The Limits of Value Propositions

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In B2B sales, having a clearly developed and clearly stated value proposition is unquestionably important. This is especially true for large, complex, or intangible offerings.

In fact, some experts go so far as to suggest a value proposition is the key component of successful sales. And most would say that a value proposition is at least a necessary condition for success, if not a sufficient one.

But this is certainly to overstate the value of value propositions. Not only are they not sufficient – sometimes they’re not even necessary. They are frequently less important than classic issues of needs and wants. And discussing value propositions without overtly addressing client confidence in the capability of the seller is not useful.

Value propositions are unquestionably powerful. But if you think nailing down a clear value proposition is going to solve your sales issues, you need to think again.

Thinking about Value

First, some definitions. I’m using “value” in a simple, narrow way to mean economic value. For example, I might offer a client a value proposition that says, “By using a distinctive approach to account development, I can improve top-line revenue by 10% within six months at virtually no cost to margins.” The “value” in that example is “10% of full-margin top-line revenue,” and the total statement includes reference to how I’m going to achieve it and in what realm of the client’s business.

But usually that’s not how clients start out thinking. In my experience, clients go rather quickly from “we’ve got a revenue problem” to “the biggest reason for our revenue problem is sales force turnover,” from whence it’s a quick hop to “we need a salesforce recruiting solution.” In which case, my highly articulated value proposition about the account development process, even if it’s correct and relevant, doesn’t even get invited to the party.

Their problem (“10% top-line revenue gap”) may rhyme with your value offering (10% top-line revenue growth”), but if the buyer is fixated on sales force turnover, game over. You could argue you need to present your value proposition earlier in the buying cycle, but that’s a problem outside the value proposition per se. Call that the “misaligned diagnosis” problem.

Another problem is relative lack of urgency. A 10% increase in top-line growth, while it sounds great, may produce yawns in organizations that are transfixed by products going off patent, or by R&D rejuvenation, or by M&A activity, or by the urgency of a cost-cutting drive.

A value proposition can work its magic only if the client a) agrees on the issue at hand, b) feels a need to address the issue, and c) wants to use the particular value proposition to address the need.

That is not a radical statement. (The value of a glass of water in the desert is greater than when lakeside.) And yet it is violated all the time. Salespeople keen on articulating value propositions to clients risk making the world look like a nail to match their value proposition hammer. We know better than to sell product vs. solution, but it’s so tempting when the “product” is disguised as a total value proposition.

Note: this can work in sellers’ favor. Over half my clients already see what they want in my offerings by the time they contact me. They articulate my value proposition for themselves. And unless they’ve gotten it quite wrong (not very common), there’s little point in forcing them to tweak it. At that point, the imperative to add value as the opportunity presents itself becomes the key task.

Selling Value and Buying Value

Suppose you haven’t productized the value proposition. You’re engaged in a constructive dialogue with an interested client. You’ve articulated your value proposition, they comprehend it, and it meets their needs. However, the same can be said for two competitors, each of whom is also talking to your potential client about increasing top-line revenue by changing the account development process.

Several issues then arise, such as the level of detail. (Just how does your approach to changing the account development process differ from theirs?) You could call this a deeper level of value proposition, but below some level it starts to look like just product variations.

But the biggest issue for buyers at this point is often not the value proposition at all, but the confidence or trust the buyer has in the seller. Confidence and trust can not only overcompensate for lower stated value, but they can overturn the value proposition entirely.

Expected Value

Consider two firms competing for a bid, with general agreement on the value proposition that the client is looking for. Let’s say the economic value calculated by each firm is about net $5 million. Sophisticated decision analytics might reveal the client has 90% confidence that firm A will deliver fully on the expected value, but only a 75% level of confidence that Firm B will do so.

That’s 15 percentage points variation in expected value—the same as if one firm had quoted a value of $750,000 more than the other! It’s also a discrepancy often sufficient to entirely wipe out the fees difference between the two sellers. Even greater discrepancies emerge when the issues turn to, “what if things go wrong? What will they be like to work with then?”

Yet this discrepancy virtually never gets talked about—at least not in a direct and quantitative way. The discussions are more along the lines of, “I don’t know. I just don’t feel like when push comes to shove they’re going to be able to get with our program.”

If you lose a bid and are lucky enough to get some post-bid debriefing, you’re not likely to hear, “Well, we just didn’t feel like when the chips were down you’d be able to get with our program.” That would be the corporate version of politically incorrect speech.

Instead, you will hear, “The other guys had a more compelling set of resumes on their team, ” or “We just felt like we had to go with their longer track record in this area.” In other words, the language of value proposition gets cited as post hoc justification even though it was not the basis for the actual decision. More prosaically, people buy with their heart and rationalize it with their brains.

Trust Can Even Overturn a Value Proposition

I’ve been on both ends of this one. I won a job by telling the client they flatly didn’t need to do a significant part of the job they were requesting. I didn’t win because I came up with a better value proposition; I won because I showed I could figure out the right thing to do. And the proof of it was they didn’t bother to solicit other bids around the new value proposition.

Sadly for me, I’ve lost this way, too. It’s not about picking the right game, it’s about picking the person who knows how to pick the right game.

The Role of the Value Proposition

Too often it’s assumed that the purpose of the value proposition is so obvious it doesn’t need stating. Doh! We assume clients buy value, clearly expressed, and tightly calculated. After all, that’s what they say they do.

There are seriously valuable roles for a value proposition, of course. They are:

  • To force the seller to have a Point of View: my client may or may not buy what I’m selling, but my statement of it marks a beginning point of discussion, a coherent account—one that suggests other ideas, proves I’ve thought things through, and shows I am worthy of valuable time.
  • To give the buyer “air cover” in justifying a decision internally: a B2B buyer wants to be able to tell anyone who asks, but especially his superiors, that they bought a proven product with a 35% ROI that will provide a 15% CAGR by an experienced-based approach to account management. They do not want to tell everyone they chose vendor A because, gee, they really felt good about them—even if that’s the truth.
  • To undergo a required, universal protocol: like meeting ISO standards, following tax rules, or complying with traffic laws, the tight definitions that come from rigorous thinking about value propositions are an assurance of quality. They may be a little pro forma, they may be subject to some tweaking, and they may not be a guarantee. But if everyone must do them, they form a common denominator by which to compare something of importance—value.

Value propositions are powerful, useful, and often necessary. Typically, however, they are not sufficient. Don’t go to into the sale armed with a value proposition alone.

