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How Do You Negotiate Price?

Differentiation determines why one product or service sells for more than another. People ask about price because it is a common denominator and easy to understand. But if people are only concerned with price, it is because they don't see the difference between one product and the next.

Price is an important part of most buying decisions, and it has become ever more important. When the economy is soft, price becomes a bigger component of the buying decision than when the economy is strong. With the advent of the Internet, high-speed communication, and data availability, it is now easier than ever to compare prices and features. There has also been an increasing emphasis on driving out costs from businesses as a way to keep prices low and competitive while making a satisfactory profit.

But think about it this way. Have you ever bought a product or service solely based on price? Didn't you also consider functionality, ease of use, style, durability, reliability, the reputation of the manufacturer or provider or vendor, delivery time, payment options, trustworthiness of the salesperson, and the guarantee or warranty?

Have you ever been offered a product or service that you wouldn't use even if it were free? Was it because it didn't suit your needs? Was it because it didn't do what you wanted it to do? Was it because you wouldn't have the time to use it or didn't like it? Was it because you thought it would be more work than it was worth? Was it because it didn't have the prestige you wanted?

Here's a quick example based on my preferences. I read a lot of business magazines. I subscribe to some. Some I receive free as a professional courtesy. But there are some that I refuse to take for free because it's going to take me time to look at it. Based on the value that I perceive I will derive from it, I choose to decline some of these free publications. (The quality of the publication isn't the issue; it's the relevance.) Now, there are others that I purchase. I like to get a good price for the subscription—I won't overpay. I'm sure you and your customers prefer to do likewise.

Can you think of situations in which you would buy a product or service where the price wasn't a deciding factor? Some possible examples could include:

The number of times that one will buy something where price isn't an issue is minimal compared to the times when it is. In the vast majority of cases, the customer will factor it in. This is why you need to be sensitive to budget issues. If you ignore budget constraints, you will be blindsided.

If everything else is equal, people will go with the lowest price—but how often is everything else equal? And what can you do to ensure that it isn't by differentiating your product or service?

Recognize that if you need to justify a price, it is the difference in price, not the total price, that you must explain. And the difference in price can indeed be small when calculated over the useful life of the product or service.

Of course, while people may be willing to pay more for the same or a similar item for the sake of convenience or warranty, there is a limit to how much more they are willing to pay. Depending on the circumstances, 5 to 10 percent may be such a small difference that customers won't think twice about it, but 50 percent probably won't be. A client was told during a review after the company had lost a bid, "Your proposal was good, but it was hard to justify that much of a difference in price"—which, in their case, was 45 percent. Everyone wants the best price, but people are willing to work with a reasonable price in tradeoffs against other factors, such as delivery time or track record.

One additional viewpoint on price: price differentials on many items occur because of the way they are provided (or positioned). Food is a good example. You can buy the raw ingredients for a meal at the supermarket, or you can pay more for takeout, or pay even more at a gourmet restaurant for the very same ingredients. The price you are willing to pay depends on your tastes, convenience, ambience, and the service level you want and are willing to pay for.

I read an article in a restaurant magazine that described how to enhance the perceived value of ice cream as a dessert by the way it is presented—for example, the plate it is served on (have you noticed that the more upscale the restaurant, the larger the plates, whether or not the portions are?), the garnish, the name. (One client said, "Imagine how much of a following sushi would have if it were called raw, cold fish.") Enhanced service is one way to create a positive price differential, provided the customer sees the added service being of value.

For sales professionals, the question is, are there additional ways to enhance the customer's perception of the value of what you provide? Is there a different or better way to combine or package what you provide so that the customer will be willing to pay more for what he or she prefers? Can you offer more than one choice?

Many times, price is not the real objection. However, when price is the problem, it may be because the customer can't afford the product or service, though the customer may be reluctant to say that. Cash outlay may be the problem, which might be solved by financing or deferred payment.

