Are you winning the price wars?
Must I discount to compete? This is a strategic issue that every businessperson must resolve.
How does one decide? You know your cost for the goods and services you provide. If you've developed a strategic business plan with financial projections, then you know what you must charge to grow a profitable business. You keep abreast of your competitors' prices, too. There's something even more important, though: what do your customers think your products or services are worth?
It's not as though those other factors are immaterial, but price is ultimately determined by customers' perceptions. The business owner can greatly influence those perceptions.
My wife's grandfather owned a furniture store in Kingsport, Tennessee. He never put anything on sale. If a table or chair didn't sell in a reasonable period of time, instead of discounting he raised its price. And if it didn't sell in a few weeks, he raised it again...and again, until it finally sold.
His successful strategy was built on this facet of human nature: what a customer is willing to give for anything depends on his perception of its value. When a merchant or business discounts, that reduces its perceived value. The discounted price becomes the benchmark price. If one sells widgets (or fabricates, repairs, or cleans widgets) for $10 and then offers them for a period of time or to some customers for $5, from then on, customers feel it's worth $5 and full price is over-charging.
If I shouldn't trim my prices, then how am I supposed to compete with others who under-bid me? Let me suggest two ways to deal with discounters.
Make the sales about something other than money. Sales produce income, sure, but they benefit you in other ways, too. Clarify to customers that you are willing to provide your product or service for a fee PLUS something else of value to your business. That "something else" might be a referral, use of project photographs in markeing campaigns, participation in a market test or new product launch, or a commitment to purchase additional items or an extended term of service.
If you believe the market value of a new item you've acquired or developed should eventually be $1,000 and your entire costs to deliver are $600, how much is it worth to have an account that is willing showcase your work or to provide a glowing reference. Is that worth $200 to you? If so, explain that your charge is still $1,000, but you are willing to accept that as $800 in cash and $200 value in goodwill, influence, or access. That preserves your value.
If you refuse to go under, go over. Don't under-price your competition; overwhelm your customer with all the features and benefits you offer. Make an irresistible case for your dependability, professionalism, and ability to carry through on commitments. Dave Lupeberger laid out a list of ways that a building contractor can establish his credibility, convince prospects of his reliability, and make saying "no" very difficult in his article, "Stop Competing on Price." His suggestions are equally applicable to other businesses:
- References and testimonials. Satisfied customers' opinions have clout.
- Photographs can have a greater impact than words.
- Provide a sample work schedule. Deal with the dread of delays.
- Document discussions and decisions. A clear paper trail, shared with your customer, will set you apart.
- Project specs. Eliminate misunderstandings by detailing all deliverables.
- Professionalism. Explain up front how project changes and additions may be made, and at what cost.
Charge what you're worth, in either fees or other considerations, and make a compelling case that the customer gets far more from you than from discounters. Will this guarantee you'll win over every prospect? No, but as Lupeberger points out, "Sometimes the best projects are the ones you don’t get." Let discounters have the customers to whom noting but price matters and build a customer base of value-conscious individuals.
Joe Haubenreich is a partner at 360 Site Design, which helps businesses develop strategies and digital resources to effectively compete and achieve their sales and profit objectives.