An alternative to price discounting
It seems that in the face of any form of competition, the response, in almost all of the organisations I have worked with is to either match the price or lose the sale.
Not only is this bad for current profitability it is bad for future profitability – because all the people who have knocked you down on a price tell their relations, friends colleagues and anyone they meet at a party that they can expect to get, the same cheap prices from you. There is evidence of this margin erosion in so many industries. For example the retail margin in the IT industry has gone from over 40% to single figures in the last 15 years). Where does it stop? Can it be stopped?
Well, in a lot of industries it hasn’t stopped and the results are a lot of people going out of business in the last ten to fifteen years.
There is a story about a hairdresser, which shows there are alternatives. It gives an insight into how to turn things around and it applies to any person selling products in any industry!
There was a hairdresser in a small country town charging $25 for haircuts and doing very well because there was no competition in the town.
One day a competitor opened a salon directly across the road with a big sign in its window saying “$6 HAIRCUTS”.
At first the original hairdresser was rattled. He realised that if he kept his price at $25, he’d lose somewhere between some and a lot of his customers to this new competitor but if he dropped his price to $6, he might eventually drive this price cutting guy out of business but perhaps he would go broke trying. He thought perhaps he couldn’t afford to take $19 off his margin.
Three points about this situation.
First he had the standard reaction to competition – meet or cut the price. It’s the most obvious answer. If you disregard the industry and the price difference, I believe most businesses in this country think they would have to either match the price or lose the sale
Second, he really had no idea about his real costs so didn’t know what his margins where or how much he could afford to compete
Third he didn’t know if the value he had been offering was good enough to beat a competitive offer.
Luckily he had a good idea – and a good idea is preferable to having no idea and simply cutting the price!
What the hairdresser did, was he kept his price at $25 and put a big sign in his window that read
“WE FIX $6 HAIRCUTS”.
Isn’t the easiest sale you ever make the person who comes to you complaining about the poor service of your competitor? Just smile and take the money.
The trouble is most businesses fix $6 haircuts for $6 when they could be charging $25
How do you fix the $6 haircut thinking in your organisation?
How about understanding how your customers value your offer?
There are literally dozens of ways you fix the urge to discount prematurely The trouble is we don’t think the value we offer and then we communicate it to the marketplace. So we wonder why people come in and knock us down on price.
Next time your prospec says the price is too high or threatens to go get a “$6 service”, ask him about what he really wants. Tell him all the things he gets for free with his “$25 service” and make the $6 service look like a risky proposition for the customer. Despite the explosion of cheap deals, most people still believe “you get what you pay for”. Unfortunately, most businesses don’t tell them what they get in the offer what they don’t have to pay for.
Brainstorm all the things your customers get that are included in the price of your products and communicate these before they make their purchase decision. Why do we have to wait until a customer gets a $6 haircut before we fix it?