So asking questions to determine whether price is the objection and whether the customer would like to hear about financing options can help resolve this issue. Showing potential cost savings or lost revenues are two other ways of helping to address this issue.

Getting customers to say why they don't want to purchase something is more than half the battle. Most people will not say. Why? They don't want a confrontation, they are embarrassed, or they don't want to discuss it or are afraid they'll end up arguing.

If you believe price is the objection, try to find out whether your belief is correct. Brian Tracy, CPAE, author of The Psychology of Selling, suggests asking, "If this item were free, would you take it?" If the answer is no, price really isn't the issue. (Again, you can probably think of something you wouldn't take even if it were free, which demonstrates this point.) This might be a time when you could illustrate the point with a story.

Not Right at Any Price

Have you ever bought something that you thought was a great bargain and that you could use, then took it home to your spouse and proudly showed off your bargain, only to get a response like, "Not in this house"? Was price the issue? When you acceded to your spouse's demands, what were you really selling? Respect for his or her wishes, perhaps? Peace, harmony? What would the real price have been if you persisted in bringing your treasure into the home?

Price Isn't the Same as Cost

Remember that price isn't the same as cost. Price is only the initial outlay. The total cost of ownership includes such things as maintenance, repairs, downtime, and servicing. How does your warranty compare to that of your competitors? What potential revenues might customers lose if they lose the use of the product? What are the consequences of downtime? Making your customer aware of cost savings that accrue from using your product or service can help you justify an initially higher price.

And while most want a reasonable price, they also want assurance that the service will work and that problems will not occur or will be fixed quickly if they do occur.

Have you ever bought something that saved a little money initially but eventually ended up costing much more? How much did you save on the initial purchase? How much more did it cost you later? If it was a lot of money, isn't it something you would rather not repeat? Can you recall the emotion you felt when you incurred the additional cost?

Most people—your customers included—can think of their own examples if you asked them the same question. I can think of a painful one: I "saved" $25, but it cost me $7,500. My wife and I were selling our home, which had a well that supplied our water. The buyer was going to have the water tested, but I wanted to make sure that it would pass inspection, so I decided to have the well inspected myself so I could get any problems corrected, even though I had never noticed any problem with the water. I called the water testing company, which said two tests were available: I could bring a sample of water to them in a sterile container and they would test it for $25, or they could come out and take the sample for $60. I said I thought the $25 test would be good. The representative said that the results wouldn't be certified because they couldn't be sure where the sample came from, but I said that would be satisfactory because the buyers were going to do their own test. That turned out to be a false savings.

The sample showed no problems in the well. The day before the closing, the buyer's attorney's office called and asked about the water report. I had forgotten that there was no follow-up test. So someone came out and took a sample. I took the sample from the sterilized faucet in the kitchen, but he took it from the hot water heater in the basement, a damp environment where it would be more difficult to get a clean sample. I tend to believe that he did not sterilize the faucet well. The next morning, just hours before we were supposed to close, we learned that the sample had failed the test. To close, we had to place $7,500 into escrow to cover the cost of a new well, if one was needed—and ofcourse, with the buyer in control, they ended up putting in a new well. We could have not closed, but at that point we felt that wasn't a viable option. To this day, I believe that if I had the fellow come out to take the sample and if he had done it properly, the well would have passed.

So the moral of the story is that while you sometimes save a little on a purchase, it can cost you a lot. Most of us can think of a time when we saved a little and spent a lot. Your prospective customers can probably also think of an example, which is a good way to illustrate that cost can be much more than the price. (By the way, besides the $7,500, we had the emotional uncertainty and stress to deal with, which doesn't have a pricetag.)

Asking the prospective customer to answer this question is one of the most important ways of negating the issue of price. You have an advantage when total cost is considered along with all the other results you get for your customers.

Customers, whether they are consumers or businesses, have become more price sensitive. We need only look at the popularity of buying clubs, superstores, and discount outlets for proof of this. Businesses are streamlining and looking for ways to cut costs. Cost is an issue we cannot ignore. It's therefore more important than ever to not be considered just a commodity, no different from the next product or service, but to stand out for reasons important to customers.

