Pricing discipline is the key to protecting your business model and sustaining profitable growth. Pricing too high, or too low, can kill your business over the long term, or really quickly.
Pricing Too High
Some companies with a low price model make the mistake of charging some client more specifically because the client is naïve. They gouge the customer because they know that the client doesn’t know any better.
They put the transaction before the relationship. This is always a mistake, and not just when you expect repeat business from that customer. It’s also a mistake because word-of-mouth is so powerful. Word-of-mouth is powerful when you do great work because it helps you acquire new clients. But it’s even more powerful when you cheat someone because they will tell others how you took advantage of them.
At some point, your client will learn, likely from one of your competitors, that they are receiving a raw deal. There is no coming back from violating your client’s trust to make a few dollars more (dollars you would have made over time had you put the relationship before the transaction).
Pricing Too Low
The lack of discipline when it comes to pricing is more often the other direction, when companies with models that require that they capture a higher price point take in business at breakeven or a loss.
Profits are sanity, sales are vanity. Revenue without the accompanying profit is empty calories; there is no nutritional value. It doesn’t help you grow, and it distracts you and your company from doing work where you can be profitable. A higher price is how companies who differentiate on value capture the money they need to execute and deliver for their clients.
It might feel good to win an opportunity, but breaking your pricing model isn’t an accomplishment worth celebrating. A lack of pricing discipline is a step down a slippery slope. It isn’t worth breaking your model to win a big account at breakeven, or a margin that doesn’t allow you to execute for them.
Keep the Model Pure
There is no business model in which you lose money on transactions and make it up on volume that doesn’t also result in your quickly going out of business.
Your higher price is an indication of the greater value that you create. The pushback you get from clients is not really that your price is too high, it is that they don’t yet know how it makes you worth paying more to obtain. Sometimes your prospective client doesn’t believe the difference that makes you different is worth paying more. Helping them see otherwise is called selling, and it isn’t easy.
Breaking the model is about trying to make selling easier. And that is never the right answer—especially when you break your model.
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Filed under: Sales