Three Sales and Marketing Myths: Myth Two

Increasing sales is the primary goal of sales effort. Economists tell us that price and demand are inversely correlated, which means that higher prices lead to lower demand, and lower prices lead to higher demand. The extent to which this happens in a product or service category can be measured and predicted using price elasticity of demand curves; calculations that economists, marketing consultants and pricing analysts can do all day.

Myth 2: Lowering your price can increase sales.

The theory is simple enough: as demand for a stuff increases, the overall market clearing price increases; i.e. the amount that the entire market will pay to win against rival bidders for the limited amount of stuff on the market. More bidders/buyers means that demand is up. The key to this pricing theory is in understanding the way demand influences the market price. The theory requires the assumption of multiple buyers bidding, as in an auction. Bid-Ask auctions behave this way like on eBay, and if you’re selling stuff, you want as big a “market” as possible. That way you have the best chance of getting rival bidders. In the end these “markets” function to determine the “market price” for something, whether grain, art, or oil, or your kid’s old toys.

The Problem

The problem with applying this theory to the sales world is that stuff that needs to be sold is not typically sold in multiple-buyer markets. Selling usually happens in a one-to-one market that doesn’t have the kind of buyer rivalry that creates a market price. Instead, the best price is usually determined by the seller, and the buyer can take it or leave it. Seller driven pricing is based on a decision to produce the good or service at a given price which creates an acceptable profit margin. At a low enough price, the profit margin is zero or negative, and the seller has the incentive not to produce the good or service.

In these situations, salespeople are employed to go and recruit demand and develop it to a point where the price is adequate for a transaction. So seller set prices require salespeople create enough demand to support the price.

Fortunately, salespeople are the best way to create demand in these situations. 

Unfortunately, reducing the price in these situations can actually harm or reduce demand. Some recent research has shown that reducing price, or putting things on “sale” can damage the perceived value and customer satisfaction. This has been shown to happen with what economists call experience goods, e.g. things that have to be used to be judged, like services. In one study researchers showed that when people paid more for something, they found that it performed better for them than when they paid less. Contrary to expectations, when researchers asked to people pay a higher price for a vitamin supplement they solved more IQ puzzles than people bought the same supplement at a discount. The same thing was shown for people’s perception of the amount of energy they got from an energy drink, but they didn’t just “think” they got more energy, they ran farther and reported less tiredness afterward. This is good news if you sell vitamins and energy drinks, but most of us don’t do that. The point is that more complex and risky transactions are arguably more susceptible to price-related judgments.  Judgments and perception equal reality.

So, since the function of the salesforce and the marketing department is to stimulate demand, it is reasonable to point out that discounting is counterproductive from a margin, but also customer experience and satisfaction standpoint. It is important, therefore, to treat price adjustments with care so that perceived value isn’t threatened.

If the aim is to sell more stuff, the best path toward that goal is to increase sales and marketing effort, not discounting.

Stay tuned for our next post– Myth Three: Your job is to talk about your product; if you’re not talking about your product, you’re not doing your job.

Image courtesy of Earls37a