 

This post originally appeared on RainToday.com

When to Offer a Low Price

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Last week, we talked a bit about pricing low to get the sale – and how that is not always the best option. But when is it okay to offer a low or  lower price? There’s always an exception (or two) to every rule out there. So, if you want to know a bit more on when you should offer a discount – read on.

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Few things in business have such dramatic impact on customer perception as how you handle your pricing, particularly when and how you offer discounts.

People may evaluate your products or your service by averaging out multiple experiences. But drop your price just once, and you’ll see how hard it is to recover. For a current example of how powerful your pricing image is, consider Bill Ackman’s painful failure to revamp the image of JC Penney—away from frequent discounts to everyday low prices as a strategy.

Yet in professional services and complex businesses, we play with offering discounts all the time. Shouldn’t we have a strategy behind it?

Don’t Just Stand There: Stand for Something

There is no one “right” approach to offering discounts. Your approach will vary with your business, your objectives, and your markets. But there are some things every approach should do:

  • You should have a rule for when to discount.
  • That rule should be easily explainable to clients.
  • You have to be willing to live by the rule.

That may sound obvious. But how often have you heard things like, “Don’t tell Bill that Joe got that price. It’ll only encourage him to want it,” or “Those guys’ll do anything to get the business.” Those statements indicate a lack of policy, and that’s death on your reputation.

What to Stand For

Again, your business will vary. Here’s what I decided for mine. I run a high-end professional services business, offering speaking, training, coaching, and related services. I want to be known for high quality, professionalism, and subject matter expertise. And in my case, because the subject matter is trust, I need to be seen as completely above suspicion.

It’s clear, then, that I need to articulate and live by some rules about when to discount. Here’s what I came up with over the years.

1. Frequency. I want to be at the opposite end of the spectrum from a JC Penney strategy of frequent discounting. I don’t want clients looking for bargains. If they’re looking to price shop, I want to send a subtle message that they’re in the wrong place.

2. Exceptions. To help that message, I need to be very clear about where discounts are appropriate. In my business, I can clearly state three such situations:

Volume. In my business, perhaps the biggest cost is cost of sales (the time, expense, and investment it takes to generate professional fees). It stands to reason that if someone can reduce my cost of sales, I have room to pass some of those savings along in lower prices.

The biggest example of that is a simply volume discount. The economics of selling one training session to 10 clients vs. selling 10 training sessions to one client are pretty clear. I am happy to receive multiple orders, and I’m happy to offer volume discounts to reflect it.

For me, volume discounts are easy to explain and easy to justify.

Special Situations—For Me. Sometimes I want to work in a new industry or with a novel offering. Those situations are as important for me as they are for the client. In those cases, I will offer a significant discount. I don’t want to shave nickels; I want to send a message about what is important and what isn’t. And in those cases, it’s about the learning. Those kinds of discounts rarely happen.

Special Situations—For the Client. Non-profits never have the kind of money that corporations do; most associations are limited as well. I don’t say yes to all those requests, but when I do, it’s only reasonable to price “off-label.” (Government is a special case, and one I won’t go into here.)

3. Non-Exceptions. That’s about it. That leaves a lot of other situations where I choose not to discount. It’s worth pointing them out:

Pleas for budget. Sorry, I have a list of charities, and corporations with a squeezed budget this year are not on the list. And make that never if you’re in the pharmaceutical or financial services industries, or if you have office space in midtown Manhattan. I have convinced myself that I need your money more than you do.

Bargaining. I have a simple way of declaring that this is not a bazaar: transparency. I explain my business model, explain when and how I give discounts, and—that’s it. I recall one client who, after our initial phone call, said, “I assume that if we go ahead, you’ll grant us our customary 20% discount.” He assumed wrongly.

The Positive Alternative. “Just say no” may (or may not) be a good strategy for drug usage, but it’s not a satisfactory answer to a client on the receiving end. None of us like to be told no, even with a great explanation.

Over the years, I developed another business practice that turned out to have a great side benefit: making people appreciate my saying “no” to discount requests. That practice is to simply take a few minutes extra to talk with them about their situation and refer them to someone else who can help them.

I am a very small player in all the markets I play in. I am far from the only one providing great service. If someone doesn’t happen to fit my business model, they may be caviar and champagne for someone else’s model.

It costs nothing to spend a little time thinking about alternatives for clients who don’t quite fit with my needs, and it generates huge amounts of goodwill. It’s a small investment with a big marketing return: they may come back when they have a need that is a fit with me, and they may speak well of me to others. And—they’re no longer complaining about how I don’t discount.

Again, my model is not the only one. You have to decide what’s right for you. But whatever it is, it should be clear, it has to be explainable, and you have to be willing to live by it.

 

This post originally appeared in RainToday.com

And the Winner Is Low Price. Wait – No…

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It’s a time-honored business strategy – low prices. Michael Porter codified Low Price as one of three generic competitive strategies, but it’s not like it wasn’t already commonsense in  every business culture. Still, it’s remarkable to see the over-reliance on this particular strategy in our “modern” times.

Which leads me to ask: Just what is it with low prices?

You see products and services being sold on the basis of low price every day, all around you. Yet you’re also well aware that you shouldn’t compete on just price—that price competition is ruinous and that low prices suggest the absence of larger value.

But just what does that mean for your business? Don’t take my word for it; find out for yourself. Are you in a vicious, cut-throat, price-gouging business? Or are you in one of those cushy, big-margin, fat, dumb and happy businesses that doesn’t have to worry about price competition?

You may be surprised at where you fall on the continuum.

The 3-Question Price Competition Quiz

First, make a subjective estimation of where your business stands on a price sensitivity scale of 1 to 10, with 1 being “price ranks very low on the scale of our customers’ concerns” and 10 being “low price is just about the only item our customers care about in this business.” On which side of 5 does your business lie? And how far over toward the end?

Second, make a list of the last 25 competitive bid jobs your company bid on—and lost.

Third, make a list of the last 25 competitive bid jobs your company bid on—and won.

Now, for the “lost” list: in how many of the 25 cases where you lost the competitive bid did the client say something like, “Nice job. Thanks for bidding, but, well, you were just a little too far out of line on price.” In other words, how many jobs did you lose on price? What percent is that of the 25?

