If you don’t like price objections, you could be accidentally killing your business.  If no one ever objects to your price, many of your customers would probably pay considerably more.

Charging a little more has a disproportionate impact on the bottom line.  For example, raising prices 10% from $150 to $165 per hour will likely raise profit much more than 10%.  Since that extra margin goes straight to the bottom line, you might increase profit 20 or 30%.  That sure beats working 20-30% longer!

In addition, pricing objections give you great insight into what the customer cares about.  They are learning opportunities.  You get to learn about the customer, and you get a chance to test your messaging for why your price premium is a good investment.  No objections, no learning.

When you get an objection, there are 4 possibilities.

1. The customer was never a good fit.  You should suggest they go elsewhere.  These are the “I want a brand new Ferrari and I have a $20,000 budget” customers.  If you currently sell them $20,000 Ferraris, you have a big problem.
2. The customer is a good fit for your company, but has legitimate reasons for wanting a cheaper price.  These are the “I want a really fast car, something like a Ferrari, and I have a $50,000 budget” customers.  Maybe they can get a used Porsche 911.  Maybe you can remove some of the value from your offering and lower your price, and/or give them discounts for upfront payment, flexible scheduling, volume purchases, or other behaviors that create shared value.  (See more on how you can Price for Profit.)
3. The customer is a great fit, but wants to see if they can get a better deal.  These are the “I’d love a Ferrari, what kind of deal can you give me?” customers.  They are asking for a discount because they know it can’t hurt.  Make sure they understand the value message, and charge them the right price.  They can get a discount if they agree to some of the shared value behaviors in step 2, of course.
4. The customer may be a good fit, but they are using price as a mask for deeper issues.  These are they “I’d love to buy a Ferrari, but I can’t spend more than $20,000 (because my wife said I could get a Ferrari if I didn’t spend more than that)” customers.  So you say “let’s say we agreed on your price, are you ready to buy today?”  If they are ready to buy, you can deal with the price objection by putting them in one of the previous 3 categories.  If they start talking about their budget cycle, IT approval, the need to get buy-in from their Tokyo office, etc, then you know that price was just a smoke screen.  They have other issues that they may not feel comfortable airing, but even if you lower your price, those issues remain.

Note that customers put themselves into these categories.  The price objection just helps you figure out how to deal with them.  Don’t assume that everyone is in #2 and will respond to lower prices.  This just becomes a self-fulfilling prophecy and teaches your customers in #3 and #4 to act like they need more discounts.

Now consider what happens when you don’t get a price objection.  Either:

1. You priced the offering at exactly the optimum price for that customer, or
2. You underpriced.

So when was the last time you got a price objection? How did you handle it?

From a pricing perspective, Amazon has done a nice job of filling various nitches, from the $79 basic Kindle (with ads–oh, sorry “Special Offers”, $109 without), to the $99 Kindle Touch (with ads, $139 without), to the $149/$189 Kindle Touch 3G and the $199 Kindle Fire. $99 and $199 are “magic” price points, that tend to increase adoption of electronics devices faster than slightly higher price points.

So is the Kindle Fire an iPad killer?

First, it’s worth noting that Amazon has already had a lot of success with the Kindle as an ebook reader. They are committed to this market, unlike some other entrants. They have great content to provide a compelling experience, and can take advantage of their cloud storage expertise to sync everything to the cloud, while saving costs by only providing 8GB of onboard storage (they do have a USB port). And for people who mainly want to consume media on this device, the price is compelling. (Note that for reading, the black and white Kindle’s are far superior to the more expensive color screens on the Fire and the iPad, both on the eyes and on the battery.) Much of the rest of the Fire experience will depend on the depth and quality of the applications available, an area where Apple has a huge lead. Apple also provides more storage, camera(s), and microphone– so if you want to make voice or video calls, the Kindle is not for you.

There are all kinds of feature/benefit comparisons you can do to find out which device, or any, would be better for you. But the pricing and user experience differences are born of the companies’ different approaches. Apple makes money from selling devices, and they have a huge software and media ecosystem around that to provide a good experience (and which now makes what most companies would consider a good deal of money). Amazon makes money from people buying content, and they sell devices as a means to encourage content purchases. Indeed, it is thought that Amazon is losing money on each Kindle Fire sold. What is right for one company may not be right for another. Both Apple and Amazon do a great job crafting a pleasant (valuable) user experience, and they price to their target market. While there is considerable overlap, there’s also a lot of differentiation (and a lot of people who already have both an iPad and a Kindle).

