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.

Copyright 2004, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.