PRICING ARTICLE

Striving for Price Competence in a Competitive Environment
By Liz Lynch

When companies tell me their products or services are priced competitively, I push back and say, "Fine, but are they priced competently?" There's a world of difference. Price competency, which I preach to my clients, is about aligning your cost structure, competitive position and customers to select a price that is profitable for you and rational for the buyer.

The Slippery Slope

When you base price on what your competitors charge, you slide down a slippery slope:

-> First, you undercut profits and perhaps lose money on your products by not charging enough for them. Often you're forced to add other differentiators - extra service, more choices, faster delivery - that you aren't able to charge for.

-> Next, you fail to differentiate your product. When I give talks and ask participants about their pricing strategy, many tell me they aim to price just below the mid-range of what everyone else is charging. Essentially what they're saying to me and to the marketplace is that their product is the same as everyone else's.

-> Because of the lack of differentiation, you slip into a poor competitive position. You think you're leveling the playing field by leveling your price, but what's really happening is you're making it more difficult to stand out from the crowd.

-> So, to gain an edge, you lower price and further cut into profits, starting this whole cycle over again.

Pricing Competently

On the other hand, pricing competently means balancing three factors to get the price you want:

1. Cost Structure: Understand that if you need to price below what it costs to create and deliver the product, you are either in the wrong business or going after the wrong customer. If you wonder how competitors can price lower, consider that they may have completely different costs based on where they're located, what other services they offer, how they sell, how they service, and what margins they're willing to accept. Don't assume they want to make as much as you do or that they're well managed. They might be knowingly or unknowingly underpricing their products, and the last thing you'd want is to follow their lead.

2. Competitors: Pick your competitive position or it will pick you. Do you want to be evaluated with the rest of the crowd, or do you want to be the only choice in your class? Your price speaks to your value. When you price at parity with your competitors, you are telling buyers that there is no difference in value. Price higher and buyers take notice. They wonder what they'll miss if they go with one of your competitors. Make sure what they'll miss is something they care about - convenience, quality, consistency - and they'll pay for it.

3. Customers: Take into account not only the kinds of companies you sell to, who have to be able to afford what you sell, but also who you are selling to in the company. Buyers of high-priced products are hooked with emotion first. Then they justify their purchase with logic. If you're dealing with the purchasing department, you'll always get beat down on price because that's their job. They're often not the ultimate beneficiary of the product, so they remain detached from the purchase. If you sell to higher levels in the company, however, you'll appeal to deeper, emotional states. A sales trainer I know has little trouble selling six-figure programs even though his competitors' are priced in the low five-figures. He sells to the CEO, not to HR. Whenever a new prospect tries to delegate him down to HR, he refuses to go. He says to the CEO, "Look, increasing sales is a strategic imperative for your company and this is a six-figure decision. Do you really want to hand it over to HR?"

Aligning the Factors

In setting your price, aligning your cost structure, competitive position and customers is key. You can't be the low-priced provider if you don't have a low cost structure. And even if you have low costs, you can price high if you go after the right customers with a relevant value story. You can always come down from a high price, but it's virtually impossible to raise a low one. When you consider costs, competition and customers carefully, it may make sense not to be price competitive at all.