And finally, for the “won” list: in how many of the 25 cases where you won the competitive bid did the client say to you, in effect, “Congratulations, you won the job; looking forward to working with you. By the way, the reason you won was you were the low bidder.” In other words, how many jobs did you win on price? What percent is that of the 25?

And the Winner Is …

Let me guess: your percentage lost on price is larger than your percentage won on price.

Let me guess again: your percentage won on price is closer to zero than it is to 25%.

Another guess: your percentage lost on price is less than half.

Another: the ratio of your percentage lost on price to your percentage won on price is 2.5:1 or more.

And finally: looking at your subjectively estimated ranking of your business’s level of price competition, does it fall on the same side of 5 as your estimated wins and losses based on price?

Now, if those guesses are wrong, please write me. I want to know what business you are in! Because for most B2B businesses, particularly those with larger, more complex sales and services offerings, those guesses are well-based on historical data (my data, that is, from giving the quiz in classes).

The Pricing Conundrum

Assuming your results look like my guesses, that raises several conundrums.

One conundrum is this: “If we’re such a price-competitive business, why do both wins and losses appear to be less often based on price than on something else?”

The other is this: “Why do we seem to lose on price more often than we win?”

The answer to both conundrums is that price is overrated as a factor in buying decisions. The real question is why? The answer has mostly to do with buyer psychology.

How Buyers Think about Price

One level of buyer psychology is available to us simply by asking, or by envisioning, what goes on in client organizations. Many consultants and accountants I talk to (and nearly all lawyers) have a tale about how the client’s procurement process is destroying quality—”all they care about is price.”

That is not what the procurement people will tell you, however. Procurement specialists have little interest in incurring the wrath of internal clients with legitimate quality concerns just to be able to say they got the lowest bidder. Value and quality are hardly irrelevant to their concerns.

And assuming your data is like I suggested above, the low bidder doesn’t always win. In fact, the low bidder, it would appear, wins considerably less than half the time, even judging from the higher of the two numbers you estimated (percentage of time you lost on price). And considering the number of times you won on price, one has to wonder how the myth of price competition arose in the first place.

The answer goes deeper into buyer psychology. Suppose you worked for a client and were charged with telling the losing bidders the bad news. How would you deliver the message?

Perhaps you’d prefer to do nothing and just skip the unpleasant task. But you know someone has to do it, and you owe it to the bidders to give a decent explanation.

You don’t want to share too much about the decision process, however, for a variety of reasons—chief among which is you chose the winning firm because, frankly, “we just feel more right about working with them.” You can’t saythat, for heavens’ sake!

So, you end up with several generalizations. Your team wasn’t quite as qualified, the winner had a really strong track record, and that game-ending no-appeals-allowed reason—your price was just a little too high.

Price is an enormously appealing excuse. It’s quantitative (and we all know numbers are good, right?). It’s completely opaque—the proposer has no way of knowing anyone else’s price and would never ask (and only partly because of legal issues).

But most important of all, the bidder wants to believe price was the reason they lost. Because the alternatives are unpalatable: they don’t have good people, they don’t have a good reputation, they don’t appear trustworthy, and so on. No selling team, particularly a team that would be involved in delivering the work, is interested in a message like that!

So, price becomes their refuge. “Darn! If we just could have priced it a little lower. I knew it. The market is tough out there; next time we can’t afford to be so choosy. We need to get in there and fight. And if we have to lower prices to get the work, well maybe we need to do just that.”

And that’s how the myth of low prices gets perpetuated. The moral of the story: if you think you lost on price, think again. Price is just the most convenient excuse for something more fundamental.

 

This post originally appeared on RainToday. 

If Selling Is Too Hard, You’re Doing It Wrong

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Salespeople are frequently fixated on athletic metaphors. Try these two:

  • No pain, no gain
  • The harder you try to hit the ball, the worse you do.

So – which is it? Effort – or form? Grit – or ease?

Many fine sales authors will tell you that an essential ingredient in selling—perhaps the essential ingredient—is effort. Gumption, grit, hustle, sweat—whatever the word, the image it conveys is that success in selling is tough. No pain, no gain.

Selling is a lot like football, this view says: the team that exerts the most effort is the team that wins. And there is a lot of truth in that viewpoint.

But consider another truth. Think about hitting a golf ball. As anyone who’s tried doing that can attest, the quality of your golf shot is in inverse proportion to your effort. That pleasing “thwock” of a well-struck iron almost never comes from trying hard.

Instead, the “trick” in golf is not how hard you swing—it’s how smooth, relaxed, and “at ease” your swing is. If you’re swinging too hard, you’re almost certainly doing it wrong. And there’s a lot of truth in that viewpoint as well.

I’ve learned that most dichotomies like this are false. Selling isn’t only like football or like golf. It’s both, in different aspects. But that’s a different article. This article is about just one side—the golf side, if you will, where if you’re working too hard at selling, you’re doing it wrong.

Adam Smith, Competition, and Selling

Blame it on Adam Smith’s The Wealth of Nations, if you will. The Scottish moral philosopher and economist famously claimed that by the self-oriented struggling of the butcher and the baker, the “invisible hand” of the market makes itself known by balancing out all for the greater good. Out of individual selfishness grows the maximum collective good.

While Smith has been unfairly characterized as arguing against regulation and in favor of unfettered free markets, there’s no question that his powerful formulation rhymes with competition—individuals seeking their own betterment. Perhaps ever since, business has been full of metaphors from war and sports. And nowhere are those metaphors more prevalent than in sales.

Here’s a partial list for just one sport alone: pitch, curve ball, hitting cleanup, bottom of the ninth, pinch hit, get our signals lined up, strike out, bases loaded, don’t swing at the first pitch, home field advantage, double play, we’re on the scoreboard, leaving men on base, pop-up, foul ball, home run hitter, shut-out, and so on.

Here’s the thing about sports metaphors: they’re all about competition. Real Madrid vs. Barca. Yankees vs. Red Sox. All Blacks vs. Wallabies. Seller vs. competitor.

And—most of all—seller vs. buyer.

Selling without Competition

It’s hard for most people to even conceive of selling without that competitive aspect between buyer and seller. Isn’t the point to get the sale? Isn’t closing the end of the sales process? If a competitor got the job, wouldn’t that be a loss? And why would you spend time on a “prospect” if the odds looked too low for a sale?

When we think this way, we spend an awful lot of energy. It’s hard work—particularly because much of it is spent trying to persuade customers to do what we (sellers) want them to do. And getting other people to do what we want them to do is never easy (if you have a teenager and/or a spouse, you know this well).

