NEVER, EVER DROP PRICE!!!! 

Dan: 

My team sells technology consulting services. I am pleased in general with our skill level. We are not perfect but are deploying more and more of your best practices ever day. 

One immediate challenge concerns how we address final negotiations with our clients. Often we are the recommended provider going into the closing stage. In most cases we come out of the meeting with the sale but at a high cost to our profit margins. In my opinion we cave too early and drop price to get the sale. Any ideas to help our team? 

Vincent 

Summerfield, North Carolina

Vincent: 

Great question! You are not alone. Many clients present a similar challenge.

My first recommendation is for you to read or re-read A TTS WHITE PAPER ON ADDRESSING THE PRICE OBJECTION. 

In summary, there are four major questions to ask in response to price objections:  

1. "Compared with what?" Or, "Can you explain that?"
2.  "Are you ready to make your final decision now?"
3.  "Are You 110% convinced that we offer the right solution and there are absolutely no other issues to be addressed?"
4. "Please share with me what the price difference is. I will make a sound case to my management and do my very best to narrow the gap."

It sounds like your team is not handling the fourth question well enough.  I think it would help to expose your team to some financial/accounting basics so they can understand the powerful negative impact their negotiation skills have on the net income of your company. I am specifically referring to the impact of price drops/discounts on your company's income statement. 

Let's say you are selling a $1,000,000 service or technology solution.  At the negotiation table the customer shares with the sales rep and sales manager (in response to question #4 above) that if they simply discount 10% the business is yours.  What is the typical response?  Most average mangers and reps leap at the deal and close it at a sell price of $900,000, high-fiving each other as they leave the building.  

You might say, Dan, what's wrong with a $900,000 deal in this economic environment? You are correct. I'm always happy to get any deal but if you know anything about my sales philosophy or my TTS workshops you know I always want superstardom! Let's take a look at what happened vs. what could have happened.   

In the scenario above, the split-second decision by the manger and rep to lower price by 10% cost their company $100,000 in lost revenue.  Given that the company's costs don't change, the discount drops right down to the bottom line.  It will cost the company $100,000 in profit. That's no small potatoes.  That could represent the engineering and development cost for a new product or the yearly cost of an additional head count in sales.  

A study of 2,463 companies by McKinsey & Russell Boisjoly, Dean School of Business Fairfield University  looked at the impact on operating profits given changes to various cost and price levers. They concluded that the marginal impact of holding or improving price could provide the most impact on corporate operating profits.  

Superstars are very aware of this accounting/finance reality and therefore gauge their response. They understand why I preach: "NEVER, EVER DROP PRICE".  Well, how do you reply to the client who is requesting a 10% discount to close the deal? Simple, you make use of the information depicted in the TTS Price Pressure Response Continuum graphic shown below. 

The TTS Price Pressure Response Continuum:

The theory is that a rep can respond to price pressure in a variety of ways from the Great (selling value and justifying the price) to the Bad (dropping price).  Let's take a look at all the options depicted. 

Sell and Justify The Value 

Superstars know how to use the "Justification" sections of their corporate and product value propositions to sell the value of their offering. They are very comfortable being higher in "initial sell price". They can use a customized ROI or TCO (return on investment, total cost of ownership) analysis to respond to a client who demands a lower price with powerful, customized proof points on exactly why their offering is worth more.   

Offer Less Expensive Product/Service 

Superstars know that margins and profits are protected by offering a lower tier product in response to price pressure.  They can then use their skills to up-sell based on the unique benefits of a higher tier offering.

Use Less Costly Materials 

Superstars know that if materials' costs drop, a lower selling price will not impact the income statement as much as selling a higher-cost solution at a lower price.

Expand The Offering - More Business and/or an Extended Agreement Term 

Superstars know that quid pro quo must be used if a lower price is to be considered. The quid pro quo should include at a minimum more business and/or a longer agreement term.  For example, a one-year agreement extends to a three-year agreement, or one system is extended to four systems to be deployed across the enterprise.

Remove or Add Options 

Superstars know that profits on the income statement in the example above would be impacted much less if options are added strategically to the deal rather than discounting. Let's say that the rep in the example above decided to provide an optional $134,000 cloud-based software solution option to the client to help close the deal in lieu of taking a $100,000 discount on sell price. You might say that we're in worse shape than the $100,000 discount. Understanding the inventory carrying cost of the software is key to realizing that it is much better to offer the software in lieu of the discount. The software has a inventory carrying cost of only $5,000. That means that the actual hit to the company profits will be only $5,000 vs. the $100,000 if a 10% discount is given.

Provide More Service 

Exactly like the example above, Superstars know that profits typically are impacted much less if more service is provided to close the deal vs. a price reduction. Why? The cost to the company to offer $100,000 of service will only hit the profit line of the income statement by the internal cost of providing the service.  That, of course, is much less than the list price of the service.

Provide More Warranty 

The same reasoning applies here. Why not extend a warranty in lieu of invading the bottom line?

Performance-Based Agreement 

Superstars know that in many situations sharing the risk (gain- share agreement) with the client offers a better deal for both parties than a simple discount. Let's say that in the above example, the customer is putting price pressure on the rep because the customer perceives that the offering is fraught with significant risk.  A mutually agreed-upon set of performance benchmarks will serve both parties better than a price drop. Note, this is not without high risk for both parties, so all reps should understand that "Special Assignment" is waiting for any rep who tries to "Lone Ranger" (no manager buy-in, approval) this type of deal.

Drop Price 

Superstars know that this should be the very last choice, but, a choice nonetheless.  I like to say that when you are laying ocean-side on your Presidents Club award trip for outstanding performance, there will be no one questioning why you gave up a bit of discount to close yet, another monster deal.  Here's the bottom line:  With respect to any large negotiation, I want you to hold tight on price, sell value, but do whatever you need to do to GET THE DEAL, NOW, not tomorrow! Time is of the essence.

Vincent, review this information and graphic with your team.  Discounting needs to be a last resort to use when under price pressure. Make sure each team member knows it well enough to teach it to others. 

Good Luck, and Close 'Em!