In past columns we’ve visited the issue of trust, a factor of paramount importance when choosing partners for long-term business relationships. Trust involves the buyer’s belief that the seller will deliver on all the promises made when the deal is struck, as well as the seller’s ability to continue keeping those promises.
We’ve also discussed, from a number of angles, issues of customer satisfaction and dissatisfaction. These include the processes of communication, sales, delivery, and customer service following the sale.
All of these factors are part of what the customer receives from the seller. They are part of what the customer is paying for. These factors have real value. All distributed products are a combination of goods and some amount of service. In recent years those who sell business-to-business have increased the amount of service coming with their goods in an attempt to increase, or simply hold onto, valued customers.
This “bundling” of services with goods is generally a good thing. It saves the customer money in the long run by making their work lives easier and more efficient. It gives the seller additional revenue stream and a means of increasing the bottom line. It usually results in a “win-win” situation and I’m a great champion of firms who are making this the normal way of doing business.
However, there sometimes comes a point when you may have to consider taking some price reductions in order to maintain your customer base. In far too many instances this becomes a “win-lose” situation, where the buyer is the clear victor.
When the economy is in the doldrums our customers do become more price conscious, and some become absolutely fanatic about getting prices down. So how does a wise supplier deal with this issue without giving away the proverbial farm?
There’s no real way to make this into the same type of “win-win” scenario you may have been working toward, but here are some ideas on how to alleviate the damage and come up with a reasonably happy ending.
The first thing to do is to really know and understand your bottom line on your products and to review the demand on those products and the margins you are currently selling them for. “Across-the-board” pricing, where everything that moves through your distribution center is marked up by a set figure, say 35%, is never a good way to maximize profit. It is, however, an easy methodology and frighteningly common.
Every product in your line should be under scrutiny as to its demand, the costs of handling and storage, the costs of shipping, and the actual profits accruing from its sale. For example, I know a firm that sells everything from small parts to large machinery. The type of parts one could find in any hardware store are marked up just enough to cover their costs. They’re carried simply as a customer convenience. The hard-to-find parts are marked up to whatever price the market will bear. Most of their big machines are marked up an average of about 20% over their total costs. The machines in the greatest demand are marked up better than twice that.
By optimizing the margins on each product, this company is maximizing their sales revenue. If they have to cut prices somewhere they know exactly how much they can go down for a particular customer, and they know at what point they will simply have to give up making the sale.
You also need to have a pretty good idea what your competitors are doing. Without that market information you can’t negotiate effectively or call any bluff your prospective buyer might make.
But most importantly, recall that you have been “bundling” products and services. Whether or not you’ve put a lot of thought into this, it’s probably happened over time. A buyer who is hunting for a bargain must be made aware right away that you also have expenses and a bottom line to worry about. And those expenses include a number of services they may be used to getting.
A review of the services that come with your product may uncover areas that the buyer is willing to live without. Perhaps they don’t really need three-day shipping or will even send over their own truck for pick-up. Maybe they don’t need an hour a month of customer service time or technical support. Maybe they will pay up front for their products instead of expecting thirty days credit.
Here’s the key point: customers who don’t have to make choices can become very price sensitive! When the choices are made clear, price becomes less of an issue. It’s why many sellers have “packages” of goods and services and label them according to price and content.
An example would be internet web hosting firms with their “silver, gold, and platinum” prices. The customer clearly knows they can get a bargain, but they also know what they won’t receive by not going with the more expensive options. They must make a choice and they do so according to their priorities between price, product, and service. Instead of being rewarded for demanding a lower price, they are rewarded for paying more.
It’s also possible, despite all, that your prospect will want to have everything. That’s when you must know your actual costs, take into account the value over time of making the sale, and then make a “no” or “go” decision. This takes some courage, especially in a small firm where every customer counts, but a sale that loses money is worse than no sale at all. And if the competition takes the deal they may be weakening themselves in the long run…which could work to your benefit.
So don’t despair or cave-in when a long-time customer calls and says they are leaving unless you can cut their costs of doing business. Instead, review what you’re already doing to reduce their expenses and the value of your relationship and the services you give to them. Then create a presentation that will give them a clearer understanding of what they get for their money as well as what they won’t get for less money.
Then give them the choice, and let them decide whether price is really the issue. You may both be surprised at what you find and a new middle ground may be struck…something that both of you can live with. And maintaining working relationships is still one of the most important things you can do for your company. That’s the real bottom line.
