Why bargain price-strategies are doomed to fail
Price should not be your main differentiator. Nobody, not even the customer, benefits from competition based on pricing. In this article, I will explain why this is a lose-lose-lose strategy. I will then discuss the main reasons behind choosing a pricing strategy and provide alternate solutions so that you can start selling value today.
First off, you lose, because the lower margin makes it impossible to focus on long term growth with your business. Your partners and suppliers lose, because they will get a lower price for their products and services. But most importantly: your customer loses, because you simply don’t have the money for research and development to keep selling value. Besides, the quality of your product is bound to be hurt by selling based on price.
The “low prices” fallacy
If you are still competing based on price, your strategy will ultimately fail. In the end there will always be a competitor with lower prices than yours. Despite ample evidence to the contrary, over the years I have noticed many salespeople still believe in the “low prices will win the deal”-fallacy. It’s deeply ingrained in the way they think and act and has become completely fixed. The customer only confirms this belief by choosing a competitor with lower pricing, further amplifying the belief that in the end all the customer cares about is money.
Good sellers have a very clear idea what features make their product better. Great sellers know what VALUE they bring to the table. They also have a strong belief, that if they lose the deal, it was not due to pricing; they were simply unable to convince the customer of their added value. However, this level of self-reflection is scarce.
Feelings over features
Perception of value is emotional, justified by logic. It is the reason customers are willing to pay a premium price. Sales is a transfer of emotions. While your product might have great pricing, or wonderful features and benefits, the only thing that really matters: is the customer being able to imagine how you are going to make them money? Or make them more efficient? Or make their day easier? For instance, if the product and contract actually contribute to their peace of mind, financial targets and security.
Many organizations struggle to find the right balance between selling added value and pricing. Sales people often want us to believe that price is the main differentiator. Why? It’s an easy argument, an aspect you as manager cannot easily deny or influence. ‘The competition is buying the deal’, so it’s not your (or my) fault. However, studies show us that price is obviously important but, in many cases, the third or fourth consideration in the decision-making process.
WHY we focus on price
What I’ve observed in the many ComEx implementations we have done over the years is the lack of a clear pricing strategy. Pricing is often only based on the concept of cost-price plus margin, not value based at all. The question is why? There are different reasons. I mention a few:
- Lack of new technologies, or services. Over time prices have the tendency to decline due to commoditization. A process in which relatively unique products or solutions eventually become commodities. Products that can be interchanged easily with other alternatives on the market. Subsequently, price erosion becomes a problem, especially if you are not able to produce against lower costs; it will deteriorate your margins.
- Solution: Anticipate on multiple market dynamics that potentially affect fluctuations in pricing and enhance your competitiveness by building stronger value propositions in advance. This concept is highly related to your ability to innovate, accept new ideas, be creative, work in teams, etc. Not once to catch up with the competition, but over and over to stay in the lead.
- Inconsistent or inaccurate customer data. Especially when it comes to market and customer intelligence. If you don’t have a clue about trends and developments in your customer markets or you have no idea how customers cope with these trends, it’s difficult to connect your differentiators or unique contribution to these coping strategies. The worst-practice alternative is pushing products against lower prices.
- Solution: Ask the right questions to build a Core Case Analysis. After creating your initial value proposition in which you describe your unique characteristics, speak to your customer about what moves them. Ask about their main concerns, trends in the market and how they currently deal with those issues. Ask if they see points for improvement. Try to connect your unique characteristics, to their market trends. Show them the business impact of your solution, be concrete and concise. Be credible by presenting evidence of your claims.
- Price complexity. Some companies employ complex price plans. Customers tend to prefer simple price strategies. Complexity and/or lack of transparency negatively affects customer perceptions of price fairness. A fair and reasonable price is about mindset. The idea that the value of your solution outweighs the fact of paying a higher price.
- Solution: Set up a very simple pricing template, that shows a customer – in ONE page – exactly what you offer, what it costs and what they will get in return (added value). Build a pricing strategy related to value, volumes, loyalty, efficiency of the order process, etcetera.
- Reactive Sales
Another challenge is the fact that salespeople are usually involved relatively late, in the customer buying process. By the time the customer calls you, or you call the customer, their needs are completely set in stone. As a result, customer choices can hardly be influenced anymore. In that case, both buyers and sellers will have the natural tendency to focus on price.
- Solution: Early involvement means that sales is still able to facilitate and influence the decision-making process, to create the so-called endowment effect. The idea that the solution is co-created between buyer and seller, there is mutual ownership of the co-created solution. The natural tendency is to focus on value. Not choosing for that solution will feel as a loss. As a result, the customer will be more loyal to this co-created solution than a similar alternative.
If you are interested in learning more about the customer buying process, click here. If you would like more information about Core Case Analysis, and learn how Motion5 can help you build the perfect value proposition, contact me by emailing to email@example.com.