Every customer has a price range where they are willing to make a decision without any further thinking. I refer to this as the Price Tolerance Ratio – also known as the PTR.
Knowing your customer’s PTR is critical. I believe it is one of the major obstacles salespeople fail to comprehend. As a salesperson, when you don’t understand a customer’s PTR, at least one of the following results is inevitable:
- You offer a price that does not maximize the profit potential.
- You get the order but encounter resistance from the customer that hinders the relationship.
- You encounter resistance that leads to spending too much time on the selling process and ultimately no order.
Let’s look at each of these individually, starting with the first one where the price offering does not maximize the profit potential.
I start with this one because it is the most common. The salesperson rarely finds out the price is lower than necessary until long after the sales is completed – or worse yet, they never find out.
The only way around this is by asking the customer early in the relationship, before they’ve expressed any intention to buy, how they determine value and what their critical needs are. Many times, trying to ask these questions during the sales transaction itself is too late, unless the customer is experiencing a significant issue as to why the order must occur.
The reason I say this is because once the customer has determined they need to buy, they many times become focused on seeing what it will take to get a lower price. If you, the salesperson, ask them a question about value at this point in the sales process, the customer may very well use the question against you.
Take the time to ask the customer why the order is important and what risks they feel they would encounter should they not receive it on time. Ask them how their order fits into the overall scheme of what they do and what their customers do (if you’re in a B2B environment).
As a salesperson, if you can identify value or risk in other parts of the supply-chain, you can leverage this information during the sales process and increase the amount the customer is willing to pay (essentially widening their PTR).
The key is to find out as much information about the customer as you possibly can early in the sales process. Also, you need to understand how critical time is to their process. Obviously, the more critical time is to the customer, the wider the customer’s PTR will be. The impact of time could be reflected in how quickly they want to order.
By thoroughly understanding the customer’s PTR, you will be able to effectively price your product and/or service. Pricing too low means you leave profit on the table; pricing too high means you don’t get the order. There is no magic formula. It comes down to your level of knowledge and your confidence.
The second scenario a salesperson may encounter with regard to PTR is that they get the order, but with resistance that ultimately hinders the relationship. Resistance is not always a bad thing. I believe strongly that if you don’t encounter some customer resistance from time to time, then you have not truly pushed the process to the point of being able to maximize profit.
When you encounter resistance, you first have to determine if the resistance is real or superficial. Many times the customer is merely venting as a way to assert their control.
The best way to measure if the resistance is real or superficial is to see if they continue to express their concerns about price on multiple occasions. If price comes up only once or twice, then you can reasonably assume it is merely the customer venting. You can overlook it and continue with your sales process, knowing your level of service and support is going to overcome any pricing perception.
If the customer does carry on regarding pricing, then the resistance is real and it will slow the sales process. You then can adjust accordingly.
The final reason knowing the PTR is essential is it prevents you from spending too much time with someone who is nothing more than a customer from whom you can’t make any money.
Early in the prospecting and sales process, you must begin determining the customer’s PTR. The easiest way is by simply asking them what they’ve been paying for services in the past and what their expectations have been for the companies they’ve been using. If you are not direct with questions like these, you will waste time chasing customers you ultimately do not want.
Price Tolerance Ratio (PTR) is a new concept. I am pleased to be one of the first to educate people on this. Since explaining this concept, we’ve seen salespeople and companies significantly improve their profitability.
If you want to improve your bottom line, begin now to identify the Price Tolerance Ratio (PTR) for each of your customers. Waiting until you close the sale is too late.