I am often asked where a client can lower prices to get more volume. Typically, they want to know which segments or customers are buying elsewhere and would switch to our client if offered lower prices. It seems like a simple question, but the answer is rarely simple and often frustrating to our clients. Our view is if you care about profitability, lowering prices to chase volume is often a bad pricing strategy.
I am not suggesting that prices don’t matter. They do matter in the sense that there is an acceptable range of prices customers will pay, but as long as you are in that range, price is seldom the most important criterion. Customers decide among potential suppliers who have generally comparable prices by focusing on whose service is better, whose sales people are most responsive, which supplier has a broader range of products and services, or simply where they usually buy. Customers usually won’t switch suppliers for small amounts of money. As an example, how often do you switch grocery stores, gas stations, etc.?
What if your prices are not in the acceptable range? If the prices you offer to a specific segment of customers are consistently higher than competitors, and your market share is lower in that segment than others, it may be a good place to lower your prices. Another metric to consider is your win/loss rate. If it is lower in the high-priced segment, lowering your prices may be the right move - but only if you can avoid lowering prices in the segments where your win rate is higher.
Don’t base your decisions on a few anecdotes that you lost business due to high prices. Do your due diligence with detailed analyses by segment including price levels at which you win and lose, as well as differences by customer size and transaction size. Also remember - if you lower prices to an entire segment, your existing customers in that segment will enjoy those lower prices too; and your margins from those existing customers will drop. Do a breakeven analysis to determine how much incremental volume you have to capture to offset the margin loss on your current customers before deciding to lower prices.
If you have appropriately identified a segment where your prices are broadly higher than competitors, and you can compete on an even footing once you have lowered your price, there are some other factors to consider. The messages you give to customers and prospects, and the order in which you give those messages are indications of what your company thinks are important. 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. 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 most important decision criteria.
Another thing to consider when lowering prices is – will the customer or prospect 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. Customers don’t like to switch suppliers and they will often give their current provider a chance to keep the business by matching new offers. Unless you have given the prospect some compelling business 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.
Chasing business with price has another disadvantage – it trains your customers to continue to ask for and expect lower prices. If you get a customer from a competitor by lowering prices, 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? And if that competitor does offer your customer a lower price, your customer will most likely come to you with a 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.
I wrote in the first paragraph that trying to win more volume by dropping prices is very often a bad idea, but not always. As you think about this question of whether there are segments in which you should lower prices, it is important to evaluate the problem at the category or product level. Unless your price positioning versus competitors and customer value is comparable across all categories, and it usually is not, making broad decisions across all categories could be disastrous. However, if you are detailed in your analysis of specific segments and products, and don’t rely on anecdotes, you may find situations where you seldom win because your prices are too high. If those segments and products would be profitable with lower prices and deliver more volume, correcting your too-high prices is appropriate.