- You can’t talk about value without talking about Price.
- The value of your product/service exists only in relation to something else: ROI
- Value is an essential element of effective prospect qualification. You can’t qualify a prospect without getting agreement on the value you are providing.
- You can’t have a price objection from a truly qualified prospect (because qualifying means to reach agreement on the value you will provide for a certain price).
- A valid price objection means that you did reach agreement on value (or did an inadequate job of presenting your value).
Value Doesn’t Exist in a Vacuum
I read an article today about how to handle price objections.
In this article the author advises salespeople to avoid talking about the price of the product or service they are selling until after they have “demonstrated the value” of their product or service.
Unfortunately there is a fundamental problem with that advice: You cannot demonstrate value without talking about price.
When you are talking to a prospect about the value of your product what is the measure of that value?
Value is not an abstract concept. It has to be quantifiable to have meaning for your prospect.
And no matter what unit of measure you use for value (cost savings, improved productivity, improved throughput, reduced customer support costs, reduced customer churn, improved customer satisfaction and so on) in the end it must always be reduced to a monetary basis to have any meaning for your prospect or customer.
Value is defined as “…the worth of something in terms of the amount of other things for which it can be exchanged…”
This means that you can express the value of your product or service, for example, in cost savings, improved productivity, or reduced customer churn but it will have no meaning for your prospect or customer unless they can measure the worth of that value in terms of the money they must pay to receive it (otherwise known as an ROI.)
You can tell your prospect that “our customers have experienced an average 19% improvement in revenues in the first 3 years of using our product” but the first thing the customer is going to do is calculate what a 19% improvement in revenues would be worth to them in terms of the investment they must make to realize that value.
But how can they make that necessary calculation if you are withholding pricing information? They can’t.
Your job as a salesperson is first and foremost to provide your prospect with the information they need to make an informed purchase decision. The number one piece of information that your prospects want when they talk to you is pricing.
Keep in mind that before they have ever talked with you, your prospects have spent time online to research your company, your products and services.
When they do talk with you they already have the facts and features of your company and product offerings in hand.
What they want to understand now is the value your products and services will provide them. This understanding cannot be reached without talking about price.
Value is the Core of Qualification
In fact, you really cannot talk value to your prospect without qualifying them. Refer back to the definition of value above.
Value is the “worth of something” (the measurable benefits your prospect will receive from your product or service) expressed “in terms of the amount of other things for which it can be exchanged” (money.) Now, think about what prospect qualification really means.
Qualifying a prospect means that you reach a tentative agreement with your prospect that the value they will receive from your product or service is worth a certain amount of money (i.e. investment) to them.
It doesn’t mean that they are in love with your price but that they agree in principle that the value they will receive from you has a certain monetary value to them.
If you can’t reach this agreement with your prospect you shouldn’t be investing additional sales time with them.
How can you demonstrate your value to your prospect without talking about price? You can’t. And you shouldn’t try. Value doesn’t exist in the absence of pricing information.
Recently I received an email concerning a tele-seminar that was to be held on the subject of the “dreaded price objection.” For 50 minutes, and about the same number of dollars, I could learn how to find out “what people really mean when they say you’re too expensive.” Really? That doesn’t require a lot of translation.
It has been my experience that when a customer tells me that my product is too expensive that what they usually mean is that my product is just too expensive.
It isn’t an objection.
It is a fact.
Sometimes a customer just can’t afford what you are selling.
Which means that instead of investing your limited selling time in a fruitless attempt to convince the customer to accept your price that you need develop some new prospects that don’t have the same budgetary constraints. But let’s get back to that in minute.
‘I really like your product but your price is too expensive.’
For instance, I recently stopped into a Bentley dealership. I really like the Bentley Continental Supersports. Who wouldn’t want one? But it’s $260,000 price tag has about three too many zeros for my checkbook.
If the Bentley salesperson thought that he was going to navigate the shoals of my price objection and arrive at a signed purchase contract then he would have wasted a significant amount of his limited time with me. In this case I never got the opportunity to voice my ‘price objection’ because the salesperson took one look at the car I drove up in and made himself scarce before I even walked in the door.
