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Back in 2008, RainToday.com published Fees and Pricing Benchmark Report: Consulting Industry in which they analyzed a ton of data from 645 consultants. There were six price-related topics. One in particular has stuck with me over the years: 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 is 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:
- the belief that certain customers are inherently “price buyers”
- the belief that feeding the price beast will make it go away.
The truth is that price is a proxy for several different fundamental buyer concerns. It has no meaning inherently. Price per se is a clearing factor, the point at which money exchanged balances with the various benefits received. And this balancing point is not just “value” as most firms mean that term; it is 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.
- 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—therefore 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 features of your bid with features of competitor’s bid. You know where costs get built up and where they don’t; have the courage to give your client the data to do the comparison.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.
- 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.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.
- 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).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.
- 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.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.”
What to Do About Price Objections
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 survey. 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 simple fear – fear of losing the deal, particularly—which drives us inward rather than outward. Rather than asking curiously, “Please, help me know what’s behind that?” we fearfully back off in the face of the aggression in the client’s tone – and start discounting.
The only two good reasons to discount are:
a. to reflect real cost differences due to volume purchases (which is great – you pass on some lower cost of sales, everyone’s happy), or
b. to buy your way into a strategically new piece of business. But be careful when you do so, because only certain clients buy that way.
The most tragic result of inappropriate 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.”
If your customers and clients tell you they don’t trust you, things have gotten bad. But you could have seen it coming. There were many early-warning signs of low trust in your organization.
This is the last in a series of five. The other posts address warning signs of low-trust organizations coming from:
How Your Clients and Customers Tell You You’re Low-Trust
It’s almost inconceivable that a high-trust organization will have low-trust relationships with its clients or customers. And that works in reverse: low-trust buyer relationships are a tip-off that something is amiss internally as well. Sometimes it’s easier to read the external signals, so here they are:
1. Your colleagues speak disparagingly of your customers.
- “They’re trying to pull a fast one on us; we can’t let them get away with it.” Whoa, simmer down. People who ascribe negative motives to customers’ actions without data, will generally do the same within the organization. With all due respect to Andy Grove, paranoia is rarely a good corporate value to promote.
- “I’ll believe it when I get it in writing.” If your people insist on contractual, legalistic relationships with customers, they’ll do the same internally. And since trust greatly reduces time and costs, that attitude is costing you dearly, internally as well as externally.
2. You haven’t gotten a new referral client in 6 months.
- This is such a key concept that it has been quantitatively refined (brilliantly) in the Net Promoter Score first developed by Bain’s Reichheld and Markey. At its heart: the single metric that best correlates with success is your clients’ tendency to promote you.
- If you have great referrals, you almost certainly have delighted customers and energized employees. And that rarely happens without great levels of trust within the organization.
3. You’re losing customers and don’t really know why.
- Look at your customer list: is it basically growing or shrinking? Come on, you know the answer, pick one.
- Now ask yourself: do I really know why that is? Or do I have a list of anecdotal, seemingly unrelated reasons? The CEO left; that guy’s a complete jerk; they decided to go with the low-price provider; they’re rationalizing suppliers.
- That is not an unrelated list, after all. The common denominator is, they don’t trust you. And if your customers don’t trust you, the odds are remote that you live in a high-trust organization.
4. You’re being asked to submit bids and respond to RFPs for long-time clients.
- We don’t want to be dogmatic about this one: there is a long-term, secular trend toward professional procurement. That trend is not Evil incarnate; the procurement people are your new clients. Treat them as such, respectfully.
- However: if YourCo seems to be singled out for this treatment, if it’s not a slow trend but a landslide for you, then maybe the market is telling you something. It’s telling you you’re not trusted. If you were trusted, you’d be seeing many fewer RFPs, you’d be getting sole-sourced where reasonable, you’d be getting in to define some RFPs, and you’d be getting some very personal coaching from the customer about how to operate in the new procurement world.
- That’s not happening? Then odds are, your customers don’t trust you. They’ve never been shown the difference between genuine concern and manipulation. They’d prefer to deal at arms-length, with professional buyers who are immune to emotional bullying and enticement alike. They prefer to deal on price, because they haven’t been shown any good reason to deal on any other basis.
