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It’s worth defending your price

In tough economic conditions most customers expect more for less. As their customers put them under pressure they in turn bring pressure to bear on their suppliers. The rise in the power, scope and skill of procurement has also exposed new areas to price pressure.

The easiest thing to do to win an order is to drop your price. If we do this frequently we train our customers to ask for bigger and bigger discounts. We have fallen victim to price conditioning.

Discounting has a massive impact on any business.

Assume your typical order generates £100 of sales

Assume you have costs of £70

Assume you want to achieve £30

If you sell at the full price you clearly need 10 orders to hit your profit target

But: as soon as you succumb to price pressure you need to close a disproportionately greater number of orders

Discounting at 5% will mean you need to close 12 orders not 10

Discounting at 10% will mean you need to close 15 orders not 10!

Three elements of price handling

It is worth sharpening our price handling skills and reminding ourselves of the steps we can take to reduce or manage price resistance.  The three main things to get to grips with are:

    • The principles of price
    • The process of price handling
    • The presentation of price

The principles of price

Few companies set out to be the cheapest in the market or to use price as their main differentiator. There are exceptions but they tend to be in mass markets like supermarkets, newspapers and fast foods and most price wars are intended as short sharp shocks to hit weaker competitors.

The downside of heavy discounting cannot be over-stressed: In July 1994 Wills launched Horizon 30s in Victoria Australia, in direct competition with Philip Morris’ Peter Jackson brand. Wills priced their new packs at 52 cents less than Peter Jackson. Philip Morris retaliated by discounting prices in South Australia, (Wills’ stronghold). At its height, the discounting war was costing the tobacco companies an estimated $8 million per week. As a result, profits and share prices of both companies dropped.

However cheap you go it is likely someone will be willing to go cheaper. As John Ruskin put it in the Nineteenth Century:

“There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.”

When you look around most customers there is usually little evidence that price is the main driver for them. Just look at the car park, what the buyer is wearing, the coffee in the coffee machine, the quality of machine tools or computers. Few buyers buy solely on price (even fewer buyers admit they do!). The exceptions are in one-off consumer purchases e.g. price comparison sites for buying a fridge and very transactional deals on products perceived to be a commodity. In hard times the trigger point does move. This is the point at which the raw transaction price becomes more important than the value of the longer relationship.

It is quite acceptable to respond to a price challenge with “Is price your only criteria?” If the answer is yes you probably shouldn’t be there! Be confident in your pricing. Understand it and support it. You may feel yours is the highest price in the market but is it really? Don’t allow yourself to go into price discussions saying to yourself “Yes you’re right, our prices are too high”.

The process of price handling

Clearly, appreciating the principles alone is not enough. We need to have robust processes. The processes might include:

  • Differentiation: How do we demonstrate that we are genuinely different from all those (cheaper) competitors
  • Timing: Do we aim to deal with price early or late?
  • Handling competitive pricing: Dealing with direct price comparisons
  • Analysing components: What are our variables? How much can we move? What is the relationship between their cost to us and their value to the client?
  • Building business cases: What is the best way of demonstrating how our offer brings value to the customer?

The presentation of price

Thirdly we need to work on the way we present price. This is partly about structures such as the sandwich, the Lowest Common Denominator, the split-up and the equivalent. Partly it is about language; avoiding negative phrases such as “I’m afraid it costs a lot” and using neutral language such as “figure”, “rate” or even positive language. Part of it is about behaviour; showing confidence but not arrogance, dealing with challenges calmly and cooperatively not with anxiety and aggression.

Conclusions

Handling price challenges is not easy, especially in a demanding economic climate but if we can master the principles, refine the processes and improve the presentation of price our businesses will prosper rather than perish; our people will fly where others fall.

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