As a sales professional, you have a choice between two different ways to value and price your recommendations. You can base your price on the value you add or you can take the easy way and base your price on the money you save. Pricing based on saving the prospect money over their current spend seems like the easy way out.
Many sales reps do this thinking it’s a fast way to win a deal. But there are four huge problems with this approach.
1. The Value Proposition Is Not Compelling
First of all, the value proposition isn’t very exciting. When you approach the market like your product is a commodity, your only option is to be cheaper than the current vendor. Since both you and your competitors likely have a similar product cost there simply isn’t much room to move to create a lower price. As a result, the best you can offer is a slight saving. In the prospect’s eyes, the savings you offer may not even be worth the hassle of changing vendors. Plus, when you suggest changing vendors, you’ve introduced yet another risk: what if your company doesn’t deliver as promised? Even though the current vendor may be more expensive, at least the prospect knows what they are getting. You are an unknown.
2. You Hurt Your Credibility
Second, when you come in cheaper than the current vendor, it brings a lot of questions into the decision. Why are you cheaper? Is your product or service as good as the current vendor? Do you have the resources to be able to support after the sale? The questions can also go in a different, and all-too-familiar direction: If you can offer a cheaper price, maybe I should see if someone else can beat yours. Thus the competitive knife fight begins. The one who wins the deal leaves with no margin.
3. You Base The Relationship On Low Price, Not Value
Third, when you come in based on a cheaper price, you base your relationship with the customer on saving them money. You may think that you can get a foot in the door on price and then bring in some value-added offerings later. That’s going to be tricky because your relationship with the buyer is now based on being the less expensive option.
4. You Set Yourself Up To Lose the Customer at Renewal
The fourth problem may be the worst consequence of selling based on price. When you use a cost-plus pricing model, you are typically thinking that you can take a thin margin on the first deal with the hope of growing margin over time. However, the customer has the opposite expectation. When renewal comes around, they look to you to find further ways to reduce your costs. You started at thin margins and now they want even more savings. When you can’t offer these savings, they look to the list of your competitors that are calling on them, eager to buy the business with a low price.
How Selling On Price Destroys Your Career And Your Industry
Approaching the market with a cost-plus model creates sales nightmares. When you go to market with the approach of, “I think I can save you some money,” you destroy your career. This is also how industries die. As average selling prices decline, profits get squeezed out of transactions. At some point, there isn’t enough profit to pay for research and development, so these people get cut. The next step is to cut support staff. At some point, the industry literally suffocates because there is no profit to sustain it.
Rather than focusing on the costs, always trying to save your prospect money, what if you focused on the value, always looking for ways to bring business benefits and reduce risks? More on this in an upcoming article!