You are behind on your sales quota for the quarter or year at Acme Cool Products, so you are looking to make up some ground and get back on track. Like Willie Sutton who robbed banks because “that’s where the money is”, you think about taking some business from your competitors. After all, you already know their customers buy the product or service; it is just a matter of getting them to buy from you at Acme Cool. If you are thinking, “I just need to find out what they are paying today and beat that price”, DON’T DO IT! Leading with price rarely works for any meaningful period and is frequently harmful to the health of your territory or business.
If your first question to the potential customer is “how much are you paying today?” or if your first statement is “I can save you money compared to what you are paying today,” you are saying price is your competitive differentiator and signaling the customer to be price sensitive. The messages you give to customers and prospects, and the order in which you give those messages are indications of what your company (Acme Cool) thinks are important. If your strategy is to lead with price, that is where the customer will focus. You will be much better served centering the conversation on the prospect’s business needs and how you can help address those needs. What are their challenges? How do they use the products or services? How are they affected by product or service attributes or the delivery mechanism? Are there any issues with their current provider, and if so, what would they like to happen to solve those problems? By focusing the conversation around the business needs and your solutions to their problems, you have a much better chance to focus the prospect on the value you can bring.
The second thing to consider about how a prospect will react to a low-price offer is – will they share that offer with their current provider? If the prospect is happy with their current provider, they almost certainly will tell that provider they have a lower offer. They will give their current provider a chance to keep the business by matching or somewhat lowering their current price. Unless you have given the prospect some compelling business/ service/ value reason to switch to you, they will most likely prefer to keep their current provider at a lower price. And as long as it remains profitable to do so, the competitor will take some action to keep their business.
If you do have a lower cost structure than your competitors and you are the low-price competitor in the market, you will certainly want to talk about low prices with your prospect. However if you have focused on the business challenges first, you will be communicating that you are more than just a low-price provider; you can solve their business needs too. On the other hand, if your cost structure is not lower than your competitors, trying to take share as the low-price provider will only lead to a price war that you cannot win.
Think about how your competitors will react to losing some business due to lower prices. That competitor will correctly interpret Acme Cool Products competes on price. The next time you are in a competitive situation with that competitor, they will be thinking Acme Cool will probably bid low. Your competitor may still think they have the best product or service and it is worth a premium, but the actual price the premium represents may be lower than it otherwise would be.
Leading with price has another disadvantage – it trains your customers to continue to ask for and expect lower prices. If you are successful in convincing a prospect who is happy with the current provider to switch to Acme Cool based on price, how loyal do you think that customer will be? The customer will have already demonstrated they are willing to switch, even when they are happy. So when one of your competitors visits, isn’t it likely the customer will try to get a lower price? It worked at least once with you, so why not try it again? What is the downside? And if that competitor does offer your customer a lower price, your customer will most likely come to you with that new lower price and ask you to beat it. So, your one-time effort to take some business from a competitor with a lower price is now leading to a spiral of ongoing lower prices.
The last area I want to address in this is what happens to overall demand. There are certainly many examples of products where demand increases as market prices come down, resulting in greater overall market size and profitability. You see it most often in consumer markets where producing more units spreads out the production costs over more units and lowers the overall cost per unit. In those situations, the higher number of units sold times the lower price results in higher overall revenue, and the reduction in price per unit is offset by an even greater reduction in production cost per unit, resulting in higher profitability. Unfortunately that is not the most common result in B2B markets. In B2B, the demand for your products and services (and your competitors’) is based on the demand for the end products produced by your customers (and your competitors’ customers). This is known as derived demand. The overall derived demand will only increase if the market demand increases for the end products sold by your customers and your competitors’ customers. That type of increase in end-product demand is most common with technology products but is otherwise typically the exception rather than the rule in B2B. A price cut from you and your competitors is typically not enough to substantively lower the prices of the end products, and your customers just pocket the price cut.
Be very cautious about the dangers of leading with price. Leading with lower prices in a B2B market generally does not stimulate overall demand, and is therefore an attempt to take market share with price. Your competitors are not going to let that share go without a fight and you will train them to lower prices elsewhere. And your customers will be trained to ask for lower prices and let the competitors battle each other for the lowest price. With all the noise around price, you will lose the chance to tell your value story and explain why you are better. I don’t see much upside in any of that. A value-based pricing strategy will be much more profitable.
Scott, thanks for this astute analysis. It opened my eyes to some market signals that we will pay greater attention to in the future. This was very helpful. Thanks!