Cutting prices to boost sales is a classic strategy, but it more often is the first step on the road to ruin instead of riches. Price cutting not only sabotages profitability, but, paradoxically, it creates more work for the sales force. Worse, any customer gained on the basis of price alone will run toward anyone else offering a lower price.
But rare is the sales person who doesn’t wilt in the face of a prospect insistent on driving a bargain. Listen to the little white lies that accompany discounted orders: “We’ll make it up on volume.” “We got our foot in the door.” “He was just about to sign with a competitor.”
“How to Sell at Margins Higher Than Your Competitors: Winning every sale at full price, rate or fee” put the backbone back into your sales force. The book lays out strong arguments for maintaining price discipline, pointing out that the sales force often wants to cut price for either the wrong reasons, or because they are too lazy to truly sell. Top executives can also learn that price discipline is much easier to maintain when pursuing profitability growth instead of the false gods of sales and market share growth. As the book stresses again and again, “Business is a game of margins, not volume.”
The strongest argument against price-cutting centers on the mathematical implications of any reduction. Some put their faith in price-cutting because they believe that a 10% price cut will lead to a 10% increase (or even more) in sales, ultimately allowing the company to make the same amount of money – “we’ll make it up on volume.” But the authors show, using easy, back-of-envelope calculations that “when we cut our price by 10% on a 35% gross margin, we actually cut our gross margin in excess of 20%.” In practice, that means that sales volume in dollars must increase by 80% -- repeat, 80%! -- to make the same amount of money that was made with a 35% margin. Even more daunting, the quantity of product that must be sold to recoup previous margins has to double.
The implications are clear. A sales force is going to have to work twice as hard to make the same amount of money. The bar gets even higher if competitors match the price cut. Even if sales can double the volume, manufacturing, support and other operations will be put under pressure, potentially affecting quality and customer relationships.
Compare that unhappy possibility with a 10% increase in price. Gross margins will expand by 17%. Yes, sales will be lost with a price increase, but companies with a 35% gross margin “can lose a little more than a third of all the sales they’ve been making and still make the same amount of money!” Additionally, higher prices bolster brand credibility. How else can Rolex sell manual watches for $8,000 that don’t keep as good time as $40 electronic Casio watches? No wonder the authors advise, “if you ever make a pricing error, you should make it on the high side.”
If the consequences of a price cut are so great, especially compared to a price hike, why do companies let customers steal from their bottom line so easily? A major reason is that companies mistakenly believe that customers buy mainly on price. Numerous studies have pointed out that price is rarely the primary factor driving a sale. Few consumers, for example, are wearing the cheapest clothes they could find. Businesses seek reliability, service and, most important, on-time delivery. When things go wrong in a business, no one ever thinks, “Well, at least I got the cheapest price.”
Rather than selling on price, companies should follow the time-honored – but oft-ignored – wisdom to sell on value. Such value can be timely delivery, guidance on complex purchases, service, reliability, knowledge of customer operations, breadth of product offerings, service and more. Selling on value instead of price takes executive commitment, customer knowledge and true sales skills. That’s hard, so sales forces often take the easy way out by waving the pricing white flag immediately after the greeting. One way sales people often invite discounting demands is by using such wording as “our usual price is…,” “the quoted price is” or “how do you feel about $200?” Sales forces also surrender by “cracking” at the first sign of customer resistance: “Now, you know I want to work with you on this.”
A sales force that isn’t trained in true selling, or a management team that is willing to sacrifice profitability for a sale, is easy prey for skilled purchasing agents. They’ll lie – “a competitor is offering it to us for less” – and be unscrupulous enough to generate fake quotes. They will throw tantrums. They will run down your product. They ask for volume discounts for low-quantity orders. They pretend to be busy, saying, “just give me your best price now.” They ask for throw-ins, such as favorable credit terms or free delivery, when their pen is poised over the contract.
The book offers solid advice on dealing with price resistance. Key tips include:
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When customers tell you that price is more important than delivery or quality, tell them “great, we’ll ship it to you in four years.”
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When customers say that they can get it cheaper from a competitor, point out that the cheaper price comes with lower quality, lack of inventory, no guarantee, etc.
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When customers say, “I can’t pay more” or “it’s not in the budget,” ask “why not?” The answer will help determine who the true decision-maker is.
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When customers ask for “your best price now,” get out your pen and ask them to sign a purchase order that reflects a price good for only two minutes.
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When customers misrepresent their purchase volume to get a lower price today, get payment upfront and give them a rebate when future orders are actually received.
“How to Sell at Margins Higher” provides good tips on how to tell when your prices are too low, or too high.
Most pricing books descend into a jungle of arcane formulas while many sales books sound like Oprah on steroids, pushing a panacea of motivation, confidence and persistence. Although the book is a bit repetitious in places, Steinmetz and Brooks present a balance between both extremes, giving both sales forces and management the wisdom – and the courage – to support pricing that matches the value delivered to customers.