Wednesday, March 30, 2011

Demonstrating Quality to Overcome Price Objection

'The question is: how does a seller demonstrate to a powerful customer why they should be willing to pay a premium for its product?' This question from Slater and Olson's article, A Fresh Look at Industry and Market Analysis, is one that our company confronts on a regular basis. In my industry, power systems, our products and services are more expensive than our competitors are. Slater and Olson recommend that overcoming the price question 'comes from providing more value to the customer than the competition provides'. One of the ways to accomplish providing value is by 'increasing benefits, such as quality or service to the customer'. This strategy, of demonstrating the value of quality to a customer in order to overcome price objections, is the strategy that my company has adopted.

Here is an example of this strategy in application. We had the opportunity to submit a $40 million bid for a project with a new customer. This customer had industry knowledge of our products, but had never purchased from us before. As the customer was planning a multi-year expansion, this $40 million project was the first in a series. If we received this initial order, it would improve our chances of getting additional orders in the coming years. In addition, as we had no work booked for 2011, getting this order was important to us.

After reviewing the bids, the customer contacted us to negotiate the price. Our price was seven figures more than the competition’s price (meaning at least a million dollars more). To close this business deal, our strategy options were: lower our price, lose money on this project, and hope to recoup it on future orders; stand firm on price and potentially lose the order; or devote resources (time, money, and opportunity cost) to demonstrate to the customer that the quality of our product was worth the premium. We chose the strategy of demonstrating our quality. We had a three phase approach: we conducted a power systems study to demonstrate that our solution would fit with their legacy systems; we conducted an environmental impact study to demonstrate why our technology was a 'green' solution; and we made changes to the project specs to better address the customer’s needs. Our strategy worked. The customer saw the quality value of our product, met our price and gave us the $40 million order.

Question: The strategy that we chose was risky- it involved spending additional resources (time and money), with no guarantee that we would get the order. Would it have been easier to lower our price, lose money on the project and hope to earn profit on future business with this customer?

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