Mals Musings: Is There Really Such a Thing as Price Pressure?
In todays tough economic climate, almost every strategists plan will talk about an external factor called price pressure. This is designed to communicate the perceived desire of customers to drive down price. Without wanting to disregard this phenomenon, the thought that crosses my mind is: Is this a problem or the symptom of a problem?
Have we got our eyes on the wrong thing concerning this? Price is a topical issue for business executives since it has such telling impacts on sales and profits. Nonetheless, I think most of our concerns with price are misplaced.
If we review our own purchasing habits for a minute, a few truths will be revealed. Firstly, none of us goes into a shop with the desire to pay more than is fair or necessary. Secondly, in an ideal scenario, we would all like a bargain. Finally, we are constantly weighing up the balance between the price we pay and how well the product solves our problem.
Perhaps our customers are more like us than we think. The equation between price and value is not an exact science, and the artistic subjectivity is what lends itself to debate about price. One of the main reasons we hire sales reps is not only to communicate the value we deliver but also to justify the value against the price. An inability to do this leads to a lot of lost sales.
Historically, price was determined by adding a set margin to cost, and in some cases some still follow this principle. For example, some law firms charge an hourly rate of, say, $200 regardless of the case. As a result, sometimes they are overcharging and other times undercharging. Price should be set relative to the problem being solved and the value being delivered.
Price is what the customer pays, value is what they get. Our conversations should be biased towards the latter. The impact of achieving a better price is enormous. A 1% increase in price typically leads to 11% increase in profits, much more than would be achieved via a similar improvement in volume or cost. Price is a key part of our marketing mix and draws the line in the sand that we try to defend and justify.
A recent study of customers purchasing behavior across several industries showed that 90% of customers were willing to pay a premium for some additional benefit. It also stated that only 10% of customers made purchasing decision solely on price. The majority of the market is not price sensitive but they are increasingly savvy at assessing value.
We have to accept that increasingly our customers are employing dedicated professionals to assess the link between value and price. For those creating genuine and fairly priced value, there is no need to panic. For the rest, it might be a good time to go back to the drawing board.
When customers question the price, they are in effect questioning the balance of the equation versus value. It means they do not perceive enough value to justify the price you are asking. It is a query about value, and sometimes clear concise communication about the value delivered can persuade our customers.
The challenge is that too often our discussions end up being about price and, although the customer never forgets our price, they also never remember our value. The majority of our challenge with price is a challenge with valuevalue created, delivered or communicated. Customers are not price sensitive but value savvy.