The business environment becomes very competitive when the economy stagnates. When revenues are slowing or declining, Presidents and CEO’s know that cash flow is critical. Holding or preferably gaining market share is important but competitors are fighting hard for the customers’ dollar. At the same time costs generally tend to increase with inflation, and with static revenues the profit squeeze is on. Sound familiar?
So is the answer to reduce the prices of your products or services, to keep cash healthy and to stabilize the business?
This is easy to do, and when business picks up, you’ll increase prices back up again. Right? Unfortunately that is also far too simplistic, and fraught with unforseen consequences. Firstly a price reduction enables your customers to see your product/service in a new lower price-value light, and like it or not, your value proposition has just been depreciated. Your customers now look more at price as the basis for your proposition, and not the intrinsic or extrinsic properties of your product or service. If you continue the pricing reduction tactics, your products or services will reduce to commodity status, and then its really hard to wrest back control of your brand.
Another consideration is that your competitors may follow and reduce their prices, and consequently the pricing structure of the industry is moving south. This means that the advantage you thought you had has disappeared, a downward price spiral is good for no-one.
So what are the alternatives before taking the tactical step to reduce prices? One approach is to look into your own price structure and to evaluate your customer’s profiles. This may take a few days of research and analysis, and here I am using the animal kingdom metaphor to expore some ideas.
The Fauna and Flora of the animal business kingdom
Let’s agree upfront that the objective of this 3 step exercise is to see how you could actually increase, rather than decrease, some prices without losing any important customers.
Step One; is to sort the “animals” in your customer base.
Fauna species # 1.The African Elephant.
This is the friendly beast that has a big appetite, and demonstrates high loyalty.
The Elephant is a most rewarding customer; large, faithful, intelligent, and has a large appetite for what you offer. The Elephant is typically the one for which fluctuations in price have a relatively low effect on their demand. In economic terms, they have a low sensitivity to price changes. Our Elephant customers have a high basic need for your products or services, and have an emotional connection to them. They trust you, as long as you don’t mess them around. They will buy from you without too much attention to the price, they focus on true value, and potentially this is a long term relationship.
Fauna species # 2. The Warthog
Not the handsomest lad on the plains, but a loyal consumer with a steady appetite.
You know the warthog, some days a bit rough around the edges, sometimes a little truculent and abrasive, but underneath all the bluster this customer is loyal. He is not your biggest customer in volume, but he is regular and reliable. He also has quite good taste, so appreciates real value and is not influenced greatly by price. Everyone needs to have some Warthog clients, but they are good to do business with.
Fauna species # 3. The Wildebeast
The Wildebeest has a big appetite, but is skittish and nervy, and looks for cheap deals.
The Wildebeest is a vast consumer across the plains of Africa, never discerning much about the qualty and always on a never-ending migration to find more. Quantity not quality is what drives this customer. No wonder that it has a muzzle shaped like a lawnmower. At the slightest change in the wind direction or move by a competitor, they move on to the next cheap source of food. These customers are nice to have because of the high consumption levels, but they may not be around for long. They are sensitive to price, in the business ccontext they focus on that rather than other features and benefits.
Fauna species # 4. The Jackal
The Jackal is always scavenging for the cheapest deal.
Seeking the easiest source of food at the lowest price is the jackal’s purpose, he is a scavenger after other animals have done the work, and he is not a big volume customer. This is a tricky character, you probably do not make much money with him, and he can take up your valuable time when you should be focusing on other more important clients.
Step Two; is to sort your products or services into categories:
These are the products or services that are the least price sensitive with customers. These typically are unique in some way, clearly differentiated, have recognized value to the user, and also have some emotional underpinning that is relevant. They are in high demand, and growing (Apple). Price is not important in the buying process because the customer is effectively making a right brain decision. The winners are by definition market leaders and their margins are good.
These are not normally high volume products or services, but they have a higher price position in their market because they deliver benefits important to the end user. They have steady positions in their markets or vertical categories. They have consistent quality, and price changes have a limited effect on demand, providing they are reasonable.
The Fence Sitters:
This category sometimes impresses only to deceive. The Fence Sitters seem to have potential for higher sales, but because they are not differentiated against competition, they fail to grow. Also, they are not different enough to sustain higher prices. Demand is price sensitive, so they neither offer growth prospects, nor better margins. These products/services need tough decisions from management sooner than later, normally the question is can we re-engineer or modify to create deference, or discontinue them?
These are the bottom feeders, being price sensitive products and services with low margins. To mix metaphors, if there is no way that the Losers can either be re-engineered or repositioned, feed them to the jackals! Losers tend to be me-too services and commodities, and unless they are strategic loss leaders with a clear purpose, eliminating them will free up capital and improve overall profitability.
Step Three; is to align the customers with the products and services that are not sensitive to price.
The fact is that a price increase is feasible on the Winners or the Dependables, or both. An increase will of course be for all customers. The crucial point is that we now know which customers are likely to accept it, the Elephants and Warthogs, and the size and importance of our relationship with them. We also know that the Wildebeest group is driven mainly by price, and depending on how we present the price increase they may go along with it. So the risk is limited to the Jackals. We do know that the Jackals may walk away, but that is a small, calculated loss.
It is necessary to prepare a proper price increase justification that is fact-based and reasonable. It is very important to have a strategic approach to the discussions with all of your Customers, but with great attention to the Elephants and Warthogs; and to a lesser degree the Wildebeest and Jackals.
As my math teacher once said – QED! It is possible to increase prices though a strategic evaluation and plan without losing important customers.
Want to discuss this further? Call John or Adrian at 905 849 3658