low price does not equal value
I’ve worked, at management level, in a lot of companies and I will roundly dispute your contention that you HAVE to price cut to maintain your customer base. Nothing could be more wrong. Research into humans buying habits and behavior continually show that people more highly value things that cost them more. When you cheapen your product it becomes a downward spiral you can never win. As your profits decline, you have to cut costs and your ability to service your customers eventually drops to a point where they get fed up and leave you, either for somebody cheaper (who will also fold soon due to unsustainably low margins) or to someone who is more costly but gives better service and/or fewer hassles.
In every company where I have been given the authority to quote jobs and to control prices, the first thing I have done when taking over my division is to set our prices where they should be – which almost always has meant raising them. Yet I have never failed to INCREASE our volume of business as well as the margins we made on it. People want “value” which is not just low price. Once you demonstrate to them that it is more cost-effective in all ways for them to pay the fair price for a combination of goods and services, while establishing a rapport with them that takes into account their individual needs, you can get the price you need to stay in business. And my business is construction and maintenance, one of the most cut-throat, price constrained lines of work you can imagine.
Whether I was in inside electrical sales or overseeing crews on a maintenance contract at a major manufacturer’s facility, I never let a customer walk away from a sale because he/she told me they found my “product” cheaper. I would always initiate a conversation about our quote versus the competitor’s. I would say, “setting aside price for a moment, what are your critical expectations for what you are buying here?” Usually it was things like on-time delivery, quality of installation, lack of surprises or hassles and (this one is important) making themselves look good to their own bosses. In most cases I could demonstrate that my crews (or my factory) had a better record on all those counts including safety and level of expertise. In fact in some cases I would guarantee such things as specific delivery times, offer discounts for early invoice payment and even an added cash refund if we failed to make any commitments on milestones or technical issues.
I took over one crew on a major manufacturer’s international HQ and production site – there were 6 other contractors on site with whom we had to compete for maintenance and construction jobs in the plant. Though we had the lowest rate per hour of any of them we struggled to keep a share of the work. The previous superintendent had kept desperately lowering the rates, hoping to get more work. After studying the on-site politics and talking a lot to the client’s various area engineers who issued the purchase orders, I discovered that though they may have said “give me your best price” in all the requests for work quotes, their 3 primary concerns for getting their jobs done were timely completion, perfect safety and that the work looked nice (the plant had frequent tours of stakeholders.) So I raised our prices across the board to be higher than the other 6 firms. But I didn’t just hand the engineers a new price list. I gave them a carefully written preamble that detailed how we had maintained such a perfect safety record on site that we were only one of two permitted to work in a Classified “exoplosive” zone of the plant, and we had been tapped to train the second contractor and to consult with the plant managers in devising their overall safety procedures. I listed the major jobs we had done over the previous 5 years pointing out that we had met or improved upon their production milestones in every case. I also demonstrated that I had the most skilled and well-trained crew, with the highest journeyman to apprentice ratio, that we had spent over $20,000 training those guys in the type of programmable controllers the plant used and we were not only maintaining an on-site and well-stocked service trailer but had added a radio system with repeater so the engineers could have who and what they needed wherever they needed in the vast plant within minutes. I promised to set up one personal point-man technician for each engineer. Then, once I had demonstrated why we were the “quality” go-to guys on site, I attached the new pricing and rates list.
Not only did nobody drop us, they actually more than doubled their orders to us over the next 3 years, even using us as the standard by which they expected other contractors to perform. Corporate policy required them to keep the other contractors in play, but the engineers often did so grudgingly and only when we were too busy to accommodate them (though some would postpone their projects until I had someone available.)
I also NEVER told a client that a tough project they presented to me was “no sweat, sure we can handle that, no problem…” That sort of bluffing “confidence” gets you nowhere fast. If you say something is easy and you stumble, you’re a jerk in their eyes. If you pull it off, you get no accolades, just a spoiled customer who thinks they can snap their fingers and get whatever they want each time. If the job was tough (even only mildly so) I would state so, with good explanation as to why it would be a challenge: “your timeline for this is way too short”, “you don’t have your full design decisions made yet”, “you are pushing it to expect to get that done over the winter”, etc. But after laying all this out, I would then state that if they work closely with me, we can try our darnedest to get it done.
This serves several purposes. First it puts doubt in their minds regarding our competitors who have all said “oh sure, we can do that, no problem”. The client is left wondering: do those other bidders really understand the complexity of this job? Are they just blowing smoke? Am I going to get shafted halfway through the job and look bad with my bosses? Many times these doubts were all that were needed for me to get the job, even at a slightly higher price (I would usually explain that I had contingencies built into the job and if we things went well and we didn’t need them, he would get a credit at the end.) The second purpose is that alerting the client to the fact that the job is a challenge, not a cake walk, puts them in a better frame of mind to work with you to mitigate problems. The third purpose is that if problems arise or the schedule slips, then they knew to expect it and have to acknowledge you warned them. They will always be more willing to work with you to solve issues that arise if you did NOT tell them “no problem” at the outset.
The fourth and final purpose to this strategy is when you DO make that deadline and everything turns out well and you can credit them the contingencies you didn’t have to use, you are a big hero. And you now have a grateful client who feels like they can rely on you to be upfront. Your performance even enables them to justify a higher cost to their own bosses; “this was a tough job but they got it done – the extra cost was worth it”.
These strategies work – perceived value, personal service, honest communication and quality trump discount pricing if you know how to market it to your customers.