Price competition can seem scary, but many of the wounds are self-inflicted. While that sounds discouraging, it’s actually good, because it means you can take control of them, avoid them, and win deals at better price points.
Pricing is the moment of truth in a deal. We all want to get the benefits of a project, or service, or item, without paying for them. One of the most effective tools buyers have is to encourage competition between vendors to bring the price down. This can be both a rational strategy and an irrational one (when buyers spend more time and give up more opportunity cost than they save). Regardless, you have to be able to handle price competition.
To start, you’re sending signals about your price long before you deliver a proposal. Your website, your references, your demeanor and attitude give buyers hints about your price. This is a good thing. If your pitch is delivering simple websites for low cost, your “Bob’s Discount Websites” site and testimonials from small businesses sets an expectation for low pricing. If you build secure sites for health care systems, your fancy website with “HIPAA-compliant” sprinkled throughout and logos of big hospital chains sets a different expectation. The point is, we don’t want to waste a ton of time with prospects who are not a good fit. Qualify them early in the process and send the folks you can’t really help somewhere else. Save your time for the people you can help most effectively.
This doesn’t guarantee that you win every deal, but it makes your pipeline much healthier. Having 10 meetings with unqualified prospects and writing 5 proposals might make you feel busy, but it won’t make you as much money as having 2 meetings with qualified prospects and writing one compelling proposal.
Once you get into the proposal process and the buyer pushes back on price, there are only a few reasons why. What you do next depends on the buyer’s reason(s), so let’s look into them.
First, we have to know if this is a real price objection, or just a negotiating ploy. We in the sales community have trained buyers to ask for discounts, and professional purchasing managers entire purpose is to wring concessions out of you. So if you get a price objection, ask, “if we could meet your price, will you sign today?”
If they say, “yes, absolutely,” then we can work on the price objection (see below). If they say, “well, I need to think about it, and talk to my IT guy, and check with my cousin’s friend’s dogwalker’s lawyer, then check with accountant about cash flow…,” then you know that solving the supposed price objection won’t actually win you the deal. You need to figure out what’s up with the cousin’s friend’s dogwalker’s lawyer.
If we have done a good job qualifying prospects before the proposal stage, true price objections involve value or risk, not strictly “price.” Value and risk are related, of course, but it’s helpful to break them out.
Not understanding the value is probably the biggest problem in sales. For example, suppose you sell software integration services, and a prospect says, “we need to integrate our CRM and our ERP systems. Can you help us?” Your naturally reaction might be to say “yes”, and get into the technical details. The sales cycle seems great until you present the price and learn that you’re 30% more than the next highest vendor.
Now when the prospect asks why you’re more expensive, you can say “we have great people”, “we have lots of experience”, “we use XYZ trendy methodology”, etc. It’s all about you. It probably doesn’t mean anything to the prospect. Whether or not you will do a better job for the prospect, they don’t perceive any differential value. And pricing power is all about perceived differential value. It’s not about the value you perceive in your offerings, but what the prospect perceives, relative to their alternatives. If there’s no perceived difference, of course the buyer will choose the cheaper option. Wouldn’t you?
If you knew the reasons behind the reasons for the project, you can speak in their terms. (“We need to tie these systems together because it takes us too long to get accurate financial reports and our CFO is under huge pressure to get this resolved before the end of the next quarter. Both her and the CIO are on shaky ground if we can’t get this done because we had to restate some numbers last year and it was really embarrassing. It takes a lot of manual work, it’s error-prone, and we have 2 people spending half their time on this, when they should be doing more strategic analysis. We tried to do this ourselves, but we’re new to the CRM system and just don’t have the people and the skills. We heard you have done this kind of integration before and we like that you’re known for the transparency of your status reports, and we were wondering if you could help us.”)
Now you can tell the story in their terms. (“We’re not the cheapest option, but we are the most thorough and least risky. We have dealt with these systems before and we are all too familiar with some of the quirks of the APIs that can cause data inconsistencies. Our XYZ tool let’s you validate transactions in both systems, side-by-side, so your team can see at a glance which types of transactions are syncing correctly. Getting the technical sync working is the easy part, it’s getting the financial semantics lined up that’s hard, which is why we have developers with an accounting background to communicate fluently with your finance department.” Or something like that.)
Now they’d be nuts to go with someone with a 30% lower hourly rate. And if they push back, you can say, “Of course they’re cheaper per hour, they’re just commodity labor. Of course they’re quoting an overall lower price, because they think this is a simple technical integration, but the technology is the easy part. We know from experience that the hard part is mapping the financials properly. If you bring in the cheapest developer, it will look great now, but it will cost you more in the long run because even after they do the technical integration, your problem won’t be solved. Not only will it cost more money, you’ll probably miss your deadline.”
They may, OK, I get it, we want to work with you, but I’ve managed to scrounge up $125K, but you’re asking for $150K, and I just don’t have it and can’t get it. It’s tempting just to close the deal at $125, but you can always walk away if you have a strong enough pipeline. (Just being prepared to walk away is really helpful.) You can also ask if they can see anything you can take out. Most sensible buyers expect to pay for what they get. They are making an investment, not just lighting money on fire. If there’s something in there that they don’t need, though, you can both save money. When I did a lot of consulting, getting data was often the biggest headache. We learned from experience that it was best when we were intimately involved in this process. However, when prospects had price objections, the best place for them to save money was if they could handle some of this themselves. We had to be very specific about what we needed, and we would ask for validation from our buyer that they had a named individual who had agreed to this, and we made sure we got money upfront, so they client was motivated. This might have delayed the initial sale, but prospects respected that we wanted to make them successful. Whatever you can cut out or shift to the client can save money. Just don’t discount reflexively.
When your proposal is out there and you haven’t heard back, it’s natural to get nervous. I had a customer of mine call me in this situation, asking “it’s been a week and I haven’t heard back– should I offer a discount?”
I responded, “well, since you haven’t heard back, they haven’t actually objected to the price, right?”
“So I shouldn’t give them a discount?”
“OK, thanks. I knew that. It just makes me more comfortable to hear you say it.”
Work with your prospects to solve their problems, and, when you get a price objection, don’t panic. It’s a buying signal. If you ask out your crush and they say, “I don’t know about this weekend, how ’bout next weekend?”, that’s a good sign, right? Next weekend might not be good for you, but you can have a reasonable conversation at that point. If you never get a price objection, and never have to deal with any price competition, that’s a really bad sign. Unless you’re heart surgeon, but that’s another story…
p.s. If you want a checklist of 12 critical questions to ask *yourself* (because you have control over that) during the sales and marketing process to avoid price competition, click below.