By Paul Reilly
“The manager has just one business. His equation tells him that if he prices a little too low, it’s not that serious. But if he prices too high, he sees himself screwing up the only thing in his life. And no one knows what raising prices will do. For the manager, it’s all Russian roulette…someone with wide experience and distance from the scene should set prices in certain cases.”
— Warren Buffet in Tap Dancing to Work by Carol Loomis
In this interview, Buffet explains why managers are more likely to charge lower prices than they should. They’re too concerned about pricing themselves out of a sale. Because of this tendency, managers often leave too much money on the table.
This brings up an interesting question. Who should control pricing? The closer you are to the deal, the less control you should have. Pricing should be driven down from the highest levels of the organization.
Salespeople are just too close to the sale. If a salesperson must slightly discount to ensure a sale, they are going to do it. From a salesperson’s perspective, the risk of losing a deal is more painful than discounting a few percentage points. However, every dollar discounted is pure profit lost. Think about how much money is left on the table.
The current economic crisis further exaggerates loss aversion. For most sellers, business is down and we’re unsure when it will rebound. The fear of losing business, coupled with economic uncertainty, makes discounting seem like the right decision. Sellers justify this discounting behavior by saying, “We can’t afford to lose any more business. Something is better than nothing.”
Consider the long-term implications discounting has on your business. Before heading down this road, here are three things to consider:
- You are establishing a new reference price. From now on, the buyer will expect a discounted price. The newly discounted price sets future budgets and influences future negotiations. You are demonstrating a willingness to discount.
- Discounts cheapen your image. Price is a benchmark for quality and performance. By lowering your price, you’re telling the buyer the solution is less valuable. Our research shows that if you offer a better solution, with better service, and lower overall cost, you don’t need to match the competitor. Even in the most commoditized industry, buyers are willing to pay 10 percent more for the better overall solution.
- Deep discounting screams of desperation. When companies are desperate and experiencing financial stress, they fire-sell their inventory. When salespeople are desperate to close a sale, they rely on deep discounts. Customers don’t want to work with desperate salespeople selling for desperate companies. This desperation creates doubt. Buyers perceive a partnership with you as “too risky.” Many sellers often use a cheap, desperate competitor to gain a selling advantage. If your competitor prices their solution too low, what does that say about their company? Deep competitor discounts create an opportunity for the seller to cast some doubt on that solution. For example:
“Mr. Buyer, the pricing seems a little desperate. If the competitor thinks their solution is only worth that amount, I am in no position to disagree with them. I can only explain the value of our solution and how it impacts your business…”
Casting a little doubt refocuses the conversation on your value, not the competitor’s low price.
Selling profitably in tough times requires commitment and courage. Commitment to creating value and the courage to make tough pricing decisions. Discounting is too expensive in good economic times. In tough times, the high cost of discounting is too costly to bear. Deep discounting sets a new pricing expectation, harms your image and creates doubt in the buyer’s mind. Think twice before you discount. Confidently and courageously hold the line.