- And if you’re quoting on price, using self-oriented sales tactics with your customers, then you probably don’t respect your own products, value and organization. Sounds like low-trust.
We hope you’ve enjoyed this little series on warning signs of a low-trust organization. Writing it has reminded us of two things:
1. Trust is infectious. A high-trust organization is highly correlated with high performance on so many dimensions: innovation, people, leadership, products, and markets.
2. Trust begins at home. Correlation is not causality, but causality is clearly at work in trust. Furthermore, it flows more in certain ways than in others. In very broad terms, the five factors we’ve discussed move in the following manner to create a high-trust organization.
It generally starts with leadership; but that’s a different series for another time.
I was coaching Bob, a busy lawyer. One of his key goals was business development – obtaining new clients. He told me that he just didn’t have time to work on business development –too busy. So I asked him a question (that’s what coaches do).
What are your priorities?
“Who is your most important client?” Bob responded with the typical answer. He started naming some large companies. “And what’s on your “to do” list?”, Bob started listing specific tasks including depositions, client meetings, briefs…well, you know the rest.
“What’s not on your list?” He struggled to answer for a bit. Finally, he got it. His business development tasks were nowhere on the list. He didn’t mention himself as an important client, and didn’t think of those tasks – the ones where he was investing in his own future – as being enough of a priority to even make it to his list. So, I asked the obvious question. “How will you accomplish your own marketing tasks if they don’t get on the list?” Of course, he said: “I can’t”.
One of my own long-time coaching clients, Peter Vogel, a prominent Dallas attorney, shared the wisdom of the “who is your most important client” with me several years ago. He got it from his father, a well-respected Dallas accountant. We are our most important client. Once we get that clear, we can create the right balance between our work, our clients and our lives.
Put yourself on the list.
Some of us have a fear that if we put ourselves on the list, we’re no longer client focused, that it’s wrong to address our own needs if there’s a client need to be attended to. But that simply is not true. If we don’t take care of ourselves, we’re not as valuable to our clients.
Examples we can all relate to: exercise, eating right, getting enough sleep. If we don’t do these things for ourselves, we won’t be able to function well eventually.
Examples we don’t like to relate to: taking a vacation, spending time with family, reading. These help us function at a higher level. Doing these activities clears our head, gives us valuable input, and can be emotionally stabilizing.
Examples professional services providers often fail to acknowledge: networking, social media activities, writing, speaking, building relationships – are all part of the job. Most of us have to do these and other activities so that we can obtain paid work.
Is it self-orientation to care about yourself?
Yes, of course it is. So what? There is nothing wrong with having things you have to do for yourself on your list. The type of self-orientation we talk about in Trusted Advisor Associates, reducing our Trust Quotient, is not about taking care of you. It’s about being self-absorbed, and unable to get out of your own way. When you take care of yourself, you are better equipped to focus on others.
Professionals who truly care about their clients often forget that they need to address their own needs as well. This includes the exercise and family time I noted above. It also includes taking steps to develop business in the future. Just because you have work on your desk today, doesn’t always mean that the work must trump a networking or business development activity.
Treat yourself as if you are a client.
Imagine that you are one of your clients. When there is a conflict between an activity you need to do for you, and one you need to do for another client, analyze the conflict and priorities the same way you would if you had two clients competing for your time. You decide which client has the more immediate priority, and you let the other client know when you will address that client’s needs. When you use this process, sometimes your needs will trump the client work. So if you have a referral-source lunch and work that needs to be done by 5, and you believe you can get it done when you get back, don’t blow off the lunch. Take care of yourself, and then take care of the client. The work will still be on your desk when you get back, and you’ll get it done in time.
So – what will you do?
Are you ready to put yourself first sometimes? Here are three easy rules to follow:
- When you create your work task list, put your marketing, and personal tasks on the same list.
- When you prioritize your task list, include all your tasks, not just your work tasks.
- When there is a conflict with your time, don’t exclude your needs when you make your decision on set priorities. You may have to take a back seat some of the time, but not all of the time.
Putting yourself first isn’t easy, and sometimes may feel selfish. Just remember that we do respect people who take care of themselves along with caring about others.