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Hold the Price & Keep the Customer
When it comes to setting prices
the majority of businesses are followers, not leaders. It they raise
prices it’s always with the fear that customers will be offended, but
they’ll lower prices to keep a customer or get a new one. They’re
usually more price-sensitive than their marketplace.
Look at any price ‘war’ – it’s about sales volumes rather than
profitability. If all a business had to do was get sales it could sell
everything at a loss and keep going until its capital dried up. Price
wars are a step in that direction.
Unfortunately prices have to cover certain costs as well as enable the
business to make a profit. If a price charged to a customer doesn’t
cover the costs of providing the product and contribute to the business’
profitability it’s effectively creating a loss center for the
organization.
Businesses should do their pricing with a focus on their own enterprise
and not try to match what their competitors are doing. This isn’t to say
that prices don’t have to be competitive, but that doesn’t have to
translate into ‘lower’. There’s a lot more to a value proposition than
just price.
Good management maximizes the profits of the organization. There are
many ways to do this, from reducing production costs to making better
use of promotional funds.
Cutting prices off the top is a guaranteed way to reduce profits, and
that’s the opposite of what management’s there for.
If the pressure’s on to cut prices there are several things to consider.
The first is the customer the business is trying to satisfy. Price is
obviously a consideration, but what else can they be given that won’t
erode profits?
First, the business must be good at what it does. This means being
everything from providing a top-quality product to doing the paperwork
correctly. Be scrupulously accurate in details like order confirmations
and invoicing, and if the business makes a commitment to its customer it
must be sure to honor it.
What else can be done? Plenty! The human side of every relationship is
critically important when it comes to fostering thoughts of changing
suppliers. Establish a personal link between the customers and the
business – little things like Christmas cards and the occasional
telephone call can be just as bonding as a low price, and a lot more
pleasant over the long term.
No business can please every customer. There are some customers that
will simply not be worth pursuing a relationship with. Those who buy on
price alone will only be with the business as long as it can come in
below the best offer someone else has given them. This is not going to
be the type of customer that will ever make a meaningful contribution to
profits.
Be open with customers. In a B2B situation they’re in business too and
should understand that a profit is necessary to stay in business so
there’s no need to apologize for wanting to make one. Give customers an
idea of where costs originate and how important it is to them that money
is spent on things like service areas and the quality of ingredients.
A business should be selective
in choosing its customers. It’s safe to say that if a prospective
customer has a reputation for having the lowest-price offering they’ll
probably be looking for other businesses to trade with them on the same
basis, and that’s not the best customer to have.
Businesses can sell the same product in different ways. If a customer
wants to minimize the price they pay for a product, the business can
work with them to do this. It might be possible to reduce a unit price
if they order less frequently in larger quantities or accept delivery in
three days instead of overnight. Often these little details are
overlooked in the ordering process but if the business’ costs are
reduced it can both maintain profitability and charge lower prices.
A final piece of advice applies
to all businesses – never cave in. It’s too easy to respond to
price-cutting pressure, especially from existing customers, by saying
“okay, I’ll cut the price but for this one time only”. This only serves
to make it almost impossible to get the price back to the previous level
because it’s been proven to the customer that the business will sell to
them for less. If the business can do it once it can do it again. The
best way to avoid this situation is not to do it in the first place.
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