“Hold your price and articulate your value…”
Is the mantra that many business coaches, advisors, and consultants advocate when it comes down to the subject of pricing your business products and/or services or having a client question your price.
But is that approach realistic and are you losing business and future opportunities in doing so?
Not always!
In my own business mentoring and coaching, I always explain to my clients that you can only hold firm on your value/price equation if it is in line with the economic and industry-specific dynamics…in other words, does it hold with the trend of your market and in relation to the overall economic picture?
In a dynamic, uncertain, hypercompetitive, and extremely volatile economy, it is extremely important to get and keep a handle on the big economic picture and its likely impact on your industry.
If you are an airline for example, then you will be extremely focused on oil prices and consumer spending…if you are an artisan chocolate company, then you may want to keep an eye on the price of cocoa beans.
It sounds simple enough, but so many companies are oblivious to economic factors and market forces that will ultimately affect their businesses and simply strive to maintain their margins regardless.
I was one of them and it took an economic recession to wake me up and force me to focus on the key external economic factors that will affect my business whether I liked it or not.
The market doesn’t care about your business or your feelings and it will take you where it wants to go
Investment bankers, hedge fund managers, traders, and analysts spend their lives trying to predict market trends and identify companies, commodities, and other opportunities to make a profit.
The best ones make excellent returns, are able to predict trends, and are not “married” to their ideas…only their results.
Isn’t it time that you start to think like them and learn about their philosophies rather than taking out-dated and outmoded advice from all of the so-called business experts and gurus?
No matter what business you are in and no matter what sector of business you operate in, you are at the mercy of the global economy, and that means you should start paying attention to it.
Market forces
Thirty years ago you could have retired on a million UK pounds here in the UK and enjoyed a very nice living from the interest alone…and without taking any risk.
Over the year’s investment interest rates have plummeted to where we will be soon, in my opinion, paying the banks to hold our money!
Thirty years seems an age ago, but this erosion occurred slowly and systematically over the period, with many people simply hoping that interest rates would go back to their previous and accepted “normal.”
It didn’t happen and all of the hard work and effort that went into building up a sizeable fortune seemed worthless as people had to dip into their hard-earned cash just to survive or take on riskier investments in the hope of maintaining their standards of living.
When there is a new release of technology, the plasma television, for example, it often came at a high price — the first plasma televisions I saw over here and around twenty years ago, came in at around 12K.
Compare that to the prices today and again, just like in our interest rate example, the erosion occurred over time.
There are many similar examples.
Now if we go back to our friends in the investment community, then they would have taken a view on the long-term trend regarding interest rates and moved out of cash…and with technology, they would have looked to capitalize on the “newness” aspects and held investments for a much shorter term, taken their profits and then invested elsewhere.
I’m not suggesting for one minute that you have to be an investor…but you can certainly learn to think like one and apply the principles to your own industry.
The trick is to predict the next market trend and be there before your competitors.
It is also common for advisors to tell their clients to “niche down” and operate in a specific market, to have a laser focus, and to give you the opportunity to become a big fish in a small sea as well as enjoy the fact that you can usually charge more for specialization.
There are advantages and disadvantages to this approach and the main advantage is that if you get the timing right, then you may be able to achieve an exit for your business and at a high price.
The disadvantage is that if you get the timing wrong, you can end up losing a substantial amount of value in your company.
I talk here from personal experience and all I can say to you that the investment community spreads risk across many asset classes…just look at the structure of a hedge fund.
You should do the same and if you do start in a niche, then diversify quickly.
Related: “Business Mentoring: Why the Riches May Not Be In the Niches.”
How to get the price right
The chances are, that you are operating in an established industry and market and where there are existing pricing structures and guidelines.
And you will either be working with your own terms and conditions of business, including pricing, or you will be working on your client’s terms.
It depends on who you are dealing with.
If you are working on your own terms, then you will probably be working with smaller companies and many of those companies will not have a dedicated procurement division to manage suppliers.
You will therefore have more control over the pricing/value process…but I urge you not to exploit it.
Companies are fighting for every dollar and that means they are scrutinizing every cent they spend, as a result.
Try to build on the qualities of honesty, transparency which builds trust.
I once operated in an established market but with a completely unique software and services solution (the only I ever had in my thirty-five-year career).
Pricing was a complete nightmare because we no other competition to price against!
But my clients simply took the nearest competitors to our solutions and drove our pricing to it.
Let’s take my main industry as an example — I operated in the telecommunications staffing industry and when I started the operating margins ranged from fifteen to thirty percent, depending on the specialization.
I settled for twenty percent and made sure that I told my clients!
Some reacted in horror and some, with joy.
When I expanded to the US, I won a major client because I disclosed my operating margins to them and explained the value proposition behind the pricing.
They didn’t tell me at the time, but I later found out when I employed someone from one of my key competitors who told me that because I disclosed my margins, they were told to do the same and along with all of their suppliers.
Those who refused would be able to continue supplying until their contracts ended, then they would be removed from the supplier list.
My new employee was working for one of the companies that were removed.
They had decided to take the stance that their pricing structure and operating margins were their business and that clients had no right to question them!
How wrong they were — clients have every right to ask you anything they want…just as you have the same right to ask them.
