One of the common issues that I come across when dealing with Business Owners is concerned with the crossover between the desire to deliver a superior level of quality & service and the need to own a successful business. Often, this leads to errors, stress and mis-judgements on how to operate.
From my experience in dealing with many such business owners, I have decided to produce a series of blogs that will address a number of the issues I come across while dealing with business owners. These blogs will focus on a single topic each and will hopefully provide some insights for others. At the very least, I hope business owners will take a little time to stop and think about their business practices.
Topic: Price versus Service:
Entrepreneurs want to deliver a service that is above that of competitors, which many link with a need to provide ‘free stuff’ in order to attract or retain customers. ‘Free Stuff’ can mean extra product, additional service, etc. at no extra cost to the customer. This can lead to a major problem; giving away your value.
One of the lasting lessons I learned many years ago on a training course is the answer to a basic business question;
Why do Businesses Exist?
The answer is simple; the sole reason for a business to exist is to MAKE A PROFIT. That does not mean that they don’t want to be known as organisations that offer premier services, quality, or the other good stuff, but the key to existence is profit.
This, I believe is where many entrepreneurs fall down.
I have dealt with numerous business owners who, as soon as a prospective client shows an interest in their product/service something is triggered in them that makes them ‘do whatever it takes’ to get the business. In general, this means that if the client challenges a price, the business owner will start dropping their prices in order to ‘get the contract’. This is a major mistake.
A prospective client approaches your company seeking to purchase your product or service. You give them a price and they say “Ooh, that’s more expensive than I thought”. So, in order to ensure you get the sale, you reduce the price.
- What message is this sending to your client?
- How much does this action demonstrate how much YOU value your own product or service?
As an experienced professional buyer I know that purchasing professionals are tasked with buying products and services for the best overall combination of price and service. I also know that buying from a company who is willing to drop their prices when challenged does not inspire confidence. Your individual customers/consumers can have the same opinions.
In order to provide your product or service, you have to spend money. This may be to purchase raw materials or equipment that will enable you to provide your product or service. These purchases are expenses to your business which MUST be recouped if you are to remain in business. I have dealt with clients who forget this when ‘dropping’ their prices in order to attract the client. So, if you end up charging a client less than it costs to prepare the product who makes up the shortfall? By dropping your price to the extent that you are not even covering your costs, you are effectively paying your client to do business with you. While the client gets a great price, your business model is not sustainable and at some point your money will run out. What will happen to your business then?
So what should Business Owners do?
First of all, identify how much it costs to produce your product/service. This is the price you cannot go below. No matter what a prospective customer demands in relation to pricing, always remember, if you drop your price below the cost to produce the product, you are effectively paying them to buy your product!
How many of your suppliers pay you to buy their products?
One way to overcome this issue is to right down all of the costs associated with supplying your product/service and have the list to hand whenever you receive a price query. Once you see it in print, it can have a seriously sobering effect when dealing with quotations.
Okay so you know how much YOU have to pay to produce the product that you want to supply to your clients. Next you have to work out how much you want to make from the transaction. The whole area of mark-up is fraught with danger. The temptation might be to charge no mark-up in order to make a sale. In this case, ask yourself, “Do I like working for nothing?” because without it you are only covering your costs, that is exactly what you are doing.
I have found from working with clients, that a better way of playing with the price that a client pays is to divide your product/service into a series of options, similar to when you want to buy a car. If you were to look for a Mercedes E-Class you can expect to pay between €42,000 to €121,000 for the saloon model. The car is the same, but the more the customer wants to pay, the more options are included in the price.
I used this example with a client recently to great effect. This client had a habit of promising the world in order to get the contract. However, instead of being conscious of how much it cost to provide the service, the client would cut prices in order to attract their customer, i.e. paying their customer to do business with them. They had persuaded themselves that ‘dropping the price = improving service’.
So what did they do? Using the Mercedes example, they identified every element of their service and the costs associated with it. They made a spreadsheet with the costs (including the mark-up). Now when a customer comes, they quote the price based on the customer’s requirements. If the customer subsequently suggests that the price is too high, they offer to revise the service to suit the customer’s budget, while maintaining their costs and mark-up.
The customer gets a very personalised service which is tailored to their requirements AND budget. For the business owner, the result is that they are now in business for profit. They are covering their costs and earning money to cover their salaries, etc.
Stephen Covey (author of The Seven Habits of Highly Effective People) wrote that in business, it should not be about having a ‘Win-Lose’ relationship between the parties in a transaction, instead the focus should be on a ‘Win-Win’ relationship where the