Value Based Pricing, Not Price Cutting

Special Requirements for Reprint: we ask only that you include Paul's name and resource box, and keep all hyperlinks as live links.

Complete Article with Resource Box at end:

Value Based Pricing, Not Price Cutting

The oldest tactic in the world to get a sale moving is to cut the price.

And it does work...but the question is, "At what cost, and can you live with the bargain?"

In the past three years it has taken longer and longer for your prospects to make up their minds, and for you to close a sale. And one typical salesperson's response to people not buying-for whatever the reason-is to say, "Would you buy if... ?" The "if" of course, is always some variant of, "...if the price was lower?"

It's the number-one classic response from sales people and owners of entrepreneurial companies who want to stimulate the buy. It certainly was the question asked by every sales manager I've ever worked for. Entrepreneurs and executives feel that end-of-quarter pressure to "make the numbers" and almost automatically start playing the tumbling price game.

In many industries, it's become an institution to give away all the profits In fact, we have even trained customers to expect it that end-of-period discounting, and many won't even consider buying without it.

The trouble is, people today are not 'not buying' because your price is too high.

They can afford your product at its current price. The reason many companies aren't buying is so they can conserve their cash and because they don't see a sufficiently compelling value to say "YES" and part with that cash right now.

Cutting your prices won't help. Since high price is not the problem, lower prices won't lead to new sales and when it does, the effect on your profits can be devastating. Follow these numbers:

Let's say you sell a product for $100. (Or $100,000, the concept is the same.) Your cost is $70. That means your product carries a thirty percent margin-your profit is $30. Now, to make a sale, you feel "forced" to cut your price by twenty percent, leaving your new selling price at $80.

All things being equal, your profit is now $10 instead of $30. That means a 20% price reduction cost you 66% of your profits. TWO-THIRDS OF YOUR PROFITS for a 20% price reduction! Cut your price much more and your profit quickly goes to zero. Or lower.

But that's not even the worst of it. Once you lower prices, they tend to stay low. That $100 widget you just sold for $80... Well, sorry to say, but it's now an $80 widget.

And worse than that: your competitors will almost definitely lower their prices, and you, my friend, are in a price war. To win in this scenario, you need deep pockets to sustain a losing position for the duration.

So for these three reasons-depressed profit margins, permanently lowered prices, and the devastation of a price war-it's a bad idea to lower your prices to buy business-regardless of the economic climate.

What can you do instead?

Here's an interesting example. One of my clients-a software company-had a hot prospect who didn't want to pay for maintenance. They felt that 18% per year was just too expensive, and wanted to pay for support ad hoc instead.

My client knew this was a bad idea. Customers without maintenance contracts typically become your worst customers. Why? Because they know it's going to cost them to pick up the phone for support, so they try not to. Thus, then they don't get the right level of service. They don't know how to use the product. They don't get the results they want.

And even though it's their fault for skimping, they point the finger at you and badmouth your company.

On my advice, my client offered the prospect a four year non-cancelable contract, and gave them the first year for free. Now really, this is a discount. It just doesn't look like one. It's a 25 percent reduction in total purchase price, but it doesn't affect the selling price today or tomorrow.

Plus, my client locked in that customer for four full years, during which time they expect to sell them additional products and services.

Conclusion: Price cutting is the "lazy man's" response when it's hard to make sales. Unfortunately, this doesn't boost sales, it merely results in drastically lowered profits on the sales that do get made. Often the results are permanently reduced prices and margins, and a price war, which has disastrous results on all players, except very deep-pocketed ones. There are other approaches that not only maintain price levels, but even support higher ones.

Paul Lemberg helps people and their companies succeed faster and more profitably than they ever thought possible. Over the past 14 years, he has transformed more than 200 companies and is currently President of Quantum Growth Coaching, Inc., the world's first Business Coaching Franchise built to systematically create more profits and more life for entrepreneurs... Guaranteed. More articles by Paul can be found at http://www.marketingsuccessdaily.com

---

Qualifying Your Prospect

How do you respond when an absolute stranger calls, at... Read More

Why There Will Always Be High Paying Sales Jobs

With the dot.com revolution crushing once solid business models on... Read More

Are You Scaring Your Customers Away?

"Hello, is (pause) puh-TREE-shuh home?"So started my weekend lesson in... Read More

Whats So Special About You? Defining Your USP

Your prospect is in the market for a widget, just... Read More

Picture Yourself a Winner

In the work place, the amount of good things that... Read More

Listen! How to Sell More by Listening More!

In my opinion, one of the biggest skills of being... Read More

Why Are Customers So Indecisive?

Do you know why your customer won't buy? You've given... Read More

Incentive Dilemma:

Manufacturers and distributors are rolling out more sales incentive programs... Read More

Lead Generation Sins - 7 Of Them!

I really just don't get it.How can so many businesses... Read More

Cold Calling Pressure Reduction

Who likes cold calling? Most salespeople don't like cold calling,... Read More

?The Power Of Consumer Opinion, & How To Profit From It!?

Selling is just a whole lot easier when you know... Read More

A Look at Child Mannequins

Not all mannequins are made to look like full-grown adults.... Read More

Write On The Money: The Ten Commandments (Plus Five) Of Profitable Sales Letter Writing

According to the Direct Marketing Association, in 2003 U.S. direct... Read More

An Introduction to Store Fixtures

Everybody is familiar with the old retail chant, "Location, location,... Read More

Persuading Learners to Buy: 7 Groups

There are seven major reasons why adults continue their pursuit... Read More

Its Better When They Tell Them

You know that word of mouth can grow your business.... Read More

Getting Past the Gate Guard

Over the years, many prospects have hidden behind their well-trained... Read More

Value-added Selling?

"Value-added." That word is used so much it has become... Read More

The Doors Of Opportunity

Alexander Graham Bell once said, "When one door closes another... Read More

A Simple Truth - Authentic Sales Tip

A Simple TruthDo you have the right stuff?Are you consistent... Read More

Selling Against Goliath

Selling Against Goliath?How to Take on the Big Guys and... Read More

Im A Second-Story Man

Can you say who you are and what you do... Read More

The Benefits of Buying Used Store Fixtures

The difference between antique or vintage store fixtures and used... Read More

Sales Letters - How to Write Them

You could just send out your brochure to potential customers... Read More

Your Best Friend - The Phone

We all know that you can't earn your commission until... Read More

Selling Strategy - 5 Ways To Success

Web sites exist for essentially two purposes. The first is... Read More

Don?t Waste My Time!

Many participants in my programs ask how to deal with... Read More

The Problem With Technology At The Point Of Sale In Financial Services

BackgroundThere's a conundrum that currently exists between the customer and... Read More

Clear Up Blurry Communication

One of the top brewing companies in America is a... Read More

The Most Important Word in a Business Letter

What do you think it is? Many experts insist it's... Read More

Freebies

Freebees--Freebees--FreebeesWHY PAY, WHEN "YOU CAN HAVE IT FOR FREE?"There are... Read More

Where to Find Mannequins for Sale

Any time a clothing store opens or expands, they must... Read More

The Basic Secrets of A Million Dollar Sales Letter

"Accepting the consequences, good or bad, will free you; take... Read More