Why Cutting Prices is Like Cutting Your Own
Throat
by Paul Lemberg
Published on this site: March 16th, 2006 - See
more articles from this month
It's the oldest sales tactic in the world...
And one of the worst...
Price cutting.
Before you make your next price cut in the face of sales resistance,
the question you have to ask yourself is not, "Does it
work?," but rather, "Can you live with the bargain?"
Here's a pop quiz: you - in your role as salesperson
- go for the close. You ask the prospect to make a commitment
and they don't. What's your first response?
Well, if you are like most people in a selling situation -
whether you are the hired sales guy or the CEO-your first
response to people not buying-for whatever the reason-is to
say, "Would you buy if... ?," and the "if"
is always some variant of, "...if the price was lower?"
And you ask it almost before you ask them why they won't buy.
And it's not only when they tell you they won't buy. Many
people in sales mentally calculate the discount into their
profit calculations, and start discounting even before they
try to close the deal. In almost every sales job that I've
worked in, people faced with an end-of-quarter crunch to "make
the numbers" start playing the discount game. In many
industries, it's become common practice to give away all the
profits, and many customers are trained to expect it.
Trouble is, people are not usually 'not buying' because your
price is too high.
If you've taken the trouble to establish the real of your
product or service, you - and your prospect - already know
that the value far exceeds the price you are asking. (If not,
you better go back and rethink the math.)
So if they are saying "no," or simply not saying
"yes," it either means they are experienced buyers
waiting for you to spontaneously cut your price, or it means
they just do not see a sufficiently compelling value...yet.
Cutting your prices will almost never lead to new sales if
they didn't plan on buying in the first place, and the effect
on your profits can be devastating. Follow these numbers:
Let's say you sell a product for $100. Your cost is $70. That
means it carries a thirty percent margin-your profit is $30.
Now, to make a sale, you are "forced" to cut 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 cost you 66% of your profits.
Two-Thirds of your profits for a 20% price reduction!
Cut your price much more and your profit quickly goes to zero.
Or lower.
And that's not even the worst of it.
Once you lower prices, they tend to stay low. That $100 widget
you just sold for $80... Well, sorry to say, but it's now
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 deep pockets
to sustain a losing position for the duration.
So for these three reasons-depressed profit margins, permanently
lowered prices, and the devastation of a price war-it's a
bad idea to lower your prices to buy business-regardless of
the economic climate.
What can you do instead?
The two main strategies are clarifying and quantifying the
value, and packaging products or services to maintain higher
prices.
Here's an interesting example. One of my clients-a software
company-had a hot prospect who didn't want to buy the typical
contract for software maintenance. They felt that 18% per
year was just too expensive, and wanted to pay ad hoc instead.
My client knew this was a bad idea. Customers without maintenance
contracts typically become your worst. Why? Because they know
it's going to cost them each time they pick up the phone for
support, so they try not to. Thus, 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
the finger at you and badmouth your company.
On my advice, my client offered the prospect a four year non-cancelable
maintenance contract, and gave them the first year for free.
And although it was a 25 percent reduction in total purchase
price, it never lowered the per year pricing, and it actually
guaranteed more than the prospect's original commitment.
Plus, my client locked in that customer for four full years,
during which time they rightly expect to sell them additional
products and services.
Price cutting is the "lazy man's" response when
it's hard to make sales. Unfortunately, it may not boost total
revenues, and results in drastically lowered profits on the
sales that do get made. Often the outcome includes permanently
reduced prices and margins, and even a price war, which has
disastrous consequences for all players, except very deep-pocketed
ones.
Sell the value instead. Spend the time to discover what your
prospect is trying to accomplish, and make sure your product
or service helps them do that. Then establish the quantifiable
financial impact, and sell them that. Or package, bundle or
go for the long-term, multi-year commitment.
There are other approaches that not only maintain price levels,
but even support higher ones. To get an overview of those
approaches, visit http://www.lemberg.com/tipsandtools.html
and download "5 tactics to avoid price cutting."
Paul Lemberg
Paul Lemberg is the President of Quantum Growth Coaching:
More Profits and More Life for Entrepreneurs, Guaranteed.
To get your copy of our free report with detailed steps to
grow your business at least 40% faster, go to http://www.fastergrowthnow.com
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