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?

If you’re better, be better, NOT cheaper.

If you believe your offering is worth more than the competition, but you don’t know how to ask for it, if you’re somehow embarrassed about the price, here’s an exercise you can do as a buyer:  Go test drive your favorite car– preferably something expensive and Italian, but as long as it’s (really) expensive, it doesn’t matter.  This sounds like fun, so far, right?  Then tell the sales man that you love the car but you just can’t see paying $X, since it pretty much does what the Kia across the street does for $20K.  Ask if they’ll match the Kia price.  If you don’t want to drive any cars, pick a different category.

The point is that no one is going to sell you a brand new Ferrari for $20K.  They might laugh, but they will be able to tell you why the Ferrari is different from the Kia, and why, if the Ferrari is really right for you, it’s a good deal.  And way, if it’s not right for you, you should just head on down to the Kia dealer.

If you can’t do this from the seller’s side when someone challenges you on price when you offer more value, you are destroying your business.  Don’t fret, lots of businesses do this and recover.  So have your story ready.  Bonus points for having a lower-priced, lower-value offer ready for price sensitive customers.  (They key is to make sure you have a good fence between the different levels of value and different price points.)

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.

Check it out.

There’s no shortage of stats in sports, just as there’s no shortage of KPIs in business.  While these numbers are interesting and sometimes even useful, they often provide little insight into true performance, and may even distort performance in a way that reduces overall effectiveness.  For example, some baseball statisticians think On Base Percentage is more important than batting average, but everyone focuses on batting average.  In business, there is a huge focus on revenue at the expense of profit.

The reason for this mismatch is not that teams hate winning or business don’t want to be profitable– it’s just that it’s easier to measure some things than others.  It’s easy to measure revenue or points scored.  It’s harder to measure profit, because cost is such a tricky subject.  And no one records whether those points came off a double screen or were set up by a teammate’s cut that drew away defenders.  (Still, we have it easy.  A friend in Africa fighting AIDS described how one of the big challenges was even measuring the scope of the crisis so they would know how to allocate resources and whether those resources were effective.)

Now some researchers at Queen Mary University in London have done some graph-theory analysis of World Cup matches, developing a way to visualize the balance of a team’s attack, and the “centrality” of each player.  Check out the graph for Holland v Spain.  I’d love to see them go a step further, and put a goal at the end of the pitch, and weight each edge of the graph by the chance of successful completion.  For example, a number of short passes may have a 90% completion rate, while a long ball might have a 50% chance of success, but may be more likely to lead to a goal.

Similarly, in the corporate world, a lot of effort gets expended on deals that make $0 profit (or even negative profit).  If you know where your profit comes from and know how to price those deals appropriately, you can have a huge return not just on investment, but on effort.

Why does this happen? What have companies tried to do about it? And what kind of results have those efforts yielded.  Do you have to choose between selling faster and more being more profitable?

February 24, 2010, 11AM CST. Register Now.

The article discusses how big pharma saw controlling the central nervous system as a path to a whole new class of profitable drugs. What they found was that the mind had a huge impact over the body, but not necessarily because of the active ingredients in drugs. Patients who thought they were taking drugs often showed improvement even without taking actual drugs (placebo). This has been documented for some time. More interestingly, patients who received placebos from doctors who actively engaged with them and suggested the patient would get better had better results than patients whose doctors were strictly clinical and aloof. (They did as well as patients on the leading drugs– not that I want to veer into a discussion of health care reform.)

Placebo effects (or “responses”, as some experts prefer to call them) can also work the other way. Patients told of a drug’s potential negative side effects are more likely to report those side effects.

In short, our minds form expectations that end up shaping how we interact with the world and become self-fulfilling, or at least self-reinforcing prophecies.

So when you focus your conversations with customers on price, cost, discounts and other aspects of the pricing calculation, pricing takes the fore and you find out that customers “only care about price.” If you express your relationship with the customer in terms of the customer’s benefits, what other similar customers have achieved, and other aspects on the value side of the ledger, you generally find lower price sensitivity.

Don Hammalian, Senior Vice President at Alexander Proudfoot, a business process improvement consulting firm with a large sales process practice notes:

Salespeople tend to credit their competition with strengths and abilities that go far beyond reality, especially around competitive pricing. I’ve been with client salespeople who, on their way to close a sale, succeeded in convincing themselves in the car that they had to reduce pricing, even though the customer had not made it an issue. In some cases, they cut prices by 10-15% based on their own self induced fears. Rather than selling the value proposition, service and dependability of their organizations they focused on assumptive prices they could not match and missed their positions of strength. In nearly all cases, these concessions are made without a complete understanding of the impact on margin and market positioning. This is a formula for failure … they failed.

