect and thank them for being allowed to submit a proposal and ask them why you lost the deal. Few businesses that I have asked to bid on a project have ever reached out to me when I failed to buy from them. If they did, they would often hear from me that it was not because of their price. More often than not, poor communication on their part left me feeling they didn’t really understand what I wanted.
On the flip side, when you win a deal, why not ask the customer what it is about your offer that compelled them to select your offer over the completion. This feedback is valuable information that you can use to adjust your proposals in the future, and it is 100% free.
In his book The Psychology of Selling, Brian Tracy points out that sales are like a horse race. The winning horse only has to win over the second-place horse by a nose. What if learning why a prospect saw you as the second-place finisher was something simple and straightforward you could correct in future bids? But because you didn’t ask, you will never know what would improve your odds of success in future proposals. If you don’t understand why you lost a bid, you will likely repeat the mistake. Brian adds that sales, unlike a horse race, do not pay for Place and Show positions and is a winner take all proposition.
Too many small businesses simply assume that they lost the deal on price because they failed to ask, which is why many obsess about lowering their price.
Why You Lose on Price
If you ask the prospect why you lost a deal, and their answer was the price was too high, there are only two takeaways. One, you targeted a prospect in the wrong part of the price continuum. As my dad, who owned an auto body repair business, used to say, “They had champagne taste but only beer money.” Or two, you failed to articulate enough meaningful value in your product or service to justify your price.
Why People Request Price Concessions
Most prospects will automatically say the price is too high to get a price concession from you during the sales process. We all do it. I have seen situations where the prospect even made up a competitor’s price that I knew would not even cover their variable costs, let alone their fixed cost, or return any profit so that I would feel compelled to lower my price.
In B2B sales, members of the purchasing department are measured against purchase metrics that can affect their salary and bonuses. Purchasing people have a corporate obligation to ask for price concessions. While they have to ask, you are not obligated to give it to them.
Moreover, in many sales situations, the prospect will state that they have received another bid from one of your competitors dramatically lower than your proposal. It is my experience this is often only a ploy. You can become better at spotting bogus claims about lower prices when you know your competition. Their goal is to just make you flinch about the price. Most salespeople are too focused on making the sale at all costs that they agree too quickly to lower their price.
Words That Signal You Are Open to Price Negotiations
In some sales situations, such as buying a car, sales involve negotiated pricing. As a car buyer, you are never expected to accept the sticker price. But there is a lesson small businesses can learn from this situation. Telegraphing that pricing is negotiable should be avoided if you are not open to price negotiations.
When a salesperson says, “Let me check with my manager,” they are saying I know my price is too high, and I’m willing to negotiate.
If a prospect raises a price objection and the salesperson responds, “What price were you expecting” they are saying I know it is high; I’m open to negotiating the final pricing.
Finally, when the salesperson offers a discount on the spot after hearing that their price is too high to get you to buy now, they are saying that their price is too high and willing to negotiate.
Offering Discounts Causes Trust Issues
I tell my clients to offer their product or service at a fair price they can defend and resist offering any discounts after the fact because agreeing to reduce the costs creates trust issues. When you show that you are willing to lower your price, it looks like you were trying to sneak one by them so you could take advantage of their ignorance or friendship. In my professional opinion, you will never have a healthy relationship with a prospect turned customer after you reduced your price to get the sale. They will always be suspicious of your motives since you no longer have 100% of their trust. Trust is a valuable character strength, especially in sales, that should never be squandered just to make a sale.
Causes for Price Objections
As a small business, reactions to pricing can have many sources. Let’s discuss a few of the most common.
Value vs. Utility
When Amazon came out with its Prime service, I didn’t jump on the offer because I made very few purchases using Amazon. Moreover, when I did place an order, it was generally over the $35 threshold to get free shipping. However, when the order size didn’t reach the free shipping threshold, I would often delay the purchase and leave the item in my cart until I had another order to exceed the free shipping threshold. It didn’t pay to buy a Prime membership for what was $109 at the time. As a result, I could not see the value in a Prime membership to justify the cost.
