The Ten Hidden Costs of Selling on Price
Price is a tool in the sales person’s toolbox, but it is often a tool that is taken out of the toolbox far too often. Besides the obvious reduction in margin and profit from the specific sale, there are a number of other potential negative consequences. Pricing should be a strategic decision, not a tactical one. Additionally, pricing should be reviewed along with all aspects of the total value offered by the company, the product , the service and overall branding and positioning of the firm. I’ll discuss strategic pricing in a future article, for now let’s review the ten hidden costs of selling on price.
1. When you win the business on price, the price is often so low you loose money
You worked hard to win the business, but your sales team got extremely aggressive on price, they got so aggressive that dollars are literally going out the door with each box that ships. Yes this actually happens. A number of years ago I “inherited” a sales Vice President that seemed to enjoy these “wins.” I asked him why he quoted a price where we would lose money. He told me that he sold at that price because he knew we would win the business and it would keep the factory busy. You can imagine where the conversation went next. There are so many reasons not to win the business like this. Perhaps one of the most important is the “death spiral” your company will face as you continue to loose money and have to let people go. The cycle continues until you can no longer keep the door open. Selling at a loss does nothing to assure your company’s long-term survival. Do you really want a customer that only buys on price? What happens when the competitor now comes in at a new lower price?
2. The incumbent supplier can retaliate in kind
The incumbent supplier looses the business because you came in and took the business on price. Eventually they learn you took the business on price and then what happens? Pricing is not done in vacuum. Competitors can and do respond. What will you do when they come in at new and even lower price? This is the stuff price wars are made of and often both companies loose in the long run.
3. Win or loose you have just established a new lower benchmark
Even if the news is “good” and you keep the business, you have now established a new lower bar for pricing. Employees tend to move around in an industry and eventually other customers will find out. Never mind the fact that the Robinson-Patman act in the United States established a law that similar class customers that purchase similar volumes should get the same price, what happens when the other customers find out? They will insist on getting the same price and you may have really upset a good customer. The fact of the situation is once you drop pricing at one account, it becomes the new benchmark and you should understand the ramifications for your business. These types of pricing decisions need to be strategic and not a tactical action by a rogue salesperson that upsets your best customers.
4. You dilute brand equity
Brand equity is very hard to create and takes years to develop. When you start to sell on price, over time you will dilute your brand equity. Lower profits means less money to invest in the business and the employees. It is much more challenging to move a brand up compared to moving a brand down. Once you head down, be prepared to possibly never gain back the brand equity you can squander when selling on price.
5. Competitors will use the lower price as a new benchmark
Competitors will assume the new lower price you used to win this business is the new lower benchmark. As they adjust their pricing to lower levels where does the downward price spiral end? As mentioned previously, and this point is worth repeating, price changes are not done in a vacuum. The competitor now expects you to come in at a lower price at other accounts and the downward spiral in pricing becomes self-fulfilling.
6. You give your customer’s competitor a better-cost position
Let’s say you have a loyal customer that purchases all or most of their needs from you. If you choose to give a lower price to a new account that competes with your good customer, you have just given an advantage to your customer’s competitor. Your sales team needs to understand and consider this situation. If your loyal customer is placed at a disadvantage they may be forced to reconsider how they do business. If your future is tied to “company x,” why give “company y” an advantage? Your customer’s success is your responsibility and this needs to be considered as part of any strategic pricing review.
7. Often you don’t succeed
Sometimes when a potential customer that uses a competitor’s product calls for pricing, all they are doing is using you to leverage a better price from your competitor. Your sales team should be trained to recognize this scenario. Neither you nor your competitor wins when you allow a competitor’s customer to exercise you like this.
8. If you are not the low cost supplier you loose
If your economies of scale and design don’t allow you to be the low cost supplier, how can low price ever allow you to win? More than one company that was not the low cost supplier in an industry has gone under playing this game. The jobs of all the people at your company depend on sales being profitable.
9. You may give low prices for false promises of future volume
I wish I had ten dollars for every time some one called over the last 25 years and said we are going to need 10,000, but we need ten first to try. Amazingly this happens all the time. It’s bad business to play this game with promises of large sales volumes in the future in exchange for a great price today. It’s not fair to customers that really purchase in volume and often leads to broken promises and bad feelings. In the end, if your sales team allows this game to be played too often, your company may fold, when so much of the sales is sold based on high volume, but only low volume purchase orders are sent in. Again strategic pricing and controls need to be put in place so you don’t let this happen to your company.
10. You are not selling, just “care taking” and end up not meeting your goals
As a sales manager or sales person you have goals for sales and profits. Nothing hurts your profit goal faster than lowering pricing. It’s imperative you understand strategic pricing, selling on value, and their impact on your company. Your reputation and job may rest on your ability to build relationships and sell on value.
These are some of the hidden costs of selling on price. These costs can be significant to your business and in some cases, lead to business failure. Strategic pricing is one of the most important tools the management of a company has. Does your company have a strategic pricing plan and policy in place? What are some ways you can avoid selling on price? Who are your best & most loyal customers? Can you think of examples where you found a value to sell instead of selling on price and won?
Andy Singer is President & CEO of Singer Executive Development LLC. Singer Executive Development provides powerful training and development that maximizes results for you and your team. We can also help you with strategic pricing decisions, branding and positioning. Contact us to learn more.
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