To draw lessons to apply to your business, you don’t have to attack another offer head-on. Take what your customers will care about and design the experience and the price around that. Amazon has done that, and that’s why their tablet effort will be much more successful than more traditional electronics manufacturers who simply tried to copy the iPad while adding a few more features or charging less money.

At this point, you’ve done the hard work.  Hard work meaning that it’s hard to go back and change it.  So you’re stuck pricing what you created.  The typical train of thought goes like this:

Product > Cost > Price > Customer

Now when you get to the customer, you don’t know if you’re delivering the right value, making it harder for sales and marketing to find prospects and close sales.

Imagine instead if you had started with a customer problem.  You could then figure out how customers tried to solve that problem today and how much better, if any, your solution would be.  How much would it be worth to the customer?  Given that value, can you product the product or deliver the service profitably?  What might you have to change?  At this point, it’s easy to change, because you haven’t done the hard work yet.  This train of thought looks like this:

Customer > Value > Price > Cost > Product

How do you think about price and value?

1. Write down your costs.  Of course, you won’t know your real costs, so just use estimates, preferably from 2-5 years ago.  These costs won’t include much nuance about fixed overhead, variable costs, service costs, customer acquisition, or anything else that will really help you understand your profitability, but that’s OK.
2. Build in a margin, based on your detailed cost estimates from step 1.
3. If sales reps discount below this margin, require that they get approval for the deal.
4. After spending a lot of time on email/phone/calls/meetings, and maybe even some analytics, approve 100% of the deals that require approval.

Whatever you do, do not attempt to understand the value of your offering in the market compared to customers’ alternatives.  How can you go wrong with cost-based pricing, especially with your detailed and accurate cost model?

April Fool’s, or they way most companies price?

You want to ask questions until you no longer get meaningfully different answers. At this point, you know what you need to know.

For example, suppose you want to understand the value of selling a data backup service to a CIO. You ask the CIO why he cares about this. He responds that “obviously, we need to be able to continue our business in the case of data loss in our main data center.” This makes sense, but doesn’t tell you how valuable it is to continue their business.

So you ask “how much money do you lose if you can’t continue your business?” The CIO does not want to share that information, fearing you will use it to increase the price of your backup service. He assures you that he has done a cost estimate. You know from a back of the envelope calculation that they are a $1B business, so they do $3-5M in revenue per weekday. If they are out of commission because of a datacenter failure, they won’t lose all of that revenue, because some orders will be deferred, but they will likely lose over $1M per day, plus the cost of overtime and other opportunity costs from dealing with the aftermath. Since this is a risk-based value, you need to know the CIO’s estimate of risk.

“How do you calculate the risk of an outage or disruption?” you ask.

“We don’t have good metrics on that, but I know I don’t want to lose my job, or have my people and my customers have to deal with it.” At this point, you’ve established a pretty good value case, right? So you present the quote, confident that you and the CIO have established a shared view of value and have a great solution. A week later, you haven’t heard back and wonder what went wrong. You call the CIO and leave a voicemail. He emails you back saying that your solution looks good but they don’t have the time or budget right now. He promises to call you back when it’s a priority.

What went wrong? The CIO had other, more pressing challenges. If you had asked, “how does data backup compare with your other priorities?”, you might have heard, “it’s important, but we’re not doing anything until we migrate to the new version of our order management system.” In a different situation, you might have heard, “The CEO has made 24x7x365 business operations my number 1 strategic priority for the upcoming year and she sent me a clip from an online news article about a company that had suffered an outage for 2 days with the comment ‘this better not happen here.’”

Now you have two very different views of perceived value in these two situations (never mind the differential part, for now), although it appeared they both had the same value at the first level. If the CIO said something like “oh, sounds expensive”, you might even note “Price Objection” as your reason for losing the deal in the Customer Relationship Management (CRM) system. Product managers might see “we’re losing 60% of our deals because of price objections” and decide to lower prices.

