Cost vs. Price: Survival Depends on Knowing the Difference

By Rick McPartlin

Get paid for the value you deliver or you will disappear! I have this conversation at least a thousand times a year, and in all but a handful of cases, making this happen is a new conversation that CEOs have to learn how to execute.

The SME (small and medium enterprise) CEO is cursed by the SME go-to-market model. Buyers always think they want everything at the lowest possible price REGARDLESS of the cost. In spite of that, most B2B SME CEOs have built a business model that provides great value and requires a higher margin.

The normal high-value SME CEO gets new customers by promising high value and discounting the price to get the client. The intent is to win the deal, and then to prove value, and finally to raise the price in line with the value.

In truth, the SME’s customers don’t really understand the SME value until they become a customer. Even then, many customers only fully experience the value when they leave the SME for a different vendor with a still lower price. When they leave for the lower price, they quickly return when they experience the difference between the vendor’s low price/value and the value of the SME business partner.

Still, the buyer seldom takes the time to monetize that “value.” If buyers don’t take the time to monetize the value, they will never realize that the value results in a lower cost, even though they paid a higher price. Most buyers won’t know unless the SME team tells them and then shows them how to measure the difference.

The next problem for the SME is that the client’s original expectation is a low price based on the original lost-leader price, with all of that free bundled value. The fact is that the SME has already set the customers’ expectations for price and value without showing the difference between price and cost.

Expectations matter and are very hard to change. When the SME sells that first engagement on price, they act like a vendor. Vendors don’t normally get invited to strategic, high-value conversations at the buyer’s leadership table. Vendors receive RFPs that someone else wrote and which they’ll respond to in writing, to win or lose based on price.

Vendors get screened by gatekeepers, and get referred to a technical buyer, purchasing or a website to register for posted items to be acquired. Vendors don’t get to raise prices. They are asked to find ways to lower the price if they want to keep providing their products or services.

Most SME companies do not have the scale to be successful low-priced vendors. Certainly, some SMEs do succeed, because they have a business model that is operationally excellent, with strong cost and cash controls, and a business model based on winning because of price. If you run a SME company and understands that your long-term advantage in the market is based on being the lowest-price vendor, the rest of this article is not for you. You already know about cost versus price and have aligned around price with your low-price engagement model and message.

The rest of this article is for those who developed their businesses to deliver creative, cool, important, high-value, business-changing offers to the client. For this group of SME companies, the skill of knowing and showing the difference between cost and price is critical. The SME and every member of the SME team must deliver value messages to potential customers showing the client problem solved and resulting in measurable business improvements — versus price reduction only. Doing this makes the SME company a “must have” partner.

Many potential clients for a value-adding SME company have not considered the difference between cost and price. If the SME doesn’t help the potential client explore the difference, the buyer will keep buying on price and hoping for value. So how do you get potential new clients to understand the value before they buy based on price, when there is no measurement of cost versus price based on vendor value?

A value-based SME revenue model must sell to humans who think about growing a profitable business and want to hear about a high-value offer. The SME must not call on humans who are heads down executing tactical activities or just getting the lowest price so they can check a box.

If the SME business model is based on making a business better, then only talk to humans (buyers) who are compelled by business improvement (growth and profit). When the SME sellers talk to business buyers, don’t talk about stuff, technology, price or corporate history until the business buyer has decided the problem the SME solves may make the SME the ideal partner — then the buyer wants proof based on technology, history, etc. In the beginning, only talk to business buyers about the business problem you solve for them and their business.

This is hard work and well worth the effort to get everyone on the SME team aligned and skilled regarding the difference between cost and price — resulting in high margins and long-term partnerships.

If an offer is based on improving business results (value), make sure the communication is about the true cost versus the price, and the person or persons receiving this message are the ones who care about business growth. The selling team must be trained to deliver the true cost message, know how to find the right human to talk to, and know when to say thanks for your time — we are not a good match. The SME leadership needs to have a clear value-based strategy, make sure the organization is in total alignment, and makes sure the structure is in place to help deliver both the message and the results for the buyer.

Make sure the team knows and acts on the difference between cost and price . Remember, in the 21st century, survival depends on it.

Rick McPartlin is the CEO of The Revenue Game and is a revenue generation consultant and Vistage speaker. McPartlin was a Vistage member development chair from 2002 to 2009.
Originally published: Feb 22, 2012

Leave a Reply

Your email address will not be published. Required fields are marked *