Overpriced? I Don’t Think So

by Al Hahn
From time to time, I have mentioned that, in addition to consulting, I present many seminars on service sales and marketing topics. Specifically, the seminars include service marketing, service pricing, selling traditional services, selling professional services, and negotiating service sales. I would be hard-pressed to name a favorite as they all help keep me in touch with the problems you face and provide inspiration for articles like this one. Today I am charged up about an issue that cuts affects most of you—service prices.

I Rant

I am angry because many of you have been made to feel that your services are overpriced, when the opposite is much more likely. I have been working with service prices as a consultant and trainer since 1990. Within that time, I have found service overpriced only a handful of times. This is hardly an epidemic of overpricing. What’s more, it’s been so long that I can’t remember when the last case was. Obviously, I don’t stumble over these every day.

A Little Perspective, Please!

To put this in perspective, I work in service pricing all the time. I write, speak, or consult about pricing regularly. In the background, the research part of my company grinds out competitive analyses of services, including prices. I swim in a river of service prices! If there is someone who is more exposed to service pricing, I’d like to meet her/him. The point is, if I am not finding overpriced services, they just aren’t out there.

Why, then, do thousands of service marketers and sellers feel that they just might be overpriced? There are many reasons, but I have chosen two to discuss in this column: relentless price pressure from the field and the conservative nature of service organizations.

Price Pressure

Customers generate a significant amount of pricing pressure. Consider the background. High-tech products have a long history of reducing prices while increasing performance. Essentially, the semiconductor industry, following Moore’s Law (from Intel’s Gordon Moore; look it up on the Web if you’re not familiar with it), is constantly shrinking chip size and increasing capability. This ripples through system-level products and allows product prices to continually decline, while reliability and functionality improve dramatically from one product generation to the next. This sets customer expectations for falling prices and reduced service requirements. Another factor is that customers’ purchasing staffs are expected to continually strive for vendor concessions, mostly in the area of price reductions or discounts. They pound on us directly and through our product sales counterparts. The result is an environment of constant price pressure.

We are (Too) Conservative

Another major factor is that service organizations tend to be conservative. We are dominated by service operations staff who have no marketing or sales training and who tend to be focused on customer satisfaction. When a customer complains about our prices, we tend to take them seriously. We don’t often realize that the customer is really negotiating or setting up for negotiating. Those of us who know better realize that we have to expect a certain bias in customer feedback regarding our prices. Even a customer who feels that our prices are pretty good is reluctant to admit it for fear that we will raise them. It is against their self-interest to indicate that they like our pricing, so don’t expect any love letters on the subject.

Faced with this toxic stew of pricing misinformation, service executives need to become educated on the topic, and service marketers need to be inoculated against popular misconceptions. A result of this situation is that we are unable and unwilling to explore much of the pricing alternatives open to us. We are just too careful and too conservative to take any risk that our prices might be too high. This means that we usually under price. What we fail to understand is that our actual price is almost irrelevant. A customer in negotiating posture or setting up for negotiations will complain and attack any price. If their job is to get vendor concessions, they are going to attack and use every possible tactic to make us feel defensive.

Reality Check

The fact is that services vary significantly and so do their prices. For a particular type of product, we typically find a wide spread of service/support offerings (You’ve heard of Bronze, Silver, and Gold?) at a 3X price spread. If one vendor has an economy level of service/support selling for $1,000, someone else probably has a premium offering for $3,000. This is in a competitive, head-to-head market. In fact, we have vast pricing opportunities available to us, but we usually don’t venture very far.

I am extremely pleased to note that Hewlett-Packard does not seem to be infected by this lack of adventurous spirit and is exploring new pricing territory. They have some, high-end services that cost more than the product! For a low-end server priced under $20,000, you can buy a high-end service program for over $50,000 per year. To be sure, every customer will not opt for this service. I applaud them, however, for recognizing that the value of the service, in certain mission-critical applications, can be more than the product. This is where we all need to consider going, into new territory. It is really a new time for services everywhere and we need to discard some of our old habits. Break free from the demons of the past and explore new pricing horizons.

Chances are that you are vastly underestimating your pricing limits. Conventional marketing wisdom is that if you are not losing 15 percent of your opportunities on price, you are priced too low. I realize that most service marketers are not prepared to risk very much, but you could probably easily push your prices by another five to 10 percent with little or no risk. Give it a try, it’s a good job market for service marketers.