I have four simple rules of thumb about price objections and price qualification that I have successfully taught to clients and salespeople over the course of many years.
- Qualifying a prospect on price means that you reach a rough agreement with the prospect that your price is proportional to their assessment of your solution’s (product or service) value. In other words, you have reached a preliminary agreement about the value that the prospect will receive for the dollars they are going to pay you. Qualification on price and value doesn’t mean that a prospect is in love with your price. But it does mean you’re in the ballpark and any further discussions of price will become a negotiation, not handling an objection.
- A price objection is a valid reason to disqualify a prospect and must take place early in the sales process. A true price objection from your prospect late in the sales cycle means that you misplaced your backbone at the moment of truth and didn’t disqualify them when you had the opportunity. They were never a true prospect for your product or service and you just wasted a lot of time with someone who was never going to buy from you.
- Be direct with the prospect about your pricing. Salespeople have developed an unhealthy fear of the price question. They want to put it in a closet somewhere and forget about it. It scares them. Like zombies or movies based on Jane Austen novels. There is no mystery to qualifying on price. The shortest distance between two points is a straight line. Do what you do best. Ask the right questions of the customer to understand their requirements and make sure they are aligned with your features and specs. And then talk price and value based on their requirements.
- You can’t have a price objection from a truly qualified prospect. As discussed in #1 above, an intrinsic part of prospect qualification is a rough agreement on price and value. If the prospect is still pushing back on price but wants to move forward with you in their buying process then you should beware. It is possible the buyer has a hidden agenda and is using you in order to advance it. I remember one very large deal I worked on where the prospect kept my company in the deal even though they kept whining about our price. We were confident in our solution so we constructively responded to his pricing concerns. But then it reached a point where it became obvious that he was just using us as a leverage point to negotiate a better deal with our competition. It was a painful lesson learned.
The Myth of The One-Time Discount
Everyone has been in this situation: the end of the month is fast approaching and you don’t quite have the numbers in hand. It is not panic time yet, but the big deal you forecasted to close this month has lost momentum and is threatening to carry over into next month.
Larry, your primary point of contact and chief internal advocate at your prospect, ABS, Inc., says the deal has gone to Purchasing. Ed, the Purchasing manager, says the paperwork is making the rounds to get signed off. You had offered ABS a discount contingent on their placing the order this month, before 4pm on the 31st. It is now the 30th, the fax machine is still silent and you haven’t received an email from their purchasing department.
You can hear the tick-tock ticking of the clock on the wall. Actually, it’s digital, so maybe that is just your blood pressure pulsating in your temples.
You confer with your boss, Brian. He says “Let’s give them another 2% if they get the order in by tomorrow.” You excitedly call Larry at ABS. “Hey, I can give you another 2% off the price. But, only if I absolutely, positively receive that order before month end, which is at 4pm tomorrow.” Larry’s excited and says he’ll check with Ed to see if that will move things along.
Well it does. But not how you would like. And you have just unleashed a cascade of unintended consequences that will have an enduring impact on the future profitability of that customer.
First, you just guaranteed the order wouldn’t be received on time. After you hang up with Larry he calls Ed in Purchasing and brags about being a hero because he just renegotiated the deal and extracted an extra 2% discount from you. Ed heaves a deep heavy sigh because now he has to re-do the purchase docs to reflect the lower price. “I thought they needed the order by tomorrow.” Larry shrugs and says “Don’t worry. They seem pretty anxious to get the business. I’m sure they’ll take the order no matter when we give it to them.”
This leads to the second unintended, but certainly not unforeseen, consequence in that the order will come in on the 1st or 2nd day of the next sales month. With the extra 3% and 2% discounts included. My observations over the years are that approximately 95% of all companies (and 100% of all salespeople) will not contest this extra discount. Here is how the situation plays out.
