The Single Most Essential Rule About Pricing
After repeatedly blogging about pricing strategies, at this point I could probably write a book about it. (Hey, maybe I will....) However, in this series of columns, I'm boiling things down to their essence rather than trying to be encyclopedic.
So, when it comes to pricing, here's the most essential rule--the pricing rule that always produces both the most sales and the most profit:
Never quote a price before the customer fully understands the benefit of buying.
Experienced salespeople at this point are all nodding their heads up and down, but for the rest of you, I'll explain with some examples.
Let's start with an environment with which everyone is familiar: retail stores. In retail, the price is placed on the product or under the product, so that you must look at the product before seeing the price. The idea is that you want the product (benefit) and then find out what it costs.
However, when customers already have a pre-conception of what a product should cost, retailers make the price larger than the product, like a sign in a grocery store that reads "1lb. Flour: $1."
Products for which customers already have a sense of what they should cost (assuming normal economic conditions) and which don't vary much from provide to provider are called commodities. Commodities are sold on price.
You might note that I'm not bringing up the issue of "value" That's because "value" is just another way of saying price. A "good value" is a product that's priced lower than normal. So rules like "sell value not price" are meaningless.
Any product for which a customer doesn't have a preconceived notion of what it should cost have what's called "price elasticity." The customer's perception of the benefit of owning the product determines how much they will pay for it.
Here's an example: Everybody pretty much knows what a notebook computer does and why you'd want one. The benefit is already established, so ads for notebooks usually feature the price. That's a commodity.
By contrast, if you want a PC custom-built to run real-time animation, you can end up paying as much as it costs to buy a late model used car. In fact, you typically wouldn't know the price until after you'd configured it. That's NOT a commodity.
Most business-to-business products are not commodities, and thus have price elasticity. Therefore, it's always a big mistake to talk about price before you've established the benefit of buying that product or service.
Focusing the customer's attention on price at the beginning of the sales cycle throws everything down a rat hole. Suddenly, you're talking about discounts and hourly rates and so forth. Kiss your profit margins good-bye.
Here's a real-life example:
I had a client who was a sales coach. Really smart guy; background in psychology; 20 years of sales experience. Smart, smart, smart. However, whenever he talked about his coaching with potential clients he emphasized, up front, that he only charged $100 an hour.
He figured everyone would go "WOW! ONLY $100 AN HOUR?!? SIGN ME UP!" Instead, he kept getting requests like "can I get a discount--like $50 and hour--if I buy in bulk?" And he'd start bargaining with them over the price.
This was insane, because many of his clients were doubling their sales...like from $100,000 a month to $200,000 a month. But because he led with price, even when he gave prospective clients those numbers, they were still thinking in terms of $100 an hour.
I told him to stop quoting a price up front and instead discuss the prospective client's current sales figures and help them estimate--based on his experience with similar clients--how much more they'd be making if he coached them.
I told him to bring up price AFTER he'd gotten them salivating over how much money they'd make. And I told him to quote them $1,000 an hour. To his amazement, most of them said: "WOW! ONLY $1,000 AN HOUR?!? SIGN ME UP!"
Now, there is a bit of a danger to withholding the price until after you've established the benefit. Some prospective clients will insist upon knowing the price before you've had a chance to establish the benefit. They'll say, early on: "So, what's this going to cost me?"
This question puts you into a bind. If you refuse to quote a price, you'll just annoy the client. However, if you DO quote a price, it will probably seem too high because the client doesn't yet understand the benefit.
Fear not. There's an easy way out of that dilemma. You say something like:
"The specific price varies depending on exactly what you order, how you pay for it, and so forth. I'm sure we can make an arrangement that will work for both of us, but in similar situations, companies like yours spend in the range of [low price] to [high price.]"
As you can see, this answers the question while simultaneously leaving your pricing options open. Two things can happen at this point:
The client goes "Whoa! That's way more than we can afford!" You win, because now you know this isn't a prospective client, so you can end the conversation without wasting more of your valuable time.
Or the client nods and says something like, "Why such a large difference in price?" You continue with "it depends on exactly what you want to accomplish..." and segue back to talking about the benefits.