Price and value.
Value and price.
They are almost always not the same thing.
In these times of economic downturn, one of the most frequent questions sales people hear from customers is a request for a cost reduction.
One of the most frequent responses I hear of from sales people is “ok”.
It is NOT ok!
Not until you, the sales person has looked deeper in to what is going on with the customer.
If you give a cost reduction, several things are going to happen:
- Your revenue will drop, assuming all else stays unchanged. If you’re a company listed on the stock market, that means your share price, EPS and other key metrics will take a hit. The kind of hit that, if too big, or goes on for too long, tends to end in layoffs. I’m just saying…
- Your profit will drop even quicker – cost reductions all come out of your profits, if you have any left.
- The customer knows that you are their ‘go to person’ next time they need a cost reduction. Giving a cost reduction without getting something in return breeds – it breeds more cost reductions. And while you’re giving away your business (because that’s what it is), your competitors are potentially stealing your other customers…
So stop doing it!
I’m NOT saying you can’t give cost reductions.
What I AM saying is… Get something in return…
A customer comes to you asking for a cost reduction. You have a price agreement that matches volume to price – more volume means less unit price – standard stuff. So you could respond with something like this…
“Hmmm. I know the economy is tough, and your volumes are down like almost everybody else’s. I understand the situation you are in. With your lower volumes our pricing agreement calls for a price increase, and I was thinking about that. How about we keep the price as it is for the moment, even though your volumes are down?”
Or how about this:
A customer comes to you demanding improved/shorter delivery times. They’ve been ordering less so they carry less inventory during the down turn, and reduce the cash tied up in inventory – very common. Now they’re seeing the beginnings of an up turn, and are concerned they won’t have enough inventory on hand to meet demand, and they want to maximise their ‘take’ on this upturn to balance the bad few quarters they, like so many, have experienced.
A shorter delivery cycle clearly means something to them – they attach some value to it. So what are they prepared to pay for it? Are they willing to pay extra in revenue terms? Possibly, but usually not. AND it’s worth asking…
A shorter delivery cycle might mean challenges for you – it can mess with your own plans, schedules, raw material inventories and so on- there’s a knock on effect, and, frankly, why should you pay for the strategic decisions, good or bad, of even one of your customers? Don’t give shorter delivery cycles away for nothing – otherwise next time a customer needs something, they’ll come to you first, and get it from you, instead of your competition… and you get nothing out of it…
Oh sure, I can hear some of you saying “if I don’t, I’ll lose their business!” – well, maybe you should! Not all business is good business!
OK. So if the customer is unwilling to pay actual extra $ for speedier delivery, what can they give you in return? More backlog – advanced orders, would be good, incentivised through a price/volume agreement… this will help you with your forecasting and planning, which is something YOU value, and maybe enough to offset the hassle you may have of providing shorter delivery cycles.
Here’s a third example:
“We like your solution. If you can beat the solution offered by Competitor X, the business is yours.”
I know. It’s tempting to a lot of sales people.
If the statement from the customer is accurate etc, that they really DO like yours over Competitor X, then find out what it is that they like more, before you even think about dropping your price.
Anytime a customer is telling you their selection is now to be decided on price alone, such as in this example, then either the customer…
- … really is buying on price alone, meaning they have commoditized you, OR, more likely…
- … you haven’t done a good enough sales job yet, and have failed to connect your solution with enough aspects of what they are trying to fix, achieve or avoid through this purchase. And this means they can’t tell the difference in value between your solution and the one from Competitor X.
Let’s assume it’s the second outcome.
In which case, go back to it, find out more about what it is the customer is trying to fix, achieve and/or avoid, and in the minds of the key decision makers, connect your new and deeper understanding of this with appropriate aspects (features, advantages & benefits) of your solution.
If you can’t do this, OR you really are in the first situation, where you have been commoditised, the customer is unable or unwilling to see your value, and all you do by giving in at the lower price is confirm their view of you – that you are not different and do not deserve a higher price… This is NOT a sustainable strategy!
OK, off my soap box! What price/value conversations have you come across, good or bad, and what happened? Let me know!