| How to handle price buyers Exploding the myth, "But we have to justify
our prices to our customers!"
by Lawrence L. Steinmetz
One of the oldest tricks in the books
is for a customer to demand that sellers justify their prices. Nothing is more absurd.
Let’s consider this logically.
The basic problem with trying to justify your prices is
that the customer does not want you to make any more money when your costs go up. For
example, if your costs go up $2, the customer thinks you should raise your prices $2. But
such a behavioral pattern would erode your gross profit margin and destroy your business.
| Figure 1 |
| |
Dollars |
Percent |
| Selling price |
$99 |
100% |
| Costs |
$66 |
66.6% |
| Gross margin |
$33 |
33.3% |
|
|
When costs go up $2
and you raise your price $2: |
| Selling price |
$101 |
100% |
| Costs |
$68 |
67.3% |
| Gross margin |
$33 |
32.7% |
|
A simple example shows why. Let’s say you offer
a power tool for $99 and your costs are $66, leaving you a gross margin of $33 (see Figure
at right). It is from your gross margin that any operating profit is available after
paying wages, salaries, commissions and other operating expenses.
If the price of your product goes up $2 (from $66 to $68),
and you raise your selling price by $2 (from $99 to $101), you would still have the same
gross margin dollars ($33), but you would have a lower gross margin percentage (32.7
percent).
Raising prices only by your cost increase lowers your
operating margins. Since profitability can only come from the margin (or spread) between
what it cost you to buy the power tool and what you sell it for, you begin to experience
profit loss on each sale.
The really disgusting aspect of justifying your price is
that it is painfully clear that your customer knows why you raise prices or charge high
prices: to make money. Your customer will argue that it is not “fair” for you to
make money on them. So who is it fair to make money on?
The only definition I’ve found of a truly “fair
price” is when both the buyer and the seller are unhappy with the price. What appears
fair to one person is not fair to the guy on the other side of the order desk.
When a customer asks (or demands) that you justify your
price, the best response is to ask why they think you charge the price you charge. Their
answer likely will be, “Because you want to make too much money.” Then ask them
what is an adequate amount of money to provide them with the goods and services
they’ve come to expect from your company.
Anyone who has ever attended a purchasing training seminar
knows they teach, 1) Always challenge the seller’s price, 2) Always tell the seller
their price is too high, 3) Always tell the seller you can get it cheaper down the street,
and 4) If you don’t ask for a discount, you won’t get it.
They also teach buyers to prey on the seller’s
insecurities. The seller doesn’t know whether the customer can get it down the street
for less money, whether the competitor down the street has it in stock, can deliver it, on
time, as promised, and whether the competitor provides the same general level of services,
technical help, support, inventory, order turn-around time, etc., at the same price.
It’s easy for customers to say your competitor does all these things; it’s
something else for that to be true.
If customers beat you up for lower prices, you are probably
inviting and encouraging those actions. How do salespeople invite customers to hammer them
for price cuts or discounts? Usually, it is either through “wowing” or
“cracking.”
Don’t wow
Wowing is when you communicate to
the customer that you think your price is too high. It happens when you say things such
as:
“Are you sitting down?”
“You better buckle your seat belt before I lay this
price on you.”
“Do you think $200 would be too much?”
“Don’t guess you’d want to pay $200, would
you?”
“Isn’t it a crime the price they charge for this
stuff nowadays?”
If you communicate that you feel your prices are high, your
customer will hammer you for a discount because they perceive you as an ally, working
against your employer to get them a lower price. They also think that your prices are too
high because if you feel your prices are too high, and you know what this stuff normally
sells for, then clearly the price must be too high.
Wowing also comes from things you don’t say or, if you
do say them, you don’t say them well. The No. 1 thing sales reps don’t say that
gets them into trouble with customers is not to talk about price. Or if they do talk about
price, they’re not comfortable. To test yourself, ask yourself this question: Do I
like to talk about price? If you said no, it’s clear you think your prices are too
high.
