One question I am asked a lot at workshops and presentations is: what about the “mark it up to mark it down” approach? In other words, what if inflate my initial price so I can discount it when I get customer price pressure? Then my final price is fair for the value of the product or service and the customer is still happy.
To me, this is a pricing game. I am not a fan of pricing games. It reminds me of shopping at Kohl’s. Everything is on sale at Kohl’s. EVERYTHING. And when I check out, the receipt tells me that I saved $287 by shopping at Kohl’s today! But you know what, Kohl’s? I bought a tank top and a candle, and I’m onto you, Kohl’s. This isn’t a deal; it’s hooey. You marked everything up just so you could put it on sale and try to make me feel good about it. Nope.
The “mark it up to mark it down” strategy in B2B price negotiations tends to work the same way: both sides know it’s a game, the customer wonders if they left money on the table and fears they’ve been fleeced. (See my last blog post about how unearned discounts hurt trust.) For this reason, I’m not much of a fan of this approach. My general rule is: don’t play pricing games.
Unless you must. In other words, it’s important to understand the landscape. In some industries and geographies, pricing games are standard, and you will be at a competitive disadvantage if you don’t play them. Also, in dealing with some purchasing agents who are bonused and promoted based on their ability to get discounts from you, pricing games can be important. If you decide to play the “mark it up to mark it down” game, I recommend two important guidelines:
- Know what the other side is playing for and know the “rules of the game.” Example: Knowing that many purchasing agents are compensated based on discount vs. initial price, the mark up/down game can be a sound strategy, as the absolute price matters less than the relative price (final vs. initial requested). This person gets to be the hero for negotiating a 10% discount from you! On what are they measured? “I’m getting hammered on unit pricing but I have some flexibility around freight.” Ok, put some price back in freight.
- If you plan to use the mark up/down approach, consider building in easy “give backs.” What are the elements of the deal that can be easily descoped as you mark down the price? If you know you are going to be in for a tough price negotiation, having some products, services, features, etc. that you can pull out as you mark down can be a nice way to maintain price integrity. (The tougher the negotiation, the slimmer the feature that you pull out for larger and larger discounts. The descoped element needn’t be commensurate with the discount to maintain price integrity.)