Unfortunately, too many salespeople and too many companies react to the price issue by just cutting price. They condition the customer to expect more and continuing price cuts, resulting in price-conscious and fickle customers who have little, if any, reason to stay with a company because they know someone will come along with a lower price.

Changing the Price Affects How Many Units Are Sold

Why is it that certain products or services must compete more on price than others? In part, it is because they are not distinguished well from those other products or services. But it also may be due to the maturity of the product or service in the marketplace. It is a bit of theory, but the following explanation will put a framework around some of the pricing issues you face and the customer responses you've seen.

When products or services are new and address a problem that customers are anxious to solve, they command a premium price; they tend to be in short supply, and demand outpaces supply. Once a product gains acceptance, it also encourages competitors. Those competitors provide alternatives. Those alternatives change what is called the elasticity of demand. The elasticity of demand describes what happens when a supplier changes the price for a product. If there is a high elasticity of demand, when the supplier changes the price—even a small amount—it greatly affects the demand. If there is a low elasticity of demand, when the supplier changes the price it hardly affects the demand. Of course, suppliers like products with a low elasticity of demand.

Figure 4 below illustrates these differences between two products, A and B. When the price for product A is increased, demand goes down just a little. People continue to buy the product, but in slightly smaller quantities. So raising the price would probably result in more revenue. When the price for product B is increased, the demand drops sharply. Product B has a higher elasticity of demand than product A. The supplier of product A could conceivably raise the price and make more money, because the cost of the product would probably stay pretty much the same. The supplier of product B, while making more money per unit, may make much less money in total because many fewer units will be sold.

Elasticity Of Demand

Figure 4:  Elasticity Of Demand

The elasticity of demand changes over time, depending on the market and how distinct the product or service is. More mature products or services have a higher elasticity of demand (reflective more of a commodity), which means that the way the product or service is delivered can affect the price. If the market is growing and demand can't be as easily satisfied, then prices tend to remain strong. If the market is static or shrinking, supply will tend to exceed demand, and prices will soften.

A good rule of thumb is that the lower the price, the more people will buy. Exceptions are those items that are valued because they are higher priced. Prestige brands fall into this category. There is an element of exclusivity about the brand because not everyone can afford it, so if the price were significantly lower fewer people might purchase it. The other extreme is when the price is so low that it makes people wonder whether there is something wrong with the product. But there aren't too many exceptions to the rule of thumb: the lower the price, the more people will buy.

Something else to keep in mind is that sometimes you are competing not against someone who sells the same thing, but someone who is competing for your customer's dollars. Electronic equipment sales were strong until car companies offered zero-percent financing. Consumers chose to buy cars instead of electronics. When the economy is slow, people may not take exotic vacations; they may go out to the movies or restaurants more often.

What does this mean for you as a sales professional? It means that if you started out selling a unique product with few competitors, but now find yourself facing more competitors and more price competition, you will encounter more price sensitivity. You will need to differentiate yourself in the marketplace so that customers see you as an important part of their purchase of your product or service.

You're going to need to exert care when it comes to pricing. What worked early in the product's life cycle won't necessarily work later. What works when a market segment is strong won't work when it's shrinking. One defense contractor, commenting on the change in the defense budget, said, "Cost is of the essence to the customers, because they don't have the budget they used to."

As a sales professional, you don't design the product or service you sell, but you can affect the way you sell it and the value you add to it.

Adding a level of service will allow you to compete more effectively against those who have poor service.

I've spent a lot of time discussing the issue of price because it is a critical factor in buying decisions. Price is the easiest way to judge a product because it is easy to understand. But price needs to be placed in context. Do what you can to position yourself so you aren't competing solely on price. At the same time, don't ignore the issue. Look for ways to enhance your perceived value. Look for ways to deliver higher value to customers. Do it while lowering their costs, which adds to their bottom line, and they will continue to buy from you.

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