Here are some of the key points to that value proposition and they may help you:
- I had thoroughly researched the company and understood where they were today, where they wanted to be in the future, and also how they differentiated from the competition.
- I gave them my opinion on the current market and my vision for the future.
- I told them the challenges they are facing and would face in the future, not by asking questions (I had already contacted many of their departments and asked many questions long before the meeting), but through my detailed research.
- I explained that my company works proactively as well as reacting fast (we had a 24/7, 365-day service) by identifying the key specialists who had in-demand knowledge and then how we drive those people to the companies that could best utilize, develop and challenge their skills.
- I presented profiles of the people who I thought would fit their company, with a monetary value proposition attached to each profile and the number of relevant man-hour experience they had that would be a direct benefit to them.
- I explained that we worked on a “demand” basis and they can hire a person from one hour to whenever.
- Lastly, I showed them the structure of our leadership team, combined with the selection criteria for each consultant that worked in the company. It demonstrated diverse leadership expertise — entrepreneurship, technology, creativity, and commercial expertise, with the qualities that we expected from our operational team.
I had no problem reaching my margin with this US arm of a global client and that was because they were being exploited a little by some of the local suppliers and I made them aware of what a true value proposition was.
With other clients, I had more of an uphill struggle and I focussed on the overall value proposition to justify the price.
But over the years, prices in certain sectors started to fall out of the sky, and in one example, clients reduced the charge rates for engineers to below what I was paying them.
This was down to pure economics, just like in my interest rate example I talked about earlier, and all suppliers had to agree or they wouldn’t be supplying — value propositions were out of the window.
When you have to negotiate
You should never really have to negotiate.
If you have done your research and clarified your value proposition, it is simply a matter of articulating it.
I divide the market into 3 sectors:
- Luxury
- Middle ground
- Volume
Luxury manufacturers such as Ferrari, Louis Vuitton and any other luxury brand you care to name will most likely always enjoy success…and high prices.
At the volume end, you have manufacturers fighting for every scrap of business and just look at the supermarkets who are all trying to win over the customers with almost daily promotions.
And then you have what is perhaps the most dangerous ground…the middle ground.
Many entrepreneurs and business people “flirt” in the middle ground and we can one day, be high-end luxury service providers, and then, we can take volume business in a heartbeat, because we need the cash flow.
In my own career, I have flirted with the luxury end as well as the lower end and that is because I am comfortable with either.
If you have a desire to be a luxury brand, then you had better make sure you can compete with the established names and I am in no way saying you can’t, but you have a huge mountain to climb in terms of building the trust where people will not hand over their money unless it is mega expensive!
If you are at the lower end of the market, then you will be constantly “price aware” and more directed to the competition, rather than the market simply because your customers are price-driven.
The dangerous middle ground can lead you to customer confusion and that is where you have to spend most of your time ensuring that your marketing message is optimized and your customers know exactly what you can give them.
So what about operating in all three?
It is entirely possible.
My favorite restaurant in the world…as far as my travels have taken me is Three Forks in Dallas, Texas and this restaurant is a steak house, that I think at its peak, has done twelve million dollars in one year and that’s a massive amount of revenue!
It’s not about the steaks they serve, which are amazing, but the overall service and customer experience they deliver.
They are not cheap, but they provide you with a level of service that for me, is outstanding.
They are owned by a restaurant group called Consolidated Restaurant Operations (CRO) and they operate different brands and across different price points around the globe.
It’s a smart move to operate across different sectors, but with a “holding” brand and that is what I would suggest you do if that is your goal.
Now let’s get to the point of negotiation.
If you are at the luxury end, you will not have this problem!
In the volume end, then you will have to at least match or better your competition, or deliver exceptional service at the market rate price point.
In the middle ground, you have the most opportunity to really push your value in relation to your price.
Negotiation should not be a problem if you have clearly articulated your value proposition and you have done your homework with regard to pricing and pricing trends.
It is a matter of a simple, data-driven conversation with your customers.
I simply cannot over-stress the importance of doing your research.
Finally, you must keep an eye on your competition — if someone enters your market with a disruptive offer that gives you the best quality and at the best price, customers will take notice!
Conclusion
Everything works…until it doesn’t!
Holding your price in relation to the value you provide is always the goal in any pricing negotiation or situation…but it is dependent on market forces.
Learn to think like the investment community who spend their entire working days analyzing markets and companies to predict their own pricing trends…the smart operators get there before their competitors.
Niches are great…until they are not and if the market crashes and your niche is affected, you have a problem.
Focus intently on the value you provide, but make sure it is of direct benefit to your clients.
Don’t get “married” to your business ideas or pricing models and remember, the market will take you to where it wants to go whether you like it or not.
There are 3 main categories of operation — the luxury brand operation, the volume market, and the middle ground; you have to be careful that you don’t try to be all things to everyone.
If you want to operate across all 3 sectors, then you can form a holding company to run different branded entities, but don’t confuse the consumer.
Negotiation is an area that is related to offering the right value and at the right price, but this is where you have to keep an eye on your competition.
Consumers love disruption and anything that challenges the status quo, especially when it comes down to price.
As always, I would love to talk to you more about this, and please share this information and get in touch if you need any help!
neiljcfrankin@gmail.com
Neil Franklin
Business advice Business Coaching Business mentoring Pricing and Negotiation
Last modified: November 1, 2020
