WHY DO WE HAVE TO JUSTIFY THE COST
In a complex solution sale, a professional services sale or for something intangible such as training and education services, a cost justification argument is quite likely to be a key element in enabling the prospect to make a decision and you to close the deal. As working capital within most organisations becomes a scarce commodity it is highly unlikely that they will commit to any level of expenditure without first justifying the cost.
If your competition is not justifying the cost of their proposal but you go through a justification exercise with the prospect, you will have gained a considerable competitive advantage as well as proving to the prospect that you have thought through the implications of your proposal and its impact on their business.
Speaking the Prospect's Language
Throughout the sale but especially during the cost justification process it helps to understand and use the financial terms and measurements that the prospect uses. It puts you on the same wavelength as the prospect, proves you understand their business and will make you stand out from your competitors.
Considerations for your price versus cost arguments
The "price is not the cost"
The price of item A is £10,000 and it lasts for 1 year, you then replace it. The price of item B is £15,000 but it lasts for two years. Over 2 years item B "costs" less, even thought the "price" was higher.
To get a price versus cost discussion going, you need to get your prospect thinking longer term, not just the immediate future. Bring into play "the total cost of ownership", "life cycle costs", hidden costs of ownership, the cost of the time taken to make the purchase (writing requirements, issuing tenders, seeing suppliers, reading proposals, budgeting), the cost of buying the wrong product and it then not working and then having to "re-purchase". Get real, tangible numbers on the table and get the prospect discussing past purchasing experiences that have not gone well what was the cost to sort it out compared to the price to buy it, what was the cost of what went wrong?
One vehicle is priced higher than another, its more reliable, it requires less servicing, it uses less fuel over the life of the vehicle, the price is higher the cost is less.
You buy a cell phone on a tariff that is cheaper than another provider the roaming charges are higher, the insurance is extra, the phone is inferior quality and you lose calls. The cheaper to buy phone is more expensive to own and run especially when you have to replace it sooner.
You hire consultant for $1,000 per day for a 10 day project, a more experienced consultant is $1,200 per day but he gets the project done in 8 days and with better results for $9,600. The higher priced consultant costs you less.
When the customer wants a discount prove to them that "reducing the price does not reduce the cost".
Get the price positioning into perspective, make it palatable for the prospect
Assume that your solution or service has a price tag of $100,000 and you are talking to someone earning $40,000, $100,000 is a lot of money it takes this person over two years to earn this amount. If you are negotiating with a CxO earning $200,000 then whilst $100,000 is still a lot of money, to the executive it is only 6 months income and so the amount involved is psychologically less of a barrier. Try and keep the price "on the same wavelength" and within the bounds of "comfort" for the person you are dealing with. A good way to do this is to break the price down into manageable amounts e.g. annual costs or monthly lease payments rather than lump sum, capital amounts.
Find out the timescales used by your prospect for budgets, forecasts, reporting etc. Then break the price down to the smallest amounts that you can get away with in line with his timescales. If you can get as low as monthly so much the better This way cost justifications involving cost of employment, for example, can easily be related to monthly salary amounts. Relate broken down costs to the prospects organisational structure by splitting and sharing costs amongst departments/offices/branches etc.
Make sure, if it suits you and the circumstances, that the customer is comparing like for like. If the prospect says "you are more expensive" or "you don't do as much" find a polite way of saying "Compared to what?". It may in certain circumstances suit you to "move the goal posts" and take the prospect away from like for like comparisons. This could be, for example, when you want to introduce features that you can give you better price : performance or cost : benefit reasoning. Relate what you have on offer to tangible cost benefits. Leave the customer to work out your competitors cost benefits for themselves.
Listen are price objections actually buying signals?
Listen carefully to what the prospect means rather than just what they are saying. For example when they say "this is a lot of money" are they saying this is expensive or do they mean "this is a large sum of money, what return on investment do we get?" or "this is a lot of money, help me justify it to my partners so we can go ahead".
Income and expenditure
Find out about costs and overheads. Ask about revenue generation such as billable hours, fee income, consultancy revenues, product and services revenues. Look for how the prospect does his business and how they generate revenues:- Examples of question that help with cost justification include:-
How is your company/department/division structured?
What are your profit and loss and/or cost centres?
What are your annual revenues?
What revenues is your division responsible for?
What revenue peaks and troughs do you experience?
How do you measure employee costs?
What profit margins are you working on?
What is your monthly expenses run rate?
How many employees are direct fee/revenue generators?
How many employees in total?
What system/method do you use to charge out or bill for your employees/fee earners?
Look outside the sphere of where your own products and services will be used. Is there a knock on effect that will result in cost savings for other departments and divisions too delivering value that was not expected?
Sell Benefits not Features
Don't forget people buy benefits not just features, i.e not what a product or service does but what they will derive from it. Don't sell features without benefits you cannot cost justify features.
- Get lots of information about costs, revenues, ROI, payback.
- Use the prospect's numbers, do not invent them, get the prospect's commitment to use them and his agreement as to their accuracy.
- Put the justification in writing especially necessary when the decision maker is more than one person and/or you are selling through someone who has to go to a higher authority for the decision.
- Use the prospect's language.
- Do not leave the prospect to do the cost justification for themselves -they may not bother.