You bring the order to your boss. Brian challenges you on the discount. “Dude, we’re not giving this stuff away. The order didn’t come in before the end of the month so the discounts are no good. Go back and get the order for the right amount.” Actually Brian doesn’t really care that the customer took the discounts, he just doesn’t want to appear weak in the eyes of his boss, Stan, the VP of Sales. So he is going to send you back to confront the customer, knowing full well that it runs the risk of pissing off the customer and delaying getting the order by weeks. If ever.
Except now, Stan, your VP of Sales is standing over the Brian’s desk wondering why the order from ABS Inc last month hasn’t been entered into the system yet? Brian doesn’t want to deal with this so he motions you over to explain to Stan why it would endanger the great relationship you have built up with this strategic customer, in addition to which it would embarrass Larry internally, if Stan and Brian rejected the order. So, Stan relents and agrees to book the order.
Now you run head -on into the third unintended consequence which is that your base price to ABS is now 5% lower than it was 30 days ago. You sent the average sales price for ABS on a trip south to the border. And it ain’t coming back up anytime soon.
Salespeople suffer from situational amnesia. Customers don’t. A salesperson only sees a tactic to close orders. He or she only remembers the times that it worked and not the 95% of the times that it didn’t. The customer remembers that he can wait until the last week of the month and invoke a Pavlovian response from the salesperson to extort an additional discount. All the customer has to say is that “The order’s in purchasing. I’m pushing everyday but I just don’t know when it will see the light of day.” Empty silence fills the phone line while the salesperson furiously tries to calculate how big a discount it will take to dislodge the order from Purchasing….
The moral of the story is that you have to protect your margins by not negotiating against yourself. Don’t hand out discounts like candy at Halloween just to accelerate orders that you are going to receive anyway.
Surplus is at the Root of Discounting
It is easy to blame the salespeople for rampant discounting but it has always been my experience that the primary responsibility for over-zealous discounting and the resulting price and margin erosion rests with management.
When a manager has a surplus, whether of inventory or of salespeople not hitting their numbers (meaning that he or she isn’t hitting their number either), they look for a solution in the form of a discount.
Approach the end of the month or quarter with too much inventory on the shelves or too many people not hitting their quota, and the first thing many managers do is authorize their salespeople to offer a discount to a customer to win an order and move some product.
All parties involved in a sales transaction, buyer and seller, are familiar with this cause and effect scenario. Salespeople wait for it. Customers wait for it. It is not an accident that the trajectory of orders during a quarter traces the familiar hockey stick shape. Everyone is familiar with the rules and is in on the game.
The problem with this end of period discounting is that these “one-time” discounts have a tendency to morph into the new default price point for your customer.
If you’re handing out discounts at the end of a quarter to induce customers to close an order or accelerate a delivery, then your next order from that customer is going to be at the new price point you established with the discount.
Balk at that and you’ll find that all your orders from customers will start to materialize around the end of your accounting periods.
Surplus is also a key factor in discounting conducted by salespeople. It occurs because salespeople oversell their product or service, in effect offering more features than what the prospect needs to meet their needs.
This overselling occurs when salespeople are not adept at precisely qualifying their prospect’s exact requirements.
A salesperson can’t sell value if they don’t understand the problem the customer is trying to solve. As a consequence, they tend to sell the entire feature set of their product or service in the hope of encompassing the prospect’s needs in the process.
When a salesperson’s offer exceeds the needs of the customer they are left with the choice of reducing either the scope of their offer or their price in an attempt to win the order. Offering surplus features that are without value to the customer almost always leads to a discount.
As a manager, to effectively address this discounting problem you need to develop a plan to reduce the surplus factors in your selling.
First, the answer for salespeople who oversell is ongoing in-depth product training. Learning to sell value is next to impossible without a true understanding of your product or service. A rule of thumb is that a salesperson can’t effectively sell value if they don’t understand their product better than the prospect. Does your training accomplish that?
The second surplus factor to manage is the end-of-quarter discounting syndrome. This is a hard habit for management to break. Unfortunately going cold-turkey is the only effective method to curtail the practice.
It could take one or two challenging quarters to flush the temptation out of your system and re-train your salespeople, prospects and customers. However, you will learn which customers are buying your product for the value versus the discount. These are the customers to focus on in the future.