Last week, we looked at how preparing a pricing battle plan increases your sales and profits while decreasing your stress. This week, let’s look at another example, a service business with about 10 professionals. To protect the guilty, we’ll call it Smiley Services, which helped companies with various process and legal issues. Service companies often have some interesting pricing challenges, and Smiley had them all:
- Customers tend to focus on hourly rates, rather than total project cost, let alone value for money.
- It’s easy to offer deep discounts to get people off the bench and back to billing.
- Customers are nervous because the whole reason they need a service is because they don’t know how to do something themselves and they may not even know how to evaluate providers.
When business owners get back on their heels, they find clients eager to challenge them on hourly rates. They end up working long hours at lower rates, or sometimes for free. What’s worse than not getting enough work and not making enough money? Working too much and not making enough money. This ends up destroying a lot of small businesses, because the love for the work that caused the owner to start their venture in the first place dries up. As the downturn hit and clients cut back, Smiley’s owner found herself working more for less money and she had to reduce her staff. She felt she provided good value, but was losing business to competitors with lower rates. In addition, while her nominal rate was pretty good, she ended up discounting it during the proposal phase, which reduced revenue by about 15-20%, but reduced profit by almost 50%.
So we put together a battle plan.
We started with #3. Smiley’s founder sensed hesitation in the buying process, and often countered with discounts. However, this hesitation is because the buyer has to make a leap of faith that the provider can deliver. Lowering the price does not lower the perceived risk– it may even increase it. Companies may not come out and say “I’m not sure you can deliver and I’m worried about my career if you don’t.” They may even say that price is the problem, or mumble something about you being more expensive. So first, we decided there would be no discussion of discounting initiated by Smiley. If the customer asked for a price break, there would be a discussion of value (issue #1). If the customer still wanted to discuss price, Smiley would discuss lower priced options (see below for more discussion of issue #2). If the customer still complained about price, Smiley would ask “What price do you want? And if I gave you that price, would you sign today?” Note that you don’t actually have to give them the price they want. You just want to know if price is masquerading for something else. Maybe they don’t really have budget. Maybe they are trying to “lock in” a good price for the future. Maybe they want to use your quote against another vendor. Find out, but don’t commit to any discounts until you know if that’s really the problem. If they want a price break, ask for something in return. The best thing is to reduce the scope of the project. If this is not practical, ask for payment upfront, early payment, a video testimonial, or something else that shows both parties are collaboratively creating and sharing value.
Now that we knew we were not going to just start throwing money at risk, we had to address customers’ concerns with hourly rates. There are a few projects that were standardized enough that Smiley could do them on a fixed fee basis. Smiley raised the price of these. Some work still had to be done hourly, however, and Smiley’s owner had trouble quoting her rates confidently. She sounded almost apologetic asking for money. If you want to be a premium provider, you have to give a premium experience, and that includes quoting your rates and prices very confidently. If you walk into an Apple store or a Lexus showroom, you won’t find salespeople apologizing for the price. They simply quote it. And if you say “but I can get a PC for half the price”, they can talk to you about why their offering is better. You can agree, and buy it, or disagree, and go elsewhere, but they aren’t going to sell you the Mac at the PC price, or the Lexus at the Honda price. When you are confident about your pricing, that shows that you’ve been around the block a bit and increases the customer’s confidence in you. So the whole idea on issue #1 was the simply quote the price. (She practiced in front of a mirror.) If customers mention cheaper competitors, never apologize for your price. Explain that of course they are cheaper, because of x, y, and z (in this case, because Smiley used industry veterans and competitors used recent college grads). Note that the customer still has a choice. They may decide that cheaper is better for them.
Before you let them go, though, let’s get to issue #2. Rather than simply discounting, especially when benchwarmers are burning a hole in your cash reserves, think about some ways to transform the project to make everyone happy. Maybe the company really wants to go with you, but simply doesn’t have the budget. You can break the project into smaller chunks and do them sequentially. Or perhaps parts of the project are mission critical and others are on the checklist but not really as important. Smiley’s battle plan for price objections therefore included ways to change the scope of the project without undermining pricing integrity. In addition, Smiley developed ways for customers to save money on non-urgent projects. Smiley developed a retainer plan and offered discounts for work with more distant deadlines. This way customers could save money by planning ahead, and Smiley benefited by doing work in time slots between more pressing projects.
How did it go? Smiley’s owner has not discounted outside or her defined plan, or lost a deal. Her passion is back, and she added “actually having a pricing plan paid for my new patio.”
great post. as someone who works for a service company, I found it really helpful.