I recently saw a very engaging article called “Do Mercedes Salespeople Stay Up Nights Worrying About Low Kia Prices?”. It’s a very good question.
At a recent seminar organised by Barclays that I went to, marketing guru Robert Craven graphically demonstrated the risks, and the potential, to impact profitability by changing prices.
Let’s say your business operates at a gross margin rate of 30%. Let’s say you feel pressured for whatever reason to drop your prices by 10% – maybe your client is playing hard to get or is complaining about “your high prices”, or maybe you’re just feeling generous. Your profit is going to drop by 10% as well, isn’t it?
WRONG! Your costs aren’t going to fall just because you choose to charge less for the same service. The result of dropping your prices by 10% is to reduce your profitabilty by around 33%. To stay in the same place and earn the same gross profit, you are going to have to do a whopping 50% more business to cover your discount costs!
In other words, you are going to have to be assured of some pretty dramatic increases in sales to justify that level of discounting.
This is all well and good, I hear you say – but I’m being told that I have to drop my prices to retain the customer. So it makes sense to drop my prices, doesn’t it?
WRONG AGAIN! Studies show that no matter what customers tell you, only 14% buy on price alone and not on value. You rarely buy something for reasons of price alone and neither do your customers.
Objections based on price are often false objections, unless you have made price the rod for your own back by disclosing price too early. As the adage goes, never tell the customer your price until they have already fallen in love with your product.
Customers generally raise the price objection because they know it is the easiest one to use. It is the objection that many salespeople convince themselves is true and the one salespeople give up with the easiest.
It is essential to understand who your customers are and above all which customers are your good customers.
Good customers are the ones that cause you the least grief, that you most enjoy working with and which ultimately bring you the most profit. According to the Pareto rule, they are probably the 20% of your customer base that bring in 80% of your profits. They are also the ones that are least likely to talk to you about your price, unless you bring it up first.
The ones that do talk about price all the time are likely to be the 80% of your customer base that generate only 20% of your profit.
So do yourself a favour. Don’t discount – raise your prices instead – it will force you and your customers to reassess the value that you represent to each other and ultimately help you to focus on the customers that really are the bedrock of your business.
Stephen Oliver is Director of Expraxis Limited, a consulting company that works with academics, entrepreneurs and inventors who need help bringing new ideas to market. We help people set their priorities, plan for their business, build relationships with partners that can help them, and work with them to help turn those ideas into reality. Expraxis has long experience in cost analysis for services businesses and has a range of analysis tools to assist companies in understanding their marginal cost base.