There is another way. It consists in simply and basically changing the entire approach to selling.

The first approach is the traditional, competitive, zero-sum-thinking, buyer vs. seller—the age-old dance that to this day gives selling a faint (or not-so-faint) bad name. It is one-sided, seller-driven, and greedy.

The new social media capabilities have not made this approach to selling go away—they have empowered it. Just look at your inbox, spam filters, LinkedIn requests, Twitter hustles, and pop-up ads on the Internet.

And boy do you have to work hard to sell that way.

The second approach is different. The fundamental distinction is that you’re working with the buyer, not against the buyer. Your interests are 100% aligned, not 63%. If you do business by relentlessly helping your customers do what’s right for them, selling gets remarkably easier.

You don’t have to think about what to share and what not to. You don’t have to control others. You don’t have to white-knuckle meetings and phone calls because there are no bad outcomes.

Selling this way works very well for one fundamental reason: all people (including buyers) want to deal with sellers they can trust—sellers who are honest, forthright, long-term driven, and customer-focused. All people (including buyers) prefer not to deal with sellers who are in it for themselves, and constantly in denial about it.

This is the golf part of selling: the part where if you lighten up, relax the muscles, let it flow, you end up with superior results. And there’s a whole lot of truth to that view. If you’re working too hard, you’re not getting the sale.

This post first appeared on RainToday.com 

Clients Don’t Buy Solutions, They Buy Problem Definitions

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You’re familiar with the old idea that people don’t buy products, they buy solutions – not drill-bits, but holes, in Ted Levitt’s classic formulation. This idea became closely allied with the commonplace view that we should be selling value, and packaging up ‘value propositions.’

But when it comes to complex services, Uncle Ted understated things.  The very idea of what is behind the “sale” in the first place needs re-examining.

So here’s a provocative statement: People don’t buy your value proposition – they buy your problem statement – and give you the sale as a reward for having defined it in a way such that the buyer can see the road to success with greater clarity.

Value: The Usual Suspect

If sales were like the movie Casablanca, and you rounded up “the usual suspects” for getting the sale, at the top of the list might be “demonstrated value.” Salespeople like to think that the reason they got the job was they did a better job at “adding value,” “demonstrating value,”  convincing customers of the “value proposition” they put forth. “Go with us,” salespeople say, “and you’ll get the greatest expected value.”

We impute this decision-making process to our customers, too. If they bought from us, it must be because we did the best job of creating potential value – maybe modified just a bit by their confidence in our ability to deliver on the value we promised.

This value-centric view of selling confirms all the biases of today’s salespeople: it’s a matter of producing challenging ideas, grand scopes, clearly articulated solutions. The winners are those who conjure up the right mixture of smarts, expertise, and hard work.

So we like to believe.

The Truth: It’s the Problem Definition

My old colleague David Maister once said, “The problem is never what the client said it was in the first meeting.” And while at the time I thought he was being slightly hyperbolic, I came to believe he was, in the real world, exactly right. A perfectly defined problem rarely requires outside expertise – it just needs a purchase order.

Consultative sellers get called in for other reasons.

The reason is, buyers – consciously or unconsciously – want the benefit of sellers’ expertise. They are open – more, or less (often less) – to learning from the seller. Yet arguably the most common error of sellers in consultative sales situations is – they blindly accept the customer’s definition of the problem.

If the problem definition is wrong, then a solution based on it is going to be wrong as well. Worse yet, a fully worked out proposal grounded on a faulty problem definition becomes increasingly tenuous. Buyers acutely and painfully recognize this, and this fact explains why so many consultant CRM systems are full of entries that say “died” instead of “lost.”

Clients don’t want to admit the definition was wrong from the get-go, so they simply stop returning calls, the sellers get resentful – and everyone goes off to try the same thing all over again, getting, of course, the same results.

The problem definition is the heart of the matter, for two reasons. The obvious reason is if you don’t solve the right problem, you’ll just make things worse, and as noted above, that becomes increasingly clear to all concerned.

But there’s a deeper, psychological reason.  If you as a seller can truly engage a buyer in a joint process of discovery, you then trigger something magical: a willingness to explore openly the true issue, and a willingness to engage your expertise in the pursuit.

The result is huge: an expertise-based joint journey of discovery, with a greatly enhanced likelihood of a better problem definition, and a vastly higher level of acceptance of that problem definition.

Getting There is Way More Than Half the Battle

A joint discovery of problem definition requires an openness and a willingness to collaborate on the part of the client. No client I’ve ever met starts out that way – no client has ever come to me and said, “Gee, Charlie, we’re really not sure what’s wrong here, but we kind of hope that maybe if you talk to us, things might get better.”

Instead, clients come to sellers with the usual set of highly defined problem definitions, desired solutions, and specifications for how those solutions must be tailored to their organization. It takes a great deal of skill to get to the point where you can mutually confess imperfection, and go on a joint journey.

It’s the opposite of that old “I’m OK, You’re OK” paradigm – it’s more like “I’m a Fool, You’re a Fool, Let’s Figure This Sucker Out Together.”  (And you don’t get there by quoting Maister about how their problem definition is wrong, either).

Having gotten to a point of mutually confessed imperfection, the best problem definition begins.  And when you do get to a great problem definition, the amazing thing happens.

The client doesn’t buy the best solution: instead, they reward the firm that did the best job of helping them define the problem. You’re not getting paid to do the job – you’re getting rewarded for having created the best ah-ha for the client – the ah-ha that says, “Ah, yes – thatis indeed precisely the issue that we’ve been having all along here. That’s the heart of the matter.”

Having gotten that ah-ha, why in the world would a customer then hire someone else to deliver on the vision you’ve jointly created?  Why would you trust anyone but the ones who created the bond with you to develop the insight to actually get you over the river?   You just wouldn’t, that’s all.

Clients don’t buy value: they buy the people they have come to trust. In particular, they hire those who have helped them define their problem in a way that they can finally see their way clear to a resolution of their issues. The project, the sale, is not “the thing” – it is simply the currency of reward for having best-defined the problem.

This post first appeared on Trust Matters. 

Bleeding Trust from Every Sales Interaction

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If there’s one guaranteed head-nod, bromide, platitude that most marketers and salespeople would agree to, it’s that trust in the seller positively affects buyer behavior. Conversely, companies we don’t trust are adversely affected by a lack of trust. Pure data to support this claim is tricky to come by, but it’s a commonsensical proposition most of us are willing to buy on the face of it. And rightly so.

