This is a question we have been asked a lot already at SME Strategies. What should be your answer when you don’t want to devalue what you do and cash flow is so vital? Whilst there isn’t an easy answer there are some important tips to help us respond.
Remember the maths!
If you do reduce your price, you will reduce your profits. These profits will have to be made up somewhere else if you are to remain at your same level of overall profit (ie you will have to work harder to stand still). Is this what you want?
If you do drop your price to keep competitive, might your competition then lower their price and so you are no better off?
Is there another way?
What is the real question?
This might sound an odd thing to say but pricing is not always the main reason for the price reduction request. When you are asked to reduce your price, you need to understand what lies behind the question.
Far from being the question you most dread, this might be a great opportunity to have a deeper conversation with your client/prospective client. The customer might not be aware of all that you offer in your product/service. Ask them what they think about the service or product you supply and the value of it to them. As far as you can, you need to move away from being seen as a commoditised product/service with many competitors. Instead you could offer something bespoke, with unique value that they can’t get from someone else.
You want to emphasise in the conversation the value/results you offer rather than simply what you do. A cheaper price for any product you are offering can usually be found but the overall great service you give should command a higher price point. Assuming you have a good relationship with your customer, this is something to be stressed. Find out if it is a genuine pricing issue or a cash flow issue for them – flexible payment terms, for instance, might be possible. If you do agree a price reduction (which should initially be by no means certain) then an immediate commitment should be obtained. Finally on this point, ask yourself how do you value the service you offer your customers? Very often small businesses undervalue their offering and so under-price themselves. If you don’t believe in your product/service offering why should anyone else?!
Offering different pricing options
Rather than price reductions, how about offering instead different pricing options? You don’t want to box your customer into a corner, so having flexibility gives scope to talk and negotiate. You will have seen how many businesses offer three options eg gold, silver or bronze (or more creatively premier, deluxe or bespoke!).
The higher levels have increasing bells and whistles. This works for both service businesses as well as products (think of a typical car brochure where a fully spec’d model of car can be twice the price of the basic model). This approach allows customers to discuss pricing without undercutting what is in your offering.
Remember the psychology that often customers will be drawn to the middle option. Take this into account to make it favourable to you too. Although customers think they are rational, studies show that they (and that includes us of course) are not. Successful selling will profitably use this irrationality.
It is much better if we can to find ways to add value to our product before we drop the price. This is especially true when the extra value we tag on is low cost to us but high value to the customer. In the current Covid-19 crisis, think of ways to adapt your product to the current crisis. Find new markets or even look again at a product that was not selling well but now might do so.
It is only human for us to feel uncomfortable when we are pressed to reduce our prices. We can take the request personally but we shouldn’t. Business is business. What you can do is to practice your answers and be ready when the price reduction request is made. It is also good to be constantly improving/tweaking your offering. Customers are always being delighted at something new and valuable that you are giving them.
How essential is your offering?
In these difficult days, a huge amount of non-essential purchases just aren’t happening but essential purchases are still being made. Think if there are ways for your non-essential product/service to be seen as essential. This is especially useful if we can take a product that is seen as non-essential or even impossible (eg booking a holiday now). Turn the product (the holiday) into a different product (eg peace of mind/reward) that can be seen as essential and something to which people can look forward to enjoying.
In normal times, it is good to understand the different sort of purchases that are made eg routine (basic supermarket shopping), low level (a coat), high level (an expensive holiday) and impulse purchase (chocolates at the supermarket check-out!). B2B selling is rarely impulsive.
Differentiation is key – the more you can differentiate your product, the higher will be the price point you can achieve. But, and this is an important but, your differentiation must be relevant to your customer.
A final word
If you drop your price you may harm your reputation. Some existing customers may even think you have overcharged them previously.
When we come out of lockdown and demand rises once again you need to ensure that you are not locked into a low price. If you are offering a very cost effective price during lockdown, ensure that it can be increased for the full product service offering when lockdown is eased/ceases.
Be very cautious as a small business owner in dropping your prices out of fear. Once they are dropped you have inevitably, at least in part, devalued your service. Standing your ground with pricing and knowing your worth is as important now as it has ever been.
If you would like to apply this article on pricing to your business do get in touch with us.