Using price to solve problems?

A business owner was lamenting the fact that his clients fail to provide timely information, yet expect timely results.  A colleague suggested a penalty fee to discourage this behavior.  Is this a viable approach?

The short answer is ‘No!’  Let’s explore the reasons why and what alternatives exist.

Adversarial

Nothing creates an adversarial atmosphere like retribution.  You’ve done something I don’t like so I’m going to reciprocate with something you won’t like.  Anyone who has used this approach knows how quickly the relationship deteriorates.  It’s how wars are started.

It doesn’t take much imagination to see what transpires.  You tell a customer you’re going to charge more because he’s consistently late.  Even if he might otherwise be willing to admit his failing, he’s not going to do so if it’s going to cost him more money.  He becomes defensive and creates reasons why his behavior should be excused.   

Realizing that his reasons are manufactured, you challenge them.  He becomes more defensive or, worse yet, highlights failings in your performance.  You defend yourself and launch a more critical condemnation of his behavior.  Things spiral downward so quickly neither party is quite sure what happened.

Futile

Charging a penalty fee is akin to using gum to stop a leak.  It’s futile; it doesn’t deal with the real issue.  There are reasons why this customer is behaving the way he is.  It may not be behavior you’re willing to tolerate, but it’s serving his purposes.  Imagine how much more successful you’d both be if, instead of charging a penalty, you tried to find a mutually-beneficial solution.

Collaboration

The real issue in situations like this is expectations.  You had an agreement that your customer would provide certain information by a certain date and you’d complete your work by an equally certain date.  Your customer’s failure to meet your expectations is making it difficult for you to meet his expectations.

The first step in resolving this problem is to revisit your original expectations to see why they are no longer meeting both parties needs.  Without forming judgments about who is right or wrong, or who’s to blame, ascertain why the original agreement isn’t working.

The second step is to either reaffirm the original expectations or find an alternative that works for both parties.  Included in these new expectations is the understanding that if the customer fails to meet his deadline, your deadline is extended for a mutually-agreed upon time.  Be cognizant of the language you use in establishing this agreement.  Don’t speak in terms of a penalty.  Instead, frame the delayed delivery as an option.  Your customer has the option of delivering on time and getting his information on time OR delivering late and waiting for his results.  The choice is his.  Future failures on his part will be his choice, not yours.  It’s difficult for people to argue against their own choices.

Lesson

The morale of this story, as it has been with so many stories, is that pricing is never a solution to a problem.  It isn’t a solution when expectations aren’t met, it isn’t a solution for competitors’ pricing, it isn’t a solution for a lack of differentiation, it’s isn’t a solution for failure to monitor customers’ changing desires and it certainly isn’t a solution to economic downturns.

Stop trying to use pricing to fix problems.  Use it for its intended purpose, to substantiate the value of your offerings to your ideal customers.  That’s the only viable use for pricing.

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