Pricing power refers to a company's ability to set and increase prices without significantly reducing demand for its product or service. It also suggests the ability to withstand competitive pressure and maintain margins. Sometimes a company has pricing power, and other times it’s difficult for them to raise prices.
Here are four signs that you have pricing power:
- Supply and demand: There is high demand for what you sell and there is limited availability.
- Parity: You haven't increased your pricing, but your competitors have.
- Cost of goods sold: You are losing profitability because your suppliers have raised their prices.
- Investments: Your clients demand more and greater outcomes that require you to invest in supporting them.
Here are four indications that you likely do not have pricing power:
- Defections: You are already priced above the market and likely to lose clients.
- Lost revenue: Your large, loyal clients would be difficult to replace.
- No greater value: You cannot create better outcomes than your competitors.
- Commoditization: There are many competitors and alternatives available.
The True Nature of Pricing Power
Many salespeople worry about having a price that is higher than their competition because they believe it causes them to lose deals. However, these salespeople don't lose deals because of the higher price tag. Rather, they lose because their contacts cannot recognize any difference in value between their product and their competitor’s less expensive one. Many salespeople who believe they lose because their product costs more have a product or service that would easily justify the higher price, but they are unable to convey that information. The worst case is a salesperson who doesn't believe that what they sell is more valuable than the alternatives. Another reason a salesperson will have trouble commanding a higher price is that they cannot create greater value in the sales conversation than their competitor.
The truth about pricing is that if something is worth more to your client or customer, they will pay more for it. Let me provide you with an example. A sales manager let their team know that their company was raising their prices, and several salespeople complained. They believed the higher price would cause them to lose deals. The most vocal salesperson was working on a big deal, and the increase would put the pricing close to 4% more than the existing supplier. The sales manager insisted the salesperson add the 4%. Worse was the fact that the prospective client would need to invest an additional 8% to produce the results they needed. The sales manager explained that the truth about pricing is that, if clients are not getting the results they need, they will pay more for something that can deliver better outcomes. This salesperson only believed this to be true after the client’s CFO signed the contract with a price 12% higher than they had been paying.
Investing in Greater Outcomes
All things being equal, buyers will choose a lower price over a higher price. It's only when there are greater outcomes that are worth a greater investment that buyers choose the higher price. You have pricing power when what you sell provides a greater outcome for your clients or customers. There are, however, some factors that will prevent a company or a person from making a greater investment even if doing so would improve their results. Certain companies have constraints that prevent them from investing more, even if it would improve their outcomes. For example, some companies have a model built on having the lowest price in their category. Because they can't capture a higher price from their clients, they cannot pay their suppliers more. In other cases, you might run into contacts who are incentivized to seek the lowest price because of how it impacts their compensation. Finally, the most common reason contacts refuse to pay more is because they believe that their current investment is good enough.
If you can improve your client's strategic outcomes, you have pricing power, but only if you are selling to a person who cares enough to make a change that would improve their results.
The Perception of Value and Pricing Power
One reason salespeople have trouble understanding pricing power is that they believe their company and offerings are, on their own, a source of differentiation. This isn’t true. On its own, a company, product, or service cannot create an advantage. In Eat Their Lunch: Winning Customers Away from Your Competition, you will find a method called Level 4 Value Creation™. The idea is to focus on the strategic outcomes your clients need. A salesperson will have difficulty acquiring a higher price if they are unable to tie that greater investment to the client’s most important outcomes.
The person who is going to sign a contract and pay for what you sell needs to understand that the value you create is worth the money they need to spend. Decision-makers and leaders are pursuing strategic outcomes, and they walk out of meetings with salespeople if the conversation isn't tailored to address those concerns. Remember that decision-makers are not paying for your “solution;” they are paying for the results it can provide. If your product or service can deliver the strategic outcomes they need, they will pay more.
Your pricing power is always a perception of value. Because different people find different outcomes important, what one decision-maker will pay more for may not be something another stakeholder is willing to invest in. You can improve your ability to command a higher price by increasing the perception of value.
It's nice when you have natural pricing power. When you do, it makes sense to use it, but when you don't, you can still sell at a higher price or raise your prices by helping your clients improve their strategic results. When you can explain how your client’s greater investment will produce the results they need, they are more likely to recognize the value that comes with a higher price.
The more value you create for your contacts in the sales conversation, the more credibility you will have when discussing the higher investment.