And yet – the degree to which modern companies bleed trust (hemorrhage might be a better word) is astonishing.

And I’m not just talking about the egregious mistakes – auto emissions software, blown drilling platforms, rigged interest rates. I’m talking about the myriad little, every-day, seemingly trivial ways that add up—ending in a virtual bloodbath of lost trust. In no particular order, let me identify a few.

Customer Tales of Woe

In Goodbye Avis, Hello Uber, danah boyd chronicles death by a thousand cuts at the hand of Avis Car Rental. Her rental car got a flat tire at 10 p.m. in Los Angeles, just seven miles from Los Angeles International Airport (LAX). A customer service phone rep said he didn’t know how long it would take to get an exchange. He said he’d text her. An hour later, she had not received a text, so she called again. They said it would take four hours. Outraged, she pushed back. OK, they said, 90 minutes.

They then suggested she leave the car with the keys in it and get a taxi. She left the car but got a ride from friends to her destination. Avis texted that they’d arrive at 4 a.m. They didn’t. She called again, and Avis blamed the towing company. They said it would take 30 minutes. Ninety minutes later a tow truck arrived.

At 4 p.m. the following day she called to make sure Avis had gotten the car. Nope. They said she was still liable. Roadside assistance told her to call customer service, who said to call the LAX counter directly, who passed her call on to the manager, whose call went to voice mail. He didn’t return the call. And, it went on.

The Avis tale may sound exceptional. But I bet you have your own horror stories to relate that are just as bad. And you probably reacted the same way danah did—by changing suppliers, even though she’d been a loyal customer for years.

One Cut at a Time

Not all customer horror stories have 15 fails in a row in a 24-hour period. But it doesn’t matter. Like little cuts, they can add up, and each one adds its own traumatic toll.

  • I recently went to trade in a car. We had a deal until the salesman noted a discrepancy on the CarFax report. I said I’d fix it. It took six weeks to fix, but I did get it fixed. However, the salesman never called to ask how things were coming along, so I bought my new car elsewhere.
  • A friend went to a store at 5:55 p.m. The manager was inside, locking up for the evening. When my friend pointed to the “Hours: 8AM – 6PM” stenciled on the door and pointed to her watch, the manager shrugged his shoulders and turned away.
  • At my daughter’s recent wedding, I asked if we could borrow a golf cart for 20 minutes to ferry the bride and groom across the wet lawn for photos so as not to get her wedding dress wet. “Sorry, we can’t afford the liability,” was the answer we received.
  • A friend who does small group communication training sessions is routinely asked by large companies to purchase liability insurance to indemnify MegaCo Inc. against any possible harm or claim of harm from anyone for any reason arising out of his delivering a half-day communication training session. (Many of you face the same exact extortionate policy of your customers offloading “risk” to you and having you pay for the privilege.)
  • Some years ago I had a great first sales discussion with a client about doing training to increase trust in their sales process. At the end of the call, he said, “This is great, we have a deal. Now, I presume you’ll grant us our customary 15% discount?” This after having discussed how to help his salespeople to stop cutting prices.
  • I’ll never forget the brokerage office head who, on hearing about my upcoming talk on being a trusted advisor, said, “Hey, anything that’ll increase my share of wallet, I’m all for it!”
  • I constantly receive offers to write articles for my blog in return for links. Ninety-five percent of the time, they show no awareness of the subject matter of my blog, much less a sense for what quality levels of content might be expected.
  • Customer service scripts are increasingly being loaded with fake empathy and inappropriate apologies: “Oh, I am sure that must be terribly frustrating for you,” “Oh, I do apologize for the power outage you experienced. …” Don’t pretend-feel. An acknowledgement is critical, but apologizing for things you didn’t do is phony.
  • Yesterday a corporate online feedback site was generating error messages, sending me “not-deliverable” emails. Acting the good business citizen, I called the corporate 800 customer service number to tell them. The customer service rep told me, “The feedback page is not our department.” When at my suggestion she connected me to that department, they insisted on giving me an incident number so I could track my concern going forward. My concern?
  • On a United Airlines flight from Chicago to Charlotte, North Carolina, two months ago, two aircraft were taken off the gate due to equipment problems. The third aircraft finally left three hours late. I emailed the airline. I got back a generic apology and a voucher redeemable against future miles—no acknowledgement of the particular issue, much less suggestions about dealing with it. (That reminds me of my cable company: after showing up three hours late, they’re trained to quickly offer you a $20 rebate—a fair deal if your time is worth less than $7 per hour).

I could go on and on. And so could you. The cut-cut, drip-drip of such low-level, tedious violations of basic customer relationships adds up. It results in listless relationships at best and cynicism, surliness, and passive-aggressive hostility at worst. Finally, we customers jump ship when the opportunity presents itself.

This isn’t “just” about customer service. There is a steel cable linking all customer experiences—sales, service, whatever—with future sales. How everyone treats customers in all ways at all times is a big driver of trust and thus of revenue.

But you already get that point. The more urgent point is this: how can you be sure you’re not imposing such semi-conscious bloodletting on your customers? Here are two ideas.

1. Follow the 10% rule. At every customer interaction point, take 10% more time to close out the interaction in a trust-creating way.

  • If you couldn’t help someone after a five-minute call, then take 30 seconds to suggest an alternate vendor.
  • If you’re going to spend 15 minutes writing an exploratory letter, then spend another two minutes to find some value-add to include in it.
  • If a potential customer walks out the door after an inconclusive interaction, take a note about a content-specific way to follow up in two weeks with an email or phone call.

You think you don’t have 10% more time? Please. Consider how much you put at risk the other 90% of time you didspend by failing to leave a trust-based impression.

2. Personalize responses in some way. Buying is emotionally triggered, and that’s as true for B2B sales as it is for B2C. Don’t let your last impression be the customer seeing dollar signs in your eyeballs.

  • Responding immediately, or in some hugely fast way, is a powerful tool for showing you’re paying attention when someone reaches out to you. Just don’t automate the response. Fast and customized is a powerful combination.
  • If you are responding to an error, then over-respond. Don’t minimize it. Acknowledge, explain what must have happened, and—most important—say what you are going to do on your own to ensure it doesn’t happen again.

Sales don’t just happen during selling. They’re a predictable result of your entire mode of relationship with your customers at all times.

