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When should you consider lowering prices to increase revenues?

July 10, 2014

2 ©2014 PROS, Inc. All rights reserved. Confiden>al and Proprietary .

Today’s Presenters

Jacqueline Davis Sr. Strategic Consultant

[email protected]

Jeff Robinson VP Strategic Consulting Services

[email protected]

When should you consider lowering prices to increase revenues?


Today’s agenda

Why do most companies consider lowering prices?

What are the dangers of cutting prices?

When should you lower prices to increase revenues?

What should you consider if you do lower prices?

1

2

3

4


The Demand Curve

Price

Quantity


Why do most companies consider lowering prices?

Let’s take a poll!


For which of the following reasons is your company most likely to lower prices?

•  Attract sales from new customers

•  Increase sales volume from existing customers

•  Lock customers into a contractual relationship

•  Address customer request for a lower price

•  Bring prices in line following a market-wide decrease in prices


What are the dangers of cutting prices?


Profit margin impact

•  1% increase in price leads to profit increases of 8-15%

•  Small decreases in price can result in large decreases in profits

Dangers of

lowering prices


Brand impact Dangers

of lowering

prices

•  Discounting high value products may conflict with brand image

•  Customers may equate lower price with lower quality or value


Impact on negotiating leverage Dangers

of lowering

prices

•  Repeated discounting undercuts your value message

•  May signal to other customers that price is “up for discussion”

•  Conversations about price often cloud conversations about value


The dreaded price war Dangers

of lowering

prices

•  Lowering prices to win or steal business from a competitor can result in a price response from a competitor

•  Competing on price can lead to spiral down pricing among the competitors

•  Market price levels can suffer


Price is typically not the main reason non-customers aren’t buying from you. In customer surveys, we’ve heard the following:

Price may not solve your sales issue Dangers

of lowering

prices

“We did not know the company sold those products”

“Their service quality was poor/ unsatisfactory”

“We have a contract with another vendor”

“We don’t like the sales rep”

“They don’t stock enough of the products we buy”

“Their product quality is poor”

“Their systems don’t interface with ours”

“It is not easy to shop and order from them”

“They don’t have enough product support expertise”


When should you lower prices to increase revenues?


The General Rule:

Avoid lowering prices unless you absolutely have to in order to accomplish your strategic goal


When might you have to lower prices?

Your price is higher than perceived

value

Switching costs are high

for target customers

Need to reach a

lower-end market

segment

You need to incentivize

customers to try your

product or service

You want to provoke a winnable price war


•  Your price is significantly above competitive prices for equivalent products

•  Be sure the problem is price, not a failure of sales, marketing, product, or service

•  Think about how the target segment really values your products’ benefits

You are losing significant amounts of business due to price

When to lower prices


•  High switching costs make your product’s TCO exceed its price

•  Separate “conversion bonus” from product price to avoid creating artificially low price benchmark

•  Tie conversion bonus to full conversion and sustained volume

You need to remove a financial obstacle of high switching costs



•  Low-end segment may not need or value all the bells and whistles

•  Better to target low-end segment with a new product/ service offering

•  Deploy integrated sales and marketing strategy to support pricing strategy

You need to reach a “lower end” market segment



•  When customers are already happy with existing offerings

•  When effective sales and marketing is not enough to achieve trial

•  Make sure “trial discount” is of a limited time and scope so not to dilute existing sales or start a price war

•  Always in conjunction with effective marketing and sales campaign

You need to incentivize customers to try your product or service



•  The only winnable price war is one where you can outlast your competitors

•  Typically, you must have a substantial and sustainable cost advantage to “win”

•  Winning at what cost? Does anyone ever really win a price war?

•  Things often get way worse before they get better— not for the faint of heart

You want to provoke a winnable price war … (don’t do it)



What should you consider if you do lower prices?


Common scenarios for lowering prices

Attract volume from

new customers

Higher volume from

existing customers

Lock customer

into contract

Customer request for lower price

Market-wide price

declines


•  Lower price alone unlikely to incent all but the most price-sensitive prospects

•  Need to address specific reasons they’re not buying from you today

•  Sales and marketing execution is critical

Attract volume from new customers A few

things to keep in

mind


•  Consider other levers besides price to increase share of wallet

•  Understand why customer maintains

multiple vendors

•  Limit price incentive to specific customer segments and behavior targeted

•  Incentive needed to keep an existing customer is typically lower than incentive to win a new customer

Increase volume from existing customers A few

things to keep in

mind


•  Understand reasons for customer’s current buying behavior

•  Make lower contractual price contingent upon incremental business

•  Consider full incremental margin impact of contract

Lock customer into a contract A few

things to keep in

mind


Understand why is customer requesting a lower price?

Address customer request for lower price A few

things to keep in

mind

Aggressive pricing by a competitor?

Just fishing for a low

price?

Maybe confusion about a

competitor’s offer?

Determine if issue can be addressed through communication of value differentiators before resorting to lower prices


•  Want to maintain existing price position and not disrupt customer buying inertia

•  Proactivity can enhance customers’ perception of price integrity

•  Good communications can engender customer good will and set expectations that prices may go back up in the future

Align with market-wide price declines A few

things to keep in

mind


Checklist to ensure effective execution

Define objectives for price decrease

Identify obstacles to achieving desired outcomes

Plan effective sales & marketing communications

Segment customers to localize the impact of price decrease

Consider scope of price change – match the way your Customer buys

Consider Customer switching costs to anticipate behavior

Anticipate and prepare for competitor responses

Provide effective sales training and enablement


Final thoughts

Lowering prices indiscriminately in the hopes of increasing revenues seldom succeeds as a strategy

1 There are cases when lowering prices might achieve your strategic goals, but even in those cases success really depends on execution

3 If not planned and executed carefully, price reductions may adversely impact company’s margins, brand, and customer relationships, and hurt negotiating leverage

2


Questions?

Jacqueline Davis Sr. Strategic Consultant

[email protected]

Jeff Robinson VP Strategic Consulting Services

[email protected]

Also, please feel free to reach out to Jeff or Jacqui individually

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