Have you been part of a discussion where everyone at your company believed that their offering provided more value than a competitor’s, but the customers just don’t see it? The marketing team often thinks sales doesn’t know how to sell the value. The sales team thinks that marketing is clueless. And the pricing team is trying to figure out how to make the best of it. Fortunately, there are ways to communicate value effectively to customers. (We won’t go into them in this article. See our paper on Value Price Waterfalls for more information.) Unfortunately, there are times when the value simply isn’t there. How should you compete and how should you price in those situations?
The simplest thing to do is simply match the competition’s price, regardless of any extra value you feel you provide. This can help you close a few deals, but it erodes your profitability and the image of your company. When the buyers who really do see extra value in your offering find out that other companies received deeper discounts, they will be back demanding the same thing.
The other approach is to unbundle value in conjunction with lowering price. If you walk into a Mercedes Benz dealership, get a quote on a $50,000 car, then tell the salesmen that you can get a very similar car from Kia for $20,000, the salesman isn’t going to offer you the Mercedes for $20,000. He may show you to the used car lot, where he can sell you a car similar to the Kia for $20,000.
While this example sounds absurd, analogous negotiations take place every day, and frequently end with the equivalent of the Mercedes dealer selling the car for a 60% discount.
How can you tell if the customers cares about your added value? When you point out your better service, better reliability, or other attributes you think the customer should value, and they say they don’t, take them out of the deal.
If the customer doesn’t want to pay for your higher level of support, offer to match the competitor’s price and their level of support.
If the customer claims that they don’t value the extra testing that goes into making your parts more reliable, offer to save them money by moving them away from a premium-grade offering.
If free express shipping really doesn’t seem important to the customer, charge for shipping. Items like shipping are particularly interesting unbundling opportunities because the shipping charge and shipping discount may occur “off-invoice”, which frequently means that companies don’t track them and don’t subject them to the same approval requirements as invoice prices.
How does this play out in the real world? I recently got to see this strategy in action in a meeting with a pricing director for a distribution company. A large deal was on the line, and he got numerous phone calls during our meeting that he had to take. He would retreat into a corner and speak in hushed tones. Then he would come back to the table and give me an update. The customer was pushing back on the company’s premium pricing. They had a lower-priced alternative and they weren’t buying the extra value pitch from the sales team. (In my opinion, the sales team was right. There was good differential value. But my opinion was not the one that matters.) On the fourth call, the director came back all smiles. The customer had accepted the deal at a slightly lower price, but without some of the logistical support that they did not value. While the top-line revenue was slightly below the original deal size, the profit actually went up, since the customer did not require some of the costly value added services.
If you haven’t already, train your sales teams to unbundle appropriately, and configure your sales force automation and pricing software to highlight opportunities for unbundling.