Thoughts, ideas, and lessons learned from real-world customer engagements and interactions...
For some reason, pricing is one of those areas that many companies seem to continually struggle with. Last month we actually held a free webinar where we tackled this topic. A recording of this session is available by going to the Monthly Webinar Series section on our Resources page.
I was recently reminded of the importance of properly pricing your product or service. A couple of weeks ago, I went out to my vehicle and took off as usual. As I was driving down the street I noticed that my windshield was cracked…(after a few choice words) I thought that I had better get it taken care of right away so that it would not spread. When I arrived at one of the local glass repair shops, I went inside and gave the make and model of my vehicle to the person working behind the counter. Within a couple of minutes I was happily given a quote for $800 installed. Again, I mumbled a few unrepeatable words to myself as I went back out to my vehicle and drove home.
When I got home, I thought that I would check with a second shop which we had used a number of years ago, and had received good service. I called and after describing the vehicle, I was quoted $300 installed. Wow, I was going to save $500 by going with this second shop….but hold on….this can’t be right! I was instantly confused and thought that this had to be a mistake. How can there possibly be $500 difference for the exact same windshield? I began to doubt myself and the person on the other end of the phone at the second shop. So after a few minutes, I picked up the phone and called them again…and sure enough I was again quoted $300. I then had my wife phone and she too was quoted $300.
So, whats the issue? If you take a few minutes to look at this, there are a number of key things in this real world pricing example worth highlighting:
1. The second place is leaving money on the table. When I was in the shop, they told me that they actually order from the exact same distributor as the first shop. However, they were shocked to hear the price their competitor was quoting. Yes, they won the business from me…but even if they were $700 they would have won the business from me as they would have still been cheaper. At $700 it goes without saying that they would have made more profit. Know your competitors pricing!
2. The second shop almost lost the business because their price was too low. Had I not wanted to get to the bottom of this pricing difference, I could have just as easily made the decision that it must have been a mistake and made the decision to go somewhere else. Yes…having your pricing too low can hurt you. If there is such a big difference between your price and the rest of the market, people will begin to wonder “what’s the catch?” and may actually decide to deal with someone else. In certain cases with extremely low prices, customers will begin to wonder if you are desperate for business, and will ultimately feel safer going with a solution that is priced more in line with the rest of the market. Again, it pays to know your competitors pricing, and if you are significantly cheaper…make sure you address this price difference early in the sales process. If you leave it to the clients to try and figure out why your price is less, they may attribute it to the wrong reason and end up going to a different supplier.
3. Low prices can cost you more. In this situation, the lady on the other end of the phone at the second shop had to take 3 calls from us before we decided to go with them. So, if you think about it, not only did the second shop make less top line profit than their competitor (had they gotten the business), they actually had a higher cost of sales than the first shop. In fact the second shops cost of sales was actually 3X that of the first shop as they had to take 3 phone calls from us instead of 1. Sure, the second company got the order….but even with such an aggressive price, their cost of sales is actually ended up being higher. So, again make sure your pricing is not too far out of line from your competitors…and if it is make sure you are explaining this up front so your sales team does not have to spend even more time convincing customers that the pricing is accurate.
Sure, this is an example for a consumer focused business. However, the example and the key points are just as applicable and valid for B2B companies and sales organizations. Take a look at your pricing…if you have an aggressive pricing strategy, take the time to make sure that you are not loosing sales due to your low pricing.