Let’s say you and your competitors both sell the same thing to your customers. You both buy the same raw materials to develop your product. You both pay $100 for those raw materials. You sell your product for $150, and your competitor sells theirs for $130. Your higher price is enough to cause some buyers to buy from your competitor. All things being equal, they’re right to pay the lower price.
But all things are not equal. The product that you sell is superior to your competitor’s. You invest more to develop the final product, it is of far superior quality, it lasts longer, and your customers don’t have to buy it as frequently. More still, your sales team is out teaching your customers how to get even more out of the product and saving them money. Your competitor has a lower price, but you have a lower cost. Why? because you create greater value.
But you lose a significant amount of deals to your competitor. Some prospects don’t understand how paying more can cost them less. You are faced with a choice. You can either more effectively sell the value you create, or you can eliminate price as an objection. It’s easier to lower your price than it is to sell better.
You match the $130. Now you have less profit to support your sales model, and you can no longer spend time teaching your clients how to save money. You also have less money to develop the product the way you had been, and so you and your competitor are now equal.
But every action has an equal and opposite reaction. Your competitor was selling lowest price. That was their business strategy. So they lower their price to $120, taking back the price advantage on which they were competing. Your customers still demand the same level of service and support, and you don’t understand how your competitor can deliver anything of value at that price. But now you’ve given up competing on the greater value you create, so you match the $120, imagining there is no way your competitor can lower their price again. But you are wrong. They lower their price to $110.
This is how sales organizations, salespeople, and whole industries are commoditized. If you have chosen low price as your strategy, then you need to compete by eliminating costs and providing the lowest price in all cases. But if you have decided to sell the additional value you create, the value that makes you different, then you need to focus on selling more effectively.
Reducing your price to increase your revenue is one way to go about increased sales. But that choice comes with reduced margins. You may indeed end up increasing your sales and selling more while building a far less profitable, and less valuable business. And you might also build a business that doesn’t make a difference in the end.
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Filed under: Sales