The oldest tactic in the world to get a sale moving is to cut the price. And it does work...The oldest tactic in the world to get a sale moving is to cut the price. And it does work...
...Sometimes.
The question is, "At what cost, and can you live with the bargain?"
Business as we all know, has slowed, and for the past three years it has taken longer and longer for your prospects to make up their minds, and for you to bring a sale to closure.
And one very common salesperson's response to people not buying – for whatever the reason – is to say, "Would you buy if...?" when the "if" of course, is always some variant of, "...if the price was lower?"
It's the number-one classic answer from sales people and owners of entrepreneurial companies who want to stimulate the buy. It certainly was the question asked by every sales manager I've ever worked for. Entrepreneurs and sales executives alike feel that end-of-quarter pressure to "make the numbers" and almost automatically start playing the tumbling price game.
In many industries, it's become an institution to give away all the profits. We have even trained customers to expect that end-of-period discounting, and many won't even consider buying without it.
The trouble is, people today are not 'not buying' because your price is too high!
They can afford your product at its current price. The reason many companies aren't buying is so they can conserve their cash (because their prospects aren't buying either)
and because they don't see a sufficiently compelling value to say "YES" and share some of their cash hoard with you.
Cutting your prices won't help. Since high price is not the problem, lower prices won't lead to new sales and when they do, the effect on your profits can be devastating. Follow these numbers…
Let's say you sell a product for £100. (Or £100,000, the concept is the same.) Your cost is £70. That means your product carries a thirty percent margin and your profit is £30. Now, to make a sale, you feel "forced" to cut your price by twenty percent, leaving your new selling price at £80.
All things being equal, your profit is now £10 instead of £30 and that mean 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.
But 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.
And worse than that: your competitors will feel forced to 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 potential 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?Here's an interesting example. One of my clients – a software company – had a hot prospect who didn't want to buy the maintenance contract. They felt that 18% per year was just too expensive, and wanted to pay for support ad hoc instead.
My client knew this was a bad idea. Customers without maintenance contracts typically become your worst customers. Why?
Because they know it's going to cost them every time they pick up the phone for support, and since they were too cheap in the first place, they try not to. Thus, then 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 want.
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-cancellable contract, and gave them the first year for free. Now really, this is a discount. It just doesn't look like one. It's a 25 percent reduction in total purchase price, but it doesn't affect the selling price today or tomorrow.
Plus, my client locked in that customer for four full years, during which time they expect to sell them additional products and services.
1. Make trade-offs, not compromises.
In other words, don't give anything away without getting something in return. When your prospect says, "I really need to pay you less," you counter with, "Which part of the value would you like me to take out?. Which part of the worth would you prefer to not get?" If you must lower the overall price because of budget restrictions, repackage the offering so that it contains less "stuff" – less product, less service, fewer options – less value. That way, you aren't really cutting the price, just the size of the invoice.
2. Extend the time your customer has to pay.
Rather than an upfront lump sum payment, or even a completion payment, calculate payments like a lease agreement. Use a term of 18-24 months, and have clients sign
a contract which obligates them to the full term. This will make it easier for people to accept your price, particularly if the customer can break even on an operating basis each and every payment period.
3. Rather than decrease price, give your customers something extra.
Suggested "gives" include a longer warranty, free installation, attendance at a workshop, add-on phone consulting or help desk time. Ideally, the things you give them have a high perceived value, but a low actual cost to you.
4. Offer a "free" initial period in exchange for a longer term agreement.
This approach is in effect, a discount. However, you lock in your customer for a longer period, during which time there are numerous opportunities to up-sell and cross-sell.
5. Raise your prices.
No matter what anyone says, price does equate to value. And if price equates to value, price yourself at the top of the pricing spectrum and justify your worth based on the quality of whatever it is you deliver. (By the way, this may even work if you have a shoddy product or crummy service.)
Remember, price cutting is the "lazy person's" response when it's hard to make a sale. Unfortunately, it rarely boosts sales; it merely results in drastically lowered profits on the sales that do get made. Often the results are permanently reduced prices and margins and a price war, which has disastrous results on all players, except very deep-pocketed ones.
