Price as a default negotiation strategy is a dangerous game

It’s tempting in the heat of a negotiation after you’ve made your first pitch and set the price but the party comes back and vaguely asks for more so now you have several dials to turn but one shines brighter than all the others. As the “room” gets hot with rising tension, you reach for the dial in the hopes of alleviating the pressure and hearing a resounding yes for reaching an agreement but to your surprise, the other party turns away leaving you hanging with your offer.

But was it because of price? The price may not be the lever that needs pulling. I argue that it is cognitive laziness which often leads us into the pitfalls of believing it is. Often sellers go into a sales situation without undergoing the due diligence of analyzing the other side’s value drivers and requirements. When the prospect rejects their proposition maybe because the competition has done the work and offered a more optimal solution, in a last ditch effort, they wiggle down the price in a brute force attempt to fit the misshapen piece into the puzzle. This might make sense in B2C situations like selling an overripe avocado or other static product, but most B2B situations are more complex with tailored solutions and contract terms, and thus more potential value drivers to align with price. Relationship building in B2B contexts can help identify those drivers so that when the time comes to set the ball of contracting in motion, more cards might be in play rather than just price.

Using price as a default strategy can be a dangerous game not just for the business but for the entire market. See it as a sort of pinball machine of cascading effects whereby once the lever is pulled, there is the end customer’s decision in that moment but also reactions of competitors, any trickle effect to other customers, a reduction in contribution margin and the associated impact on the business’s cost drivers which may conflict with the very value drivers of higher paying customers. That sounds like a cannibalistic downward spiral.

In addition to identifying value drivers other than price to negotiate on, there are other considerations to consider when considering a price decrease:

How would sales targets need to change to attain the same profit levels?

With lower prices diminishing the contribution per unit sold (price - variable cost), how many more units need to be sold to reach the same profit level as that attained at the higher price level before the change? In other words lowering the price effectively should raise the sales target. Sales targets should be defined within a framework of price ranges to be meaningful. Sales targets should be redefined as contribution targets. If a service costs 50 dollars to produce each time then selling it at 100 dollars yields 50 dollars in profit but selling it at 75 dollars only yields 25 dollars. Therefore 25 percent off the sales price diminishes 50 percent of the profit.

How will lower prices impact demand?

Will enough people be enticed by reduced prices for demand to rise sufficiently to meet the higher sales targets?

• If demand is very elastic, then lowering prices may very well open the demand floodgates leading to higher profitability.
• If demand is not so elastic, then the contribution loss from lowered prices may outweigh any sales gain.

How might lower prices for a service affect its perceived value?

There is a perception effect in play when it comes to prices. Prices often signal quality so that customers often place more value on higher priced goods and services. Customers may assume the service entails a higher cost to produce. Lowering the price can signal just the opposite and that can lead to commoditization. This is especially true for services which are opaque and difficult to judge quality on.

How will lower prices affect demand for other products in the line?

Will it cannibalize sales for products that command far higher contribution margins and thus eat away at profits? The product at the higher price might have been offered as a bundle with a different product and lowering the price might also affect whether customers purchase the item vs the bundle.

How will competitors react to lower prices?

Lowering prices can lead to effects that cascade across the market, and that can lead to a price war, resulting in a downward spiral of prices, and ultimately the destruction of value as competitors seeking cost cutting measures and further quality detetioration.

A pin ball machine, no?