This post first appeared on RainToday.com

How Bad Thinking Can Lead You to Discount Your Prices

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I originally wrote this post way back in 2009. And even though it’s been six years – the message is just as relevant. Keeping with the theme of sales and the ever-present fear of losing a sale (thus the reaction to lower prices and the need to face the demands for price cuts), I wanted to (re)explore the subject of sales – and how bad thinking is what can lead you to discount your prices in order to close a sale. (hint: there’s more to it).

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RainToday.com recently published its Fees and Pricing Benchmark Report: Consulting Industry 2008 in which they analyzed a ton of data from 645 consultants. There were six price-related topics, all of which are interesting. But one in particular caught my eye: the analysis on discounting.

As the authors point out, discounting is Ground Zero for hypocrisy in pricing. Everyone decries it, yet everyone, (actually, 65%), does it. It reminds me of dieting: “I know I shouldn’t, but this one little brownie won’t hurt. And I’ll get back on the wagon again tomorrow.”

Couched this way, the problem of discounting sounds like one of willpower: we all know we should stick to standards and principles, yet we are morally weak at the moment of truth.

I don’t think that discounting is a moral problem, however. Instead, it is one of bad thinking. And it centers around two false beliefs:

  1. The belief that certain customers are inherently “price buyers”
  2. The belief that feeding the price beast will make it go away.

Technically, price is a set amount of money given in exchange for various benefits. But in truth price has no inherent or default meaning. It is a proxy for several different fundamental buyer concerns that are very much tied up with the psychology of the buyer.

What Clients Mean by Price Objections

It seems obvious. A client expresses an objection to a price. They say they want a lower price. Clearly they are concerned about money, value and price. Right? So the only question is, shall we discount, and by how much. Right?

No, and no. Here are four distinct things that buyers are saying when they say they want a lower price. And not one is really about price.

  1. Mismatch with expectations: Only experienced buyers do a good job of guesstimating price quotes from professional services firms. They tend to focus on a basic mental model of time vs. rate, and naturally under-estimate each.

    (Recall your own shock at first finding out your billing rate as a newcomer; and the shock of industry hires when they first see time estimates for what they thought was just a request for a data-dump from an expert).

    Bottom Line: This “objection” isn’t an objection at all. It’s just the natural human expression of surprise and dismay when we find out our expectations didn’t match reality. Discounting just confuses them more, and rewards their delusions for the future.

  2. Mismatch with budget: Sometimes buyers just have a limited budget. They feel trapped, and often a little embarrassed that they have asked you to quote into a situation in which they under-budgeted or over which they have no real control. Their natural reaction is to push back, in hopes that you can solve their problem without their having to confess their embarrassing ignorance, or go back to their boss for more money.

    Bottom Line: This too is best not seen as an “objection;” it is a simple constraint of the world – budget vs. cost. Again, discounting just confuses the matter, and reinforces the idea that the client can afford to not be open and transparent with you.

  3. Mismatch with competitors: Frequently clients faced with competitive bid situations will say, “Company X is cheaper than you by 25% – you need to discount to stay in the game.”

    Let’s assume the claim is true on the face of it. There are two reasons for one firm pricing 20% below another; one is intentionally buying the business, with the intent to raise price later. The other, and most common, is that the client is comparing apples to oranges.

    The solution to the first is easy: explain to the client why your competitor’s cost structure is virtually identical to yours, and why a 25% discount is inherently unsustainable, thereby showing the client is facing a relationship vs. transaction issue.

    If they choose transaction, then be glad your competitor just trashed their bottom line to buy a price-shopping client. They’ll eventually be back.

    The solution to the second is to have the client carefully compare, component by component, the features of your bid to the features of the competitor’s bid.

    Most likely, you’ll be offering a value-added service that the competitor isn’t, and then the client can then pay the higher price for that service or have you drop it from your proposal – have the courage to give your client the data to do the comparison.

    Bottom Line: Competitive mismatches aren’t really price objections; they are fundamentally rooted in a misunderstanding of either industry economics or project design economics. The answer is not discounting, but education.

  4. Mismatch with motivation: Professional services firms suffer disproportionately from the delusion that clients make decisions on purely rational, monetary, statistical criteria. Clients, like everyone (including ourselves) make our decisions with the heart, and justify (rationalize) them with the brain.

    A basic human need is to make sure we didn’t get a “bad deal.” You can give all the “value” data you want, but unless a client feels you are being straight with them and/or they’re getting the best possible “deal,” they will remain suspicious. When suspicious, our innate tendency is to bargain, to determine some subtle psychological resistance point, just as we would at a bazaar or yard sale.

    This behavior has nothing to do with price per se, and everything to do with transparency of your economics and the prices others have gotten from you.

    Bottom Line: Not paying attention to motivations leads to discounting, which has the perverse effect of convincing buyers that – aha! – you really were holding out on them! Which leads them not only to haggle again the next time, but to fundamentally mistrust you because you quoted them a price that was an attempt to “get by.”

So what’s to be done? We all know the answer – don’t discount – but we think it’s a moral weakness, a failure of principles. It’s not. It’s a failure of understanding the reason for price objections.

Armed with the truth – that it’s not about price, and it never is about price – we can do the right thing: be curious, probe and sensitively get one level deeper when presented with price objections.

Back to RainToday’s research report. Why do 65% of consulting firms discount, even when, as the authors point out, the average 11% reductions could go straight to the bottom line?

It is simply fear, fear of losing the deal. Rather than asking curiously, “Please, help me know what’s behind that?” we fearfully back off in the face of the client’s aggressive tone…and start discounting.

The only reason to discount is to buy your way into a strategically new piece of business. And be careful when you do so, because only certain clients buy that way.

The most tragic result of discounting is not even the lost profit; it is that we confirm the client’s suspicion that we are untrustworthy. It leaves the client thinking, like Sir Winston Churchill’s apocryphal line, “We have now established what you are. We are merely haggling about the price.”

What’s So Different about Trust-based Selling?

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What’s the purpose of selling?

Sounds pretty straightforward, right? Try Googling It – you’ll get “the purpose of selling is to gain revenue,” or “the purpose of sales is to create a customer.” But there’s a problem with viewing sales that way.

If you think the purpose of selling is to add to your firm’s topline (or your own bottom line), then you’re thinking in you-terms – not in client-terms. No matter how much you sugar-coat it with language about “serving client needs” and “addressing fundamental client problems” there’s no getting around your overriding purpose – to move money from their bank account to yours.

