Dropping prices should have a cooldown timer
After my post discussing how vendor-client relationships are complete crap most of the time — which was really a thinly veiled excuse to post a funny vid — a friend of mine posted a response on my Facebook page:
While you’re right that you in essence ‘get what you pay for’ in this economic climate you’d be surprised how much lower vendors will go in order to keep a customer satisfied (which in turn could bring in more work…)
This is quite true, and I’m sure she wasn’t alone in her opinion, so here’s some additional insight. The problem isn’t the act of dropping prices, but the speed with which we as vendors come to that decision. Many vendors drop their prices at the first hint of customer disapproval. Clients know they can feign disappointment to try and get a better price (that’s what makes the video funny!), but if a vendor has a solid product at a reasonable price, they should ignore that impulse to cave to such requests.
Consistently dropping prices unnecessarily has a lot of long-term penalties. The customer who gets a discount once will ask again, further decreasing the bottom line on that client work. Those bits of discount add up really fast, yet the companies I’ve worked with rarely stopped to calculate how much they are actually losing in discounts. Only when the customer was obviously taking the business to the cleaners did they give it a harder look.
Plus there are more “fuzzy” net effects, like price perception. A product’s value is tied to the price that a customer actually pays, not what you “might have” charged them before you offered that on-the-spot discount. Decreasing the price decreases the value a customer places on the goods they receive. Luxury goods live and die by this rule. Why are Diesel jeans, Oakley sunglasses, and Coach purses considered premiums in their respective markets? An expert could talk about product quality, but the vast majority of people couldn’t identify these tangible advantages. The pricetag is the number one conveyor of luxury status.
I’m not saying “never give discounts,” just that companies should be more selective in doling them out. Most of the time, clients already see the value of goods and services, and *will* pay for it, they simply want to squeeze as much value as they can out of it. Standing up to these scare tactics, as illustrated in the video, can save companies tons of trouble down the line.
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There are three critical questions that, acting as the seller, need to be answered as early in the sales cycle as possible.
1. Does the customer have a need that I can address?
2. Does the customer have a budget to pay for these goods or services?
3. Will the customer buy from me?
Dropping the price is often a last ditch effort to recover a sale that was, in reality, lost much earlier.
In truth, you generally only have control of only #3 and price is one of the factors in the decision. It is a mistake to believe that all other deficiencies can be made up for by a price reduction.
When lowering price there are some things must be kept in mind.
1. Is the customer’s resistance to closing the deal really price based? If price really isn’t the problem then lowering the price simply causes confusion in making the sale. You should always have a solid reason for dropping your price and “to get the order” is not in and of itself a solid reason.
2. If you reduce the price, don’t play games with the customer. The sleight of hand where you reduce the price but also quietly take something out of the deal will come back to bite you big time. For example, if you have reduced the maintenance from three year on-site to one year depot you have reduced the cost but not the price. This is not to say that you shouldn’t get creative to get below a hard cap in the user’s funding, it only speaks to the disclosure. If you are open about what you are doing you are partnering with your customer and they will view it that way.
3. The customer should never be taken by surprise by a price reduction. This is allied with the first point but speaks to effect rather than the action. An unanticipated price reduction will often put the brakes on the deal rather than close it.
If you have done your homework on the first three points and priced your product appropriately then you will have all the justification that you need to counter pressure to reduce price by the customer that is really after the sale is fundamentally complete.
Awesome corollary, Lynn, thanks for that insight! If a seller asks your three pre-req questions, and is then mindful of the consequences I’ve laid out, they should have no trouble at all avoiding those irritating 11th hour negotiations. I’ve really got nothing to add.
But when did they let you out of the back office to start making purchasing decisions?
Many years ago… like when I was about your age
I did pre-sales technical with some really awesome salesmen and women. Ok, there were a few dolts too but one in particular was Joe Lopez. Joe was of Mexican descent, born and raised in Chicago. He was about 6’5″ and a bit intimidating at first. He was the first person to refer to me as Mr. Macey and not make me think that he was referring to my father.
Joe and I were out to change the world, one computer sale at a time. Joe’s territory was Kansas, Iowa and Nebraska and we spent a lot of time on the road. A day might have us leave Kansas City, fly to Wichita and drive west to Pratt to call on Kansas Fish and Game. Yes, this was during the time that I could get on an airplane with almost no advanced preparation 15 minutes before they closed the door. Pratt is a good 2 hour drive from Wichita so we might have 4 hours in the car by the time the day was done so we had a lot of time to talk. We spent a lot of time talking strategy and I never went into a customer opportunity without knowing exactly what Joe expected to accomplish on the call and what my responsibility was. Joe was the one who distilled the three questions for me.
We had a good product that competed very well against a DEC Vax-780. It was faster, cheaper and actually did virtual memory for real rather that the rather artificial approach that the Vax took. It suffered from one serious problem however and this is where item #3 in the first list was hammered home, often. Since we weren’t from DEC, the customer often would not buy from us. This was true regardless of how well the benchmarks went, how well we sold the product, the company or the support.
Joe’s first responsibility was to discover why we had been invited to the prospect. Most left at least a crack in the door but we did find others that had really already decided what they were going to purchase. We were just there as a token “other supplier” that they needed for their procurement process. Joe was good at sniffing these folks out and cutting our losses early.
Just about anyone in sales does pretty well with 1 and 2; if they don’t, they don’t have a future selling. The problem with 3 is that it goes counter to the usual sales drive. Sometimes when you are trying to sell something to someone ego gets into the driver’s seat. It becomes a personal challenge. In the end, this is when the “I cut the price to get the order” comes out of the toolkit and the result can be a disaster.
If you do get the order, the customer may still not consider you as the best to do business with and you may wake up to discover the the terms that you are now in are not very favorable to you. Undoubtably you made compromises along the way BEFORE you cut the price. Trust me when I say that there are worse outcomes than losing a deal.
If you don’t get the order you have to look at not only all of the resources you poured into the effort to close it but also at the lost opportunities that you passed up because you were working so hard to close the lost deal.