B2B selling is not getting any easier. Competitors are as aggressive as ever, customers are under pressure and are passing those pressures on to you, and your quotas are certainly not getting any lower. In this environment, the price battle is getting ever harder to win, and it’s extremely tempting to default to a lower price to win that big deal.
But if you’re armed with the right knowledge you can still win the price battle and preserve your margins. That’s because the key objective in this war is not your dumbest competitor’s pricing; it’s not some specified percentage over your costs; it’s the buyer’s willingness to pay (WTP). WTP is not a number—it’s a range, and you can strongly influence the extent of that range through your mastery of two topic areas: finance and psychology.
WTP is a function of (economic utility and psychological factors.
Economic Utility: In business to business sales, utility is the unquestioned number one factor that determines willingness to pay, because it is the fundamental reason that customers spend and invest, and it is often the factor over which you have the most objective and tangible control.
In economic terms, an asset is worth the present value of its differential cash flows. In plain English, that means that business buyers pay dollars in the expectation of getting more dollars in return, or preventing a greater loss.
The expectation of future cash flows is based on how the buyer uses what you sell to either increase cash inflows or reduce outflows. In sales terms, that means that your effectiveness depends on a) an intimate knowledge of how your customer can increase revenues, cut costs, or reduce asset investment, and b) being able to quantify and gain agreement in measurable financial terms.
That in turn requires financial and business acumen, and in my wholly unbiased opinion the best source for that is my own book: Bottom-Line Selling: The Sales Professional’s Guide to Improving Customer Profits. It’s a “mini-MBA” that is specifically written for salespeople, which means there is nothing in it that does not pass the so what test.
Psychological factors: While economic utility sets the anchor from which the buyer perceives value, there is still a lot of room for perception (subjective factors), especially for products or services that the customer does not buy on a regular basis. If they’re buying supplies or raw materials, their expectation of the regular price is firmly set, but if they’re buying consulting services or a complex production system, they have very little experience with what things “should cost.”
What things “should” cost is a fascinating field in psychology. Here are just a few of the more important factors that affect the psychology of WTP:
As Amos Tversky said, we don’t choose between options, we choose between descriptions of options. For example, you probably would not consider it fair if a store told you that you had to pay a surcharge for using a credit card, but what if they offered you a discount for cash? The point of all this is that how the decision is framed has a significant—often decisive—effect on the final decision.
One of the most important frames in pricing psychology is loss aversion, where potential losses are weighed more heavily than potential gains. Highlighting the risks of buying a cheaper product through well-designed questions can shift the focus away from price during your sales conversations.
Psychologist Dan Ariely describes an experiment in which participants are first asked to write the last 2 digits of their social security number, and then to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent more. The simple act of thinking of the first number sets an “anchor” that strongly influences the second, even though there is no logical connection between them.
Suppose you are proposing a solution to a problem, which will require a $500k investment. In your presentation, it’s helpful to show that you looked at several options, but be sure to list the most expensive option first. $500k will seem less if you first tell them you considered an option that would cost $700k.
Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a batch of slow-moving turquoise jewelry. Before she left town, she left a note for her assistant to mark down all the prices on it by ½. The assistant misunderstood and doubled all the prices. The entire lot sold out within days.
The old idea that you get what you pay for is so strongly ingrained in our minds, that our perceptions of value and even utility can become self-fulfilling prophecies. Studies show that the price of an aspirin can actually affect the level of reported pain relief , and even experts’ opinions of wine quality are swayed by the bottle price. Think about this before you decide to lower your price to win business. If you’re proud of having a higher price, that confidence can be contagious.
These three factors barely scratch the surface of the vast and fascinating topic of price psychology. Here are three excellent books for learning more:
Priceless: The Myth of Fair Value (And How to Take Advantage of It), by William Poundstone
Negotiating Rationally, by Max Bazerman and Margaret Neale
Predictably Irrational, by Dan Ariely