Your customer instinctively knows that if you thought your
price was any good, you’d be more than happy to talk about it! That’s why one of
the first things a customer does is attack you with the question, “What is the
price?” If you avoid talking about price, you are telling the customer that you feel
your prices are too high. Our research shows that 94 percent of the time a sales rep will
not raise the issue of price. When directly asked the price, 44 percent of the time
salespeople tend to avoid answering the question. Why do you avoid talking about price?
Only one reason: You feel your prices are too high.
Who are the 6 percent of salespeople who raise the topic of
price? Price sellers. People who feel they have good prices tend to lead with price. The
customer knows instinctively, if you thought your price was any good, you’d be happy
to talk about it. When salespeople are uncomfortable or avoid talking about price, they
are “wowing” in the eyes of the customer. And that means the customer is
winning, because you have told them you think your prices are too high.
Never crack
Cracking is when the sales rep
communicates that the seller might be willing to negotiate the price. Cracking comes from
things you say that sound like:
“You know I want to work with you on this.”
“You know you’re one of our most valuable
customers and we really want to do business with you again.”
“Let me sharpen my pencil on this deal.”
“Let me talk to the boss and see what I can do for
you.”
“Let me talk to the boss and see what we can do for
you.”
“What will it take to get your business?”
“What will I need to do to get the business?”
And of course, one of the most popular lines is, “Tell
me where I need to be.”
Any sales rep who uses these expressions (or anything like
them) is telling the customer they will negotiate the price. When you tell a prospective
customer you might be willing to negotiate the price, you will negotiate your price. Your
customer will hammer you harder when you crack. Don’t crack!
Acknowledge your price
When a customer says your prices
are too high or they can get it cheaper down the street, you can do one of two things:
crack (and surely suffer the consequences of cutting your price), or acknowledge that your
prices are higher than your competitors and sell under those conditions.
Most salespeople crack to varying degrees. People who sell
at top dollar do not crack. Rather, they acknowledge their prices are higher than their
competitors and come out selling the customer, rather than talking to the boss about
offering the customer a discount.
Any sales rep who wants to sell at premium prices should
understand that if you are going to sell at premium prices, you have two requirements: 1)
you have to ask a premium price, and 2) you have to hang in there when the customer starts
telling you about how they can get it cheaper down the street.
Here are some ways to respond:
“That’s right, our prices are higher. Let me tell
you why we get more money,” or “I realize you think our prices are higher. But
the reason we get more money is because we provide these services, these benefits,
etc.”
Fundamentally, selling at prices higher than your
competitors comes down to getting the customer to listen to you when you honestly and
convincingly explain about your better service, technical help, support, inventory,
quicker order turn-around time, etc.
Most salespeople believe customers won’t listen to
these things, that “all they want to talk about is price.” Yet people who sell
at premium prices learn to use to their advantage the fact their prices are higher than
competitors.
They feel good acknowledging that their prices are higher
and then explain what their company does that benefits the customer and earns them a
higher price.
When salespeople communicate to the customer that they feel
their prices are too high (or that they are willing to negotiate the price), those
salespeople will end up cutting the price because they haven’t done a good job of
selling. All they do is get orders by having prices lower than their competitors.
A final thought
If price were the only reason
people bought anything, only one seller would win: whoever could survive the longest at
the lowest price until everyone else goes broke. A corollary is that if price were the
only reason anyone bought anything, we wouldn’t need sales reps.
In today’s electronic world, all sales transactions
could be handled electronically if price were the only reason to buy. Selling means
getting in the customer’s face and explaining why they should buy from you,
notwithstanding the fact they might be able to get the same product down the street for
less money. It requires sales reps to be tuned into every dimension of value offered
customers, not just price. n
For more information about Lawrence L. Steinmetz’s
programs on “How to sell at prices higher than your competitors,” contact him at
High Yield Management Inc., (800) 323-2835, or by e-mail at pricexpert@aol.com.
This article originally appeared in the May/June
2000
issue of Progressive Distributor. Copyright 2000.
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