Clients feel this. They can sense your discomfort with selling, and feel it in your high-flying verbiage. They know in their bones that if your primary objective is to get the sale, then you are not on the side of the angels – you are on the side of the used car salesmen.

Harsh language? Not if you realize there’s an alternative – and there is. The alternative is to view your fundamental purpose, objective and goal as being to help – your – client. Regardless of whether they buy your canned solution. And to view the sale as being a byproduct – an offshoot – the collateral good fortune that comes your way by doing a fabulous job of helping your client.

Most people are skeptical. They have two concerns. First, is it realistic? Do clients really behave this way, or will they take advantage of us? Second, does it actually work? Do we really have time to run around being nice to clients all the time – ‘don’t you realize we have to make a living?’

Both these concerns are unfounded. Let’s address them head on.

First, about being realistic. Ask yourself: would you rather buy from someone who genuinely has your best interests at heart, or from someone who’s trying to extract money from you – and isn’t even comfortable saying so?

And, if you do run across someone who is competent, capable, and truly dedicated to your best interests – do you personally choose to rip them off and take advantage of their naivete? Or do you decide, ‘This is actually the kind of firm I prefer to do business with.’

The vast majority of buyers prefer such sellers – (and the cynical exceptions are easy enough to spot, so you can pass them on to your competitors).

Second, about efficiency – do we really have time to give away in just being generous? Don’t we have to focus on selling?

Again, ask yourself: how would you behave if you ran across a person and firm you could really, genuinely trust? Wouldn’t you stick with them? Wouldn’t you spend less time on lawyers? Wouldn’t you be more open and forthcoming about issues? Wouldn’t you feel more comfortable collaborating with them?

Of course you would. And that’s why trust-based selling produces higher repeat business, lower sales costs, greater insights, less scope creep, and higher levels of cooperation.

Put it this way.

  • In Scenario A, you focus on getting the sale: you win 50% of the time, and your average sale is $100K. Net expected value of a given sale, $50K.
  • In Scenario B, you focus on doing the right thing for the client – and as a byproduct you get 60% of the sales, and your average sale is $1.5 times X. Net expected value, $90K (60% x $150K)

Scenario B represents an 80% revenue improvement over Scenario A – before even counting lower sales costs!

That’s exactly what happens in Trust-based Selling. Buyers have a strong, predictable preference for buying from people who have their best interests at heart – and not from people whose main objective it is to sell them.

It’s a real paradox, isn’t it? By being willing to detach from the outcome, we actually increase the odds of that outcome. The “trick” is – you simply have to believe it.

When Clients Demand Price Cuts

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I first published this post on RainToday a little while back. But this is an evergreen topic – one that keeps coming back up into conversation. Especially when people ask me for sales advice. What holds most of us back when a client or a potential client demands a price cut is the fear of losing the sale. But sometimes, we have to let go of our fears in order to see what’s truly at the root of the “price” concern.

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“A long-standing client came to us and said our price was too high for a job we quoted. They said one competitor was priced 20% below us, and another 30% below. We’re seeing this a lot; word is we’re the high-priced firm in this market, and we’ve lost a few big jobs. It seems to be pretty much a question of price. This business is getting commoditized. Particularly in this economy, we need to seriously consider cutting prices, but our margins are already low.”

Have you heard those words lately? Perhaps spoken them? Before you act, make sure you investigate the situation. This article gives you a structured approach to addressing fee issues, looking at causes, solutions, and handling discussions.

Causes: What Drives Client Demands

Before you respond to demands for price, it is useful to understand what lies below such demands. Three things drive the vast majority of client demands:

  • Fear. The simple fear of being taken advantage of. If clients perceive that someone else is getting a better “deal,” they can quickly feel abused, and may react very negatively. Clients who feel abused become very creative about attributing causes—your rates, your profits, your margins, and so forth.
  • Miscommunication. The “apples and oranges” problem can arise from many project design issues, including the scope of issues addressed, the leverage of your team, the depth to which issues are explored, timing, and choices about staffing. If the client orders an apple and you price out an apple pie, the client may think you are charging absurd margins on fruit.
  • Quality. Misaligned assumptions about quality required. Many service providers make an implicit assumption about the quality required for a certain kind of work. Often the client doesn’t perceive the need for the highest quality solution, they think a stopgap will do just fine, and often, it will.

Clients demanding price concessions do not present the issue in these neat terms. They simply say, “your price is too high, and you need to cut it.” Listen carefully, this does not mean that your price is too high, nor that you need to take drastic action. But you’d better investigate what’s going on.

Solutions: Fix the Right Problem

When your client demands a price concession, he usually assumes that rates, costs and profit margins are the problem. Few clients (or providers) challenge this assumption. The client thinks a voracious provider is taking him advantage of him. The provider feels pressured by a callous client playing him off against others. Both then cast the issue in terms of greed and motives, and dig in for tough price negotiations.

Rates and margins are almost never the real problem.

The real problems lie in design issues and in misunderstandings. The worst thing to do is negotiate on a total price alone—it makes the client think you’ve been hiding something, and wonder if he should ask for even more. Too often both parties try to negotiate price when they should be discussing design.

To see why rates are not the issue, consider your economic model. The building blocks of a project bid boil down to:

  • The firm’s costs—i.e. compensation levels
  • Rates—a function of cost, utilization and margins
  • Project design scope
  • Project design leverage
  • Project design quality

Now ask yourself: how does my competitor’s model differ from mine, and what is he cutting to get his prices 30% below mine?

Compensation costs hardly vary at all. The salary market is extremely competitive. Nor do firms vary much on billing rates, utilization and models. None of it is enough to explain a competitor’s 30% discount.

That leaves two explanations: either the projects being discussed are just not comparable, or your competitor will lose money on this bid. The discussion you need to have with your client explores both options, in that order.