Selling on value is covered in Sales 101 and Pricing 101. The particulars of any given sales situation make it much more complex to implement, of course. Some organizations and individuals will try it, and most will see some kind of success. But it’s often anecdotal (despite the views of professor Jenny McCarthy, this does not make it valid). A couple of setbacks, and companies stop trying.

The goal is not remove price sensitivity, or win every deal at full price. This would be absurd. The idea is that overall, you can create a small but meaningful shift in pricing results, simply by positioning price appropriately. And if your margins are 10%, a 1% improvement just added 10% to your bottom line.

How can you use this effect to your advantage with your customers and sales team?

Part of it is a mindset shift.

We saw one company whose new executive team knew that it had to increase margins. They explicitly focused on value and improving price yield rather than just whether the deal is signed. They moved price exception approval from an administrative function to an executive function. They used our software to get details of open opportunities and how they compared to similar opportunities with the same customer or related customers. They even rejected a few deals that might previously have been considered acceptable. Within a month, the sales team had adjusted to the new regime and stopped asking for massive discounts. Sales and close rates did not change.

This effect is also why companies spend a lot of money on the customer experience outside the core “product.” Fancy restaurants have fancy decor and nice plates, setting your expectations for the food (and the bill). A Lexus showroom is very different from a used car lot. An Apple retail store looks different from Fry’s. Businesses communicate expectations about price and value, deliberately or not. Better to be deliberate, and aligned with your value proposition.

So if you feel you have a premium offering, act like it. This will help set customers’ expectations for price. If you want to communicate that you’re a low-price offering, don’t try to be as fancy as the more expensive competitor. Just don’t fall into the trap of saying you’re the premium offering and acting like you’re the discounter– you’ll incur the expenses of developing the premium product, but fail to achieve premium margins.

The pipeline reports were tallied with care
In hopes that the revenue soon would be there.

The sales teams were in hotel rooms, snug in their beds
While visions of commissions danced in their heads

The CFO had his latte, and I had my cap[puccino],
because after working all night we really wanted a nap.

When in the conference room arose such a clatter,
That meant we wouldn’t make numbers– that was the matter.

To my dashboards I flew like a flash,
I knew I had found a great source of cash.

Sales Compass showed our profit on each deal in flow
Which ones were met target, and which were below.

And then what to my wondering eyes should appear
But deal approval alerts and analytics so clear.

That I didn’t need Excel, I could be nimble and quick
And I knew which deals needed which kind of trick.

More rapid than eagles the deals they came
And I whistled and shouted and called them by name.

“Now Upsell! Now Cross-sell! Now Big Deal and such!
On this one and that one there’s no need to discount so much!

If we drop the price here our profit will fall!
And we’ll give away all our hard work after all!”

As dry leaves that before the wild hurricane fly,
When they meet with an obstacle, mount to the sky,

So up to the Target Price the deals they flew,
With price optimization and simple comparisons, too.

And then, in a twinkling, I heard on the phone
The happy laughter of successful sales reps back home.

As I drew in my hand, and was turning around,
Across the wi-fi St. Benioff came with a bound.

He was dressed in a Hawaiian shirt, true to form
Because the North Pole is cold but The Cloud is quite warm.

A bundle of toys he had on the AppExchange,
Some expensive, some cheap, some just a bit of change.

Under his breath he was singing about “The Cloud”
And I’m not sure he knew he was singing out loud.

The stump of a cigar he held tight in his teeth
And the smoke it encircled his head like a wreath.

He was long haired and bearded, a bit tall for an elf,
And I laughed when I saw him, in spite of myself;

With the click of a mouse and a twist of his head,
He gave me great insight to move some deals out of the red.

He spoke many words, and went straight to work
And filled my page layouts with Apex and Visual Force,

And swiping a finger across his iPhone,
He approved several deals, including one of my own;

He sprang to his sleigh, to his team gave a whistle,
While data sync’d in the cloud, gently as the down of a thistle.

But I heard him exclaim, ere he drove out of sight,
Happy Christmas to all, and to all a good night.