advertising colorado internet marketing Why Cutting Prices Is Like Cutting Your Own Throat - advertising colorado internet marketing

Why cutting your prices
is like cutting your own throat.

Its the oldest sales tactic in the world

And one of the worst

Price cutting.

Before you make your next price cut in the face of sales resistance, the question you have to ask yourself is not, Does it work?, but rather, Can you live with the bargain?

Heres a pop quiz: you in your role as salesperson go for the close. You ask the prospect to make a commitment and they dont. Whats your first response?

Well, if you are like most people in a selling situation whether you are the hired sales guy or the CEOyour first response to people not buyingfor whatever the reasonis to say, Would you buy if ?, and the "if" is always some variant of, ...if the price was lower?

And you ask it almost before you ask them WHY they wont buy.

And its not only when they tell you they wont buy. Many people in sales mentally calculate the discount into their profit calculations, and start discounting even before they try to close the deal. In almost every sales job that Ive worked in, people faced with an end-of-quarter crunch to make the numbers start playing the discount game. In many industries, its become common practice to give away all the profits, and many customers are trained to expect it.

Trouble is, people are not usually not buying because your price is too high.

If youve taken the trouble to establish the real of your product or service, you and your prospect already know that the value far exceeds the price you are asking. (If not, you better go back and rethink the math.)

So if they are saying no, or simply not saying yes, it either means they are experienced buyers waiting for you to spontaneously cut your price, or it means they just do not see a sufficiently compelling valueyet.

Cutting your prices will almost never lead to new sales if they didnt plan on buying in the first place, and the effect on your profits can be devastating. Follow these numbers:

Lets say you sell a product for $100. Your cost is $70. That means it carries a thirty percent marginyour profit is $30. Now, to make a sale, you are forced to cut your price by twenty percent. Your new selling price is $80. All things being equal, your profit is now $10instead 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.

And thats 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 its now an $80 widget.

Even more damaging, your like-minded 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 reasonsdepressed profit margins, permanently lowered prices, and the devastation of a price warits a bad idea to lower your prices to buy businessregardless of the economic climate.

What can you do instead?

The two main strategies are clarifying and quantifying the value, and packaging products or services to maintain higher prices.

Heres an interesting example. One of my clientsa software companyhad a hot prospect who didnt want to buy the typical contract for software maintenance. They felt that 18% per year was just too expensive, and wanted to pay ad hoc instead.

My client knew this was a bad idea. Customers without maintenance contracts typically become your worst. Why? Because they know its going to cost them each time they pick up the phone for support, so they try not to. Thus, they dont get the right level of service, they dont know how to use the product and they dont get the results they paid for in the first place.

And even though its 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 maintenance contract, and gave them the first year for free. And although it was a 25 percent reduction in total purchase price, it never lowered the per year pricing, and it actually guaranteed more than the prospects original commitment.

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

Price cutting is the lazy mans response when its hard to make sales. Unfortunately, it may not boost total revenues, and results in drastically lowered profits on the sales that do get made. Often the outcome includes permanently reduced prices and margins, and even a price war, which has disastrous consequences for all players, except very deep-pocketed ones.

Sell the value instead. Spend the time to discover what your prospect is trying to accomplish, and make sure your product or service helps them do that. Then establish the quantifiable financial impact, and sell them that. Or package, bundle or go for the long-term, multi-year commitment.

There are other approaches that not only maintain price levels, but even support higher ones. To get an overview of those approaches, visit http://www.lemberg.com/tipsandtools.html and download 5 tactics to avoid price cutting.

--PL

Paul Lemberg. All rights reserved

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Paul Lemberg is the President of Quantum Growth Coaching, the world's only business coaching franchise system built from the ground up to rapidly create more profits and more life for entrepreneurs. (http://qgcf.com) Paul is also Executive Director of the Stratamax Research Institute specializing in helping entrepreneurial companies quickly increase short term profits for sustainable long term growth. Of course, he is available for keynote speeches and workshops and can be reached via http://lemberg.com