This is just sales 101, though, right? What does this have to do with pricing?
Nothing, and everything.

First, you may be tempted to lower the price to sweeten the deal in the first case. However, you still won’t get the deal, because price isn’t the issue. At least not yet. However, if you have already offered a concession, when the CIO does call back to talk about your solution, he will start with the discounted price and negotiate further from there.

What can you do with price?
If price is not an issue, then lowering the price does not help. However, there are times when price is not a serious issue, but it can help. For example, if you know you have professional services personnel who are not currently billing, you may offer a discount on implementation services for a limited time. Even better than the savings for the buyer may be the ability to achieve some other goal with the extra money. Even better, if you are about to raise prices, you offer a compelling reason to sign now.

To give you an example, a company I worked for in the past was having trouble closing a deal. They warned the customer that prices were tripling next year. The buyer thought they were bluffing. It turned out to be an expensive gamble. Not everyone has the ability to negotiate with the threat of a 300% price increase, but if you have strong value, you can encourage prompt buying.

Lo handed out 1,000 red velvet cupcakes in one day at 8 locations– Red Velvet Events’ headquarters and the offices of existing clients. This celebration, backed by Twitter and Facebook campaigns, highlights RVE’s creative style. It also shows existing customers that they’re special, and probably led to more worth-of-mouth advertising than a traditional business development campaign. Plus, Lo garnered press coverage in the Austin Business Journal (and all over Twitter). Perhaps best of all, being different is fun. “We go all-out for our clients on projects– this was a great way for us to go all-out to show appreciation for them and do something fun at the same time,” said Lo.

What can you do that’s different, that’s better, rather than just following the traditional path? What will you have to offer, other than price, when the customer is making a buying decision?

• It’s really hard to tell what the advantages of the Dell are.  I think the point is that the machines are similar, at least in hardware specs, but the Dell is much cheaper.  Surely the web designers at Dell could have come with a way to highlight this point.
• The site ignores Apple’s student discounts ($200, plus a free iPod Touch– a small handout to both parents and students).  Even with this price difference, the Dell is still cheaper.  So why not be upfront about it?  Most students and their parents who are preparing to buy a new laptop for school probably know about the Apple offer already.  So now if anyone actually reads through the whole chart, they are going to doubt the veracity of the claims.  (Heck, Dell could always note that with their savings, you could buy your own iPod/iPhone/trip home/trip to spring break.)
• In addition to being hundreds of dollars cheaper, Dell is offering additional discounts in the range of $200-$300.  How many people are going to say: “I was going to spend hundreds of dollars more on a Mac, but now that Dell has reduced the price a bit more, I’ll buy a Dell. It must be just as good but costs half as much”?  Pitch the discounts when you’re targeting price sensitive segments, not when you’re trying to swipe people from Apple.  It’s worth noting that in it’s heydey, Dell was the Apple of the PC world, with the top-notch specs and higher unit selling prices than the competition, which had a very positive effect on profit.
• What family is this in the picture on the laptops page?  They don’t look like they’re trying to save money on a computer. 

What should Dell do?  Aside from addressing the issues above, they should talk about why the Dell experience is as good or better than the Apple experience.  Don’t just present a bunch of specs.  For example, one of the potentially powerful benefits of the Dell– the 25GB of free online storage– is buried at the bottom of the third tab.  Why not let them know that they don’t have to worry about losing that research paper, it’s all backed up online?  (Not that your Dell would ever crap out on you, of course, it’s just so snazzy that someone might walk off with it.)  And sure, more people may use Windows Live Messenger than iChat, but perhaps not in the student’s demographic.  Make sure they know that they can use the widest array of software, including the ability to do video chats and share files with Macs.

And if you really want to highlight the price, provide a comparison of what students and parents could do with that extra money.  All things being equal, maybe the kid would really want an Apple.  But what if he could do the same work on the Dell, and go to Europe for the summer?  (Don’t make it too much about the price– otherwise that $499 iPad might start to look appealing.)

Come on, Dell.  Here in Austin, we want you to succeed.  Now here’s a comparison.  Less specs, more about the benefits, the value.  Check out Apple’s education page.

Check it out.