Handling the Pricing Discussion

Above all, clients want to know they are being treated fairly. Doing so starts with a fair price for work done, and the willingness to be open about how you arrive at that price. Very few clients actually want to pay an unfair price to a provider who has dealt fairly with them. Here’s how to have that discussion.:

  • Commit to resolution. Make sure you spend enough time understanding and empathizing with the client’s concerns. Say you’re committed to finding a mutually acceptable resolution—and mean it.
  • Suggest a series of price drivers, from scope and quality concerns to economic drivers, and commit to exploring each in turn.
    • Start with scope and design issues. Ask the client to compare in detail your project design with the competitor’s. That means nailing down modules, scope of research, staffing levels—everything that might be different. Then compare. More than half the time, discussion will stop right here. Most fears are simply misunderstandings of design.
    • Move on to quality issues. Determine whether quality in your proposal is higher than that proposed by a competitor. If so, then ask whether the client is willing to pay for extra quality—or not. If the answer is “not,” be ready to scale back or walk. Your “standards” may be costing you business.
    • If the issue is not yet settled, then put your structural economic cards on the table. Tell the client your billing rate structure, base compensation structure, leverage model and utilization rates. Explain why these numbers add up to a fair profit model for you, and why they probably don’t vary much by competitor—certainly not 30%.
  • Now you can face the competitor’s 30% discount head on. Confirm the project design is comparable. Say to the client, “I believe their economic model is similar to ours, and we could not sustain a 30% discount. How long do you believe you will continue to get that discount? Are you willing to switch again if and when they move to sustainable prices?”

If the client would be willing to switch yet again to find yet another discounter, then you should probably walk away and find a relationship buyer. If so, walk away smiling, your competitor just lost money, and you didn’t.

Price negotiations don’t have to be about power and control, trust and openness go a very long way. Most clients are happy to pay a fair price to a provider they trust. Just give them the information with which to trust you.

Should you ever cut price? Yes, in two cases. The first is for a volume discount, including existing-client discounts. In these situations, your cost of sales is genuinely reduced. That’s real money, and can be shared.

The second reason is to buy your way into a new business or client. Don’t do it lightly. Eventually you will have to raise rates to sustainable levels; and a client who switched to you on price is prone to switching again.

Buddhist Capitalism vs Competitive Selling: the Power of Trust and Collaboration

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When you think of capitalism, you probably think of competition as a central, driving force. We have enshrined the value of competition in our antitrust laws. We view competition between providers as a way to increase innovation and reduce costs; in today’s parlance, competition is what yields creative disruption.  Adam Smith is frequently (and somewhat inaccurately) cited as the prophet of competition in his concept of the “invisible hand.”

At a micro-level, we have also glorified competition. Athletic competition is seen as a metaphor, as well as a proving ground, for competition in business. Businesses line up to sponsor major athletic events and athletes.

And nowhere in business is competition more revered than in sales.

The truth is much of what we think about competition is dysfunctional, suboptimal, and actually destroys value. By contrast, what I’ll whimsically call Buddhist Capitalism shows another way that adds more value. I’ll explore this theme first at the business world level, then at the sales level.

Business Competition in the Real World

In the real world, pure competition leads directly to monopoly. Competition is inherently unstable, resolving to dominance of one more powerful firm over all the others. What we call “competition” in the modern Western world is a finely tuned mix of rules and regulations, as well as a few customs, that serve to keep behavior within socially acceptable bounds.

If you doubt this, think of what the U.S. economy would look like in the absence of the FTA, the FDA, the FAA, the SEC, or the FDIC. Or just look back a few decades in the history books. Maintenance of a state of competition depends enormously on the power of the referees.

Pure competition, even where regulatory regimes are strict, rarely exists. There are imbalances of labor, education, geography, and a hundred other variables. The point is in nearly every industry, there is an imbalance of power, exploited by one party at the expense of the weaker parties. “Competition” in the real world is more or less about zero-sum games, with one party holding the stronger hand.

The definitions of “capitalism” have been hijacked by extremist theoreticians in recent years: people such as Milton Friedman, Ayn Rand, and Alan Greenspan, who believe in a moral purity produced by competition. (Never mind that an ethics built on selfishness isn’t worthy of being called ethics in the first place.)

Buddhist Capitalism

By contrast: imagine an economy relatively unencumbered by laws and regulations, but where trust and custom abounded. An economy with not nearly as many lawyers, but with fewer legal battles. An economy where the frictional costs of competition (and the regulation of competition) are lower, and innovation is higher.

You get such an economy when you introduce the concept of trust and collaboration. Zero-sum games shift to 1+1=3 games. Stephen MR Covey Jr.’s book The Speed of Trust is all about this: when trust is present, speed goes up and cost goes down.

If my Buddhist friends will forgive me the crude colloquial language, I’ll call this Buddhist Capitalism. What I mean is that it focuses on collaboration, not competition; on getting along harmoniously rather than vanquishing; on letting go attachment to outcome rather than obsessing over goal achievement.

It’s far from crazy. The lesson of the Prisoner’s Dilemma work in game theory is that a collaborative strategy always, always beats a competitive strategy if played long term. Research shows that collaboration produces more innovation than solitary introversion. Collaboration and trust build on each other, increasing knowledge of both parties to the point where they can jointly add value, cut costs, and reduce risks.

It may sound like a Beatles song—the more you give, the more you get—but it’s no less true for being musically suggestive.

Buddhist Selling

What does all this have to do with sales? Selling is just the micro-version of the same thing. We as human beings have a primal desire for survival, which can easily revert to competition. But we have an equally strong desire for connection, collaboration, and cohesion.

Except for pure commodities (and not even water or electricity is a pure commodity), buyers prefer to buy from sellers they trust. Trusted sellers have their customers’ interests at heart, ahead of their own. They play the long game because they know that the best way to long-term success is through their customers’ success, and, therefore, no particular sale is worth sacrificing the long-term relationship.

Trusted sellers are also not attached to a particular outcome. They don’t keep meticulous score at a detailed level, and they are willing to let their agenda be influenced by client needs. Finally, they keep no secrets from their customers because they see their interests and their customers’ interests as one and the same, and the value of shared information to both parties exceeds the value of secret information privy to just one party.

Of course, these attitudes are hard to come by in a world that prizes competition. Sellers everywhere are taught to compete not only with their competitors, but also with their own customers (that’s not a joke – go read Mike Porter’s Five Forces model of competitive strategy). Not getting a sale is considered bad form, if not unacceptable. Metrics in sales are short-term, incentives are largely extrinsic, and motivation basically consists of war chants.

But a seller who can “think Buddhist” will outperform a competitive seller over time because customers prefer to deal with sellers they trust. And they do not trust people who are in it for themselves.

The ultimate irony: by being willing to forego a sale and do the right thing, the “Buddhist seller” will end up selling more than the competitive seller.

 

This post was originally published in RainToday.com