Exploding the myth, "But we have to justify our prices to our customers!"

by Lawrence L. Steinmetz

One of the oldest tricks in the books is for a customer to demand that sellers justify their prices. Nothing is more absurd. Lets consider this logically.

The basic problem with trying to justify your prices is that the customer does not want you to make any more money when your costs go up. For example, if your costs go up $2, the customer thinks you should raise your prices $2. But such a behavioral pattern would erode your gross profit margin and destroy your business.

A simple example shows why. Lets say you offer a power tool for $99 and your costs are $66, leaving you a gross margin of $33 (see Figure at right). It is from your gross margin that any operating profit is available after paying wages, salaries, commissions and other operating expenses.

If the price of your product goes up $2 (from $66 to $68), and you raise your selling price by $2 (from $99 to $101), you would still have the same gross margin dollars ($33), but you would have a lower gross margin percentage (32.7 percent).

Raising prices only by your cost increase lowers your operating margins. Since profitability can only come from the margin (or spread) between what it cost you to buy the power tool and what you sell it for, you begin to experience profit loss on each sale.

The really disgusting aspect of justifying your price is that it is painfully clear that your customer knows why you raise prices or charge high prices: to make money. Your customer will argue that it is not fair for you to make money on them. So who is it fair to make money on?

The only definition Ive found of a truly fair price is when both the buyer and the seller are unhappy with the price. What appears fair to one person is not fair to the guy on the other side of the order desk.

When a customer asks (or demands) that you justify your price, the best response is to ask why they think you charge the price you charge. Their answer likely will be, Because you want to make too much money. Then ask them what is an adequate amount of money to provide them with the goods and services theyve come to expect from your company.

Anyone who has ever attended a purchasing training seminar knows they teach, 1) Always challenge the sellers price, 2) Always tell the seller their price is too high, 3) Always tell the seller you can get it cheaper down the street, and 4) If you dont ask for a discount, you wont get it.

They also teach buyers to prey on the sellers insecurities. The seller doesnt know whether the customer can get it down the street for less money, whether the competitor down the street has it in stock, can deliver it, on time, as promised, and whether the competitor provides the same general level of services, technical help, support, inventory, order turn-around time, etc., at the same price. Its easy for customers to say your competitor does all these things; its something else for that to be true.

If customers beat you up for lower prices, you are probably inviting and encouraging those actions. How do salespeople invite customers to hammer them for price cuts or discounts? Usually, it is either through wowing or cracking.

Dont wow
Wowing is when you communicate to the customer that you think your price is too high. It happens when you say things such as:

Are you sitting down?

You better buckle your seat belt before I lay this price on you.

Do you think $200 would be too much?

Dont guess youd want to pay $200, would you?

Isnt it a crime the price they charge for this stuff nowadays?

If you communicate that you feel your prices are high, your customer will hammer you for a discount because they perceive you as an ally, working against your employer to get them a lower price. They also think that your prices are too high because if you feel your prices are too high, and you know what this stuff normally sells for, then clearly the price must be too high.

Wowing also comes from things you dont say or, if you do say them, you dont say them well. The No. 1 thing sales reps dont say that gets them into trouble with customers is not to talk about price. Or if they do talk about price, theyre not comfortable. To test yourself, ask yourself this question: Do I like to talk about price? If you said no, its clear you think your prices are too high.

Your customer instinctively knows that if you thought your price was any good, youd be more than happy to talk about it! Thats why one of the first things a customer does is attack you with the question, What is the price? If you avoid talking about price, you are telling the customer that you feel your prices are too high. Our research shows that 94 percent of the time a sales rep will not raise the issue of price. When directly asked the price, 44 percent of the time salespeople tend to avoid answering the question. Why do you avoid talking about price? Only one reason: You feel your prices are too high.

Who are the 6 percent of salespeople who raise the topic of price? Price sellers. People who feel they have good prices tend to lead with price. The customer knows instinctively, if you thought your price was any good, youd be happy to talk about it. When salespeople are uncomfortable or avoid talking about price, they are wowing in the eyes of the customer. And that means the customer is winning, because you have told them you think your prices are too high.

Never crack
Cracking is when the sales rep communicates that the seller might be willing to negotiate the price. Cracking comes from things you say that sound like:

You know I want to work with you on this.

You know youre one of our most valuable customers and we really want to do business with you again.

Let me sharpen my pencil on this deal.

Let me talk to the boss and see what I can do for you.

Let me talk to the boss and see what we can do for you.

What will it take to get your business?

What will I need to do to get the business?

And of course, one of the most popular lines is, Tell me where I need to be.

Any sales rep who uses these expressions (or anything like them) is telling the customer they will negotiate the price. When you tell a prospective customer you might be willing to negotiate the price, you will negotiate your price. Your customer will hammer you harder when you crack. Dont crack!

Acknowledge your price
When a customer says your prices are too high or they can get it cheaper down the street, you can do one of two things: crack (and surely suffer the consequences of cutting your price), or acknowledge that your prices are higher than your competitors and sell under those conditions.

Most salespeople crack to varying degrees. People who sell at top dollar do not crack. Rather, they acknowledge their prices are higher than their competitors and come out selling the customer, rather than talking to the boss about offering the customer a discount.

Any sales rep who wants to sell at premium prices should understand that if you are going to sell at premium prices, you have two requirements: 1) you have to ask a premium price, and 2) you have to hang in there when the customer starts telling you about how they can get it cheaper down the street.

Here are some ways to respond:

Thats right, our prices are higher. Let me tell you why we get more money, or I realize you think our prices are higher. But the reason we get more money is because we provide these services, these benefits, etc.

Fundamentally, selling at prices higher than your competitors comes down to getting the customer to listen to you when you honestly and convincingly explain about your better service, technical help, support, inventory, quicker order turn-around time, etc.

Most salespeople believe customers wont listen to these things, that all they want to talk about is price. Yet people who sell at premium prices learn to use to their advantage the fact their prices are higher than competitors.

They feel good acknowledging that their prices are higher and then explain what their company does that benefits the customer and earns them a higher price.

When salespeople communicate to the customer that they feel their prices are too high (or that they are willing to negotiate the price), those salespeople will end up cutting the price because they havent done a good job of selling. All they do is get orders by having prices lower than their competitors.

A final thought
If price were the only reason people bought anything, only one seller would win: whoever could survive the longest at the lowest price until everyone else goes broke. A corollary is that if price were the only reason anyone bought anything, we wouldnt need sales reps.

In todays electronic world, all sales transactions could be handled electronically if price were the only reason to buy. Selling means getting in the customers face and explaining why they should buy from you, notwithstanding the fact they might be able to get the same product down the street for less money. It requires sales reps to be tuned into every dimension of value offered customers, not just price. n

For more information about Lawrence L. Steinmetzs programs on How to sell at prices higher than your competitors, contact him at High Yield Management Inc., , or by e-mail at .

This article originally appeared in the May/June 2000 issue of Progressive Distributor. Copyright 2000.

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