Then the pandemic hit, and my order frequency went through the roof. Now, it made sense to get the Prime membership. Today, we get an Amazon delivery nearly daily. Initially, the value of using the Prime service was too low for me to buy a Prime membership. It was not that the price was too high, but rather that the value I was getting out of it was not in line with the cost of the membership until my use increased.
Maybe your prospect will not use your product or service often enough to justify your set price. If your price justifies the average utility, rather than lowering your price to the level of their utility, give the prospect a reason for increasing their utility.
In another example, for about a decade, we owned a sailboat in Colorado. Sailboat ownership in Colorado is pretty expensive. Not because boats are more expensive but because the sailing season lasts only about six months. The other half of the year is too windy, or the lakes and reservoirs are iced over. Compare this situation to that of one of my sailing friends who lives in Florida. The sailing season there is 12 months long. My possible usage was half of theirs.
Before you automatically focus on your price, consider how much utility your prospect will get from the use of your product or service.
Budget Constraints
Recently, I bought a new desktop PC, and when I went to the build-desk, the technician said, “What is your budget?” I explained that while I was not looking for bleeding-edge technology, my goal was based on the performance level I needed and not on the price. I was not looking for trade-offs to keep the price below a specific price. Instead, I was looking strictly at value based on performance. If upgrading something like my GPU to the next level had a considerable price premium yet only provided a marginal increase in performance, and the lower cost item met my requirement, I was not willing to pay the higher price. I need to see the solution to see how much utility I will get from it. If you can provide enough value, money should not be an issue.
David King was one of my business mentors. He taught me that budgets constrain mid-level managers while budgets do not constrain senior executives. David used to charge $5,000 per day for his advice, which was back in the 1990s. When I asked him about his rate, he said he never dealt with mid-level managers with a budget. “I’m hired by someone in the “C” suite, and they are strictly looking at value and not constrained by a budget. Price was never an issue if what I was offering made sense to the business.” He also said that when his rate was much lower, he dealt with mid-level managers, and they often never followed through on his advice, which was a shame. However, when he advised the CEO of a large publicly-traded company, he said they always listened intently to what he said and followed through on his advice. By the way, David was billing about 200 days a year at this rate. For the math challenged, that is $1,000,000 per year.
The lesson here is to focus on decision-makers not constrained by tight budgets who have no other option but to squeeze you on price.
Inappropriate Benchmark Price
A prospect often sees a solution at a lower price and uses that price as their benchmark to evaluate your solution’s price. When your solution came in higher than their benchmark price, they failed to understand that your solution was more comprehensive than the one they used to establish their benchmark.
Let’s say that your business does employee background checks. The prospect saw a flyer that offered background checks for $10 and considered that to be the benchmark price. For that price, the prospect would only get an employment history verification and assigned that price as a benchmark. However, they were shocked when your bid came in at $100 per background check. They failed to see that, in addition to just an employment verification check, your solution checked the prospective employee against the sexual offender and terrorist watch list, searched for criminal records, and included a pre-employment drug test. From the prospect’s perspective, they only saw that your background check was an order of magnitude higher. They failed to consider that making a poor hiring decision would cost them far more than the $90 difference in price.
A good salesperson makes it clear that it is an apple and orange comparison and highlights the difference between the inappropriate benchmark and their solution in such a way that the prospect can see the value difference and agree that their solution is well worth the additional price since it prevents the business from making poor hiring decisions that can cost significantly more.
Total Cost of Ownership
I bought a new Brother “all-in-one” color inkjet printer a while ago. The cost of the new printer was about twice the cost of a similar one that I was replacing. The cost premium was justified because the total cost of ownership (TCO) was lower. You see, my old color HP printer used very expensive printer ink and printed on one side only. Rather than have a single-color cartridge like the HP cartridge that often ran out of just one color, requiring that I replace the whole color cartridge, the Brother printer uses separate ink cartridges for each primary color that are overall cheaper than the HP color cartridge.
Moreover, I could print on both sides of the page, saving me paper. Even though the initial capital cost of the Brother printer was higher, the ongoing monthly operation cost went from over 9 cents per page to about 5 cents. After only five reams of paper, we achieved a break-even based on the ink cost alone.
A good salesperson makes the TCO or ROI visible to the prospect by using a model to make the solution’s value more tangible for the prospect to grasp, rather than letting them focus solely on price. Using a spreadsheet model, where you can simply enter the prospect’s data, does wonders to take the focus off the price and place it on your solution’s TCO and ROI, which should really matter to the prospect in the long run.
Responding to Price Objections
Good salespeople expect the prospect to react to the price and have a set of responses prepared to deal with their objections.
One way to avoid wasting time on prospects that will probably never buy from you is to set the expectation early in the process that you are offering a solution with high value and that you are not the lowest-cost provider. If they say that price is their primary consideration, do not invest too much time on the prospect because you will not win the deal at the price you want. As they say, if you are going to lose a sale, lose it early.
When you get a reaction to your price, one good response is: “I’m not surprised that you had that reaction to our price. I hear that a lot. As I said up front, we are not the lowest-cost provider. Should we walk thru the proposal again to make sure we are comparing apples to apples?” This is where a good salesperson will focus on meaningful differentiators.
Another good response to a pricing objection is: “When you said our pricing was high, what is the basis of your comparison?” Often, it could be to another bidder, their budget, their current solution, or an in-house solution.
Never react to a pricing objection without digging deeper to understand their objection. Never try to guess what they are thinking. Always take the time to ask: “What part of our price is surprising?”
If necessary, you should reinforce your position by saying, “Since we are never the lowest-cost provider, what do you think all of our other clients see in us rather than our competition that makes them pay more for our solutions?
Exchanges for Price Concessions
If you have no other option but to consider a price concession, never give one without getting something in exchange for the price concession. Below are some things you may want to get in exchange for a price concession.
Order size: “If I reduce the unit price, would you consider increasing your order size?”
Payment terms: “If I reduce my price, would you consider accelerating the payment terms?”
Agreement terms: “If I reduce my price, would you consider extending the length of the agreement?”
Scope: “If I reduce my price, would you consider reducing the scope or requirements of the project?”
Delivery: “If I reduce my price, would you consider taking delivery earlier/later?” Whatever makes the most sense to you and the business.
Active referral: “If I reduce my price, would you consider facilitating an introduction to a colleague that could use what we offer?”
Reference: “If I reduce my price, would you consider serving as a reference when needed?”
The Problem with Ignorant Competitors
One big issue when you are in a contested “red ocean” market dominated by other small businesses is that many of your competitors likely fail to understand how to price their offerings. I can’t tell you how many clients I speak to want me to help them increase their sales because they think more sales will solve their cash flow issues. I notice that their stated need to increase sales is more often not a sales issue but rather a pricing problem. When we forensically dissect their pricing to get to discretionary earnings, I almost invariably discover that nothing is left. So, making more sales will not fix their cash flow issues because they are consistently underpricing their solutions.
When I taught marketing and sales concepts at the United States Air Force Academy, I would say that first, we need to verify that our aircraft is flying straight and level and not pointing downward before we push on the marketing and sales throttle. If we add throttle before validating that we are at least flying straight and level or pitched up, it will only guarantee that we make a deeper hole on impact.
Conclusion
Price alone is rarely the reason you will lose a deal.
Don’t target the wrong prospect that does not value what you offer
Ask for feedback when you win and lose a deal
Losing on price is often not what it seems
Everyone is conditioned to ask for price concessions – Don’t react too quickly
Avoid giving the impression that the price is negotiable
Recognize the real cause of price objections
Develop a series of responses to price objections
What is your plan for dealing with price-related issues and changing the focus to the value you provide?
