I hear even highly-respected consultants express dangerous misconceptions about price and discounting. I suspect it’s because so many people took basic economics to heart without digging deeper into the underlying assumptions or learning the true role of pricing. No thanks to economics, we often apply the supply/demand relationship we learned in our introductory Econ courses. You could not make a bigger mistake.
The demand curve is a foundational concept in economics. The law of demand states that lower prices incentivize higher units demanded. The principle is correct, but only under artificial conditions. Rather, my decades of work in pricing and value have driven a conclusion that most businesses grossly mis-apply supply/demand analysis in the real-world.
I’ve met multiple sales people, sales leaders and CEOs who rationalize discounting. Presumably, they are relying on a misunderstanding of the demand curve. This is far more than mere misinterpretation of the law of demand; it kills businesses.
Let’s review: the demand curve represents aggregated behavior of for a commodity: as price falls, additional customers appear, willing to pay the lower price.
Does dropping your price really help win that deal?
The demand curve correctly states that value for your offer is different for each individual. Prospective customers compare any given price against value. As price drops, demand increases when a customer who formerly perceived inadequate value, now perceives a positive value from purchasing. Unfortunately, when you capture a sale from that marginal user who perceives borderline value , you simultaneously just trained all of your higher-value users to expect discounts.
While the perceived value of a product or service can – and is – often individual, it isn’t fixed. Value is a perception, and perceptions change. Perceptions of desirability of an outcome, adequacy of substitutes, and environmental/extraneous considerations change constantly. In fact, this is why the sales profession exists.
Drop your price without knowing your value? Stop it!
The demand curve assumes that your product or services is a “fungible” commodity: all units of the same product or service are identical replacements for each other.. That is, it assumes that you have no differentiation. This is ridiculous. For instance compare the price of a one ounce pure gold bar from a no-name mint vs. a one ounce Krugerrand. The demand function you learned in school ignores differentiating features, branding, distribution, availability, support/service, durability, etc. This was done so that the math works more easily. While there is some great advanced economics work that incorporates differentiation, you probably never learned about it.
Another way that the real world differs from economic models: Customers don’t have perfect information. When your customers don’t know about all alternatives, don’t fully understand value-in-use, or all the ways that your offer provides value to them and their company, they don’t make “economically efficient” decisions. Imagine a seller discounting their service — with ROI in the hundreds of percent – which a customer will receive, but doesn’t realize it. That discounting behavior isn’t moving anyone from a non-buyer to buyer…it just makes them a discount-accustomed buyer. Or worse, makes them question the value which they had placed in the service.
For these reasons, you should shift a marginal customer who perceives inadequate value to tip in your favor. This avoids the collateral damage to your existing customers willing to pay your existing price.
Your price isn’t just the effect, it’s the cause.
Your price isn’t just “that quantity” a customer weighs against your offer’s value. Because of all of the differentiation floating about in the world, consumers use price as an indicator of value. Given this, if you are the new CEO of a company that didn’t discount for forty years before you entered the job, what do you think you’ve done to the corporate brand when you encourage discounting to “win” deals? If your service regularly achieves ROIs in the hundreds of percent, what business do you have discounting?
My work on value and price
When I help clients, we usually find that their offers are priced well below true value. This doesn’t necessarily mean we raise prices, but almost always helps them see that discounting is merely shipping profit dollars out the door to their customers.
Don’t be “that guy”.
The only kind of value there is: customer-perceived value. It’s impossible to have value that the customer hasn’t validated yet…you don’t have value; just a value proposition. Customer-focused conversations and interactions which get your prospects to validate value is the difference.
I’m happy to help you on your journey to understand how you can capture the value your company earns in the form of pricing power. Comment below or reach out to me directly to discuss in more detail.
To your success!