Marketing manager: “I’m really upset!”
Underling: “Why?”
Marketing Manager: “We just lost a $750K order to BadCo over a measly $35K difference in price.”
Underling: “Why couldn’t we just match their price?”
Marketing Manager: “We have a cool feature that enables real-time inverse quadratic metrology (RTIQM). It gives us a performance advantage. But it also adds some cost to our system so we weren’t able to come down as low as they did on price.”
Underling: “Oh, so the customer just didn’t have the ability to pay the extra $35K for the RTIQM?”
Marketing Manager: “No, they had the money. They had budgeted $800K for this purchase. They were just fixated on price. That’s why we lost.”
Underling: “Are you sure that we lost on price? It sounds to me like the customer didn’t see any value in our RTIQM capability?”
Don’t Believe CRM
A scan of your Customer Relationship Management System (CRM) probably indicates that price is the primary reason that you lose orders. Don’t believe it.
Nobody is cooking the books. It’s just that when a sales person learns that the competition won the order with a lower price, he or she will likely record the reason for the loss as “price.”
If you take this data at face value, you’ll start driving the organization to lower gross margin expectations or spend a whole bunch of money on value engineering. But price probably isn’t the real the issue.
The Only Time You Lose on Price
There is one rare case where you can lose on price. It’s the case where your lowest price exceeds the amount of money that the customer has available to spend. Here, you have lost on price if the competition met the available funds threshold. You’ve also lost on price if the customer was unable to buy at all because there were no offerings in the market that met their threshold.
In the capital equipment world, the most common capped-funds scenario is the grant-based purchase. For example let’s say a university has applied for and received a $1M grant to purchase your type of equipment. If you cannot meet the $1M threshold, you will lose on price.
The Real Reasons You’re Losing
All other losses can be categorized as one of these two loss reasons:
- Customer didn’t value your differentiation.
- Your value was not differentiated.
The first is the scenario played out in the opening dialogue of this article. Your product has unique capabilities. The customer acknowledges your uniqueness, but doesn’t value it.
In the second, the customer sees no difference, between your and the competitor’s offering. So the customer just purchases the lower priced item. In both cases, you’re not losing on price. Instead you’re failing to provide value for which the customer will pay a premium.
What to Do
Your first reaction to price as a loss reason in a CRM entry should be skepticism. Try this. Extract all the loss orders from CRM where price is identified as the culprit. Then re-categorize each as one of the following:
- Price exceeded available customer funds
- Customer didn’t value our differentiation
- Our value was not differentiated
For those that were lost because your price exceeded available customer funds, you really did lose on price. If you plan to capture customers like these you are going to need a differentiated product at a price point below this market’s price threshold. For those where your customer didn’t value your differentiation, or didn’t see any, you’ve got three options.
- Identify a market segment that sees and values the differentiation your product already has.
- Remove the differentiated, but not valued feature to lower cost.
- Gain a deeper understanding of how customers of this type value products like yours. Then seek to differentiate on the things that drive value for your customer.
It’s very important that you’re not cavalier about how you deal with orders that on the surface appear to have been lost on price. The knee-jerk reaction to losing on price is usually a product cost reduction program. This is almost never enough. You will need to differentiate on the things that the customer values. The insight for that is born out of an intimate understanding of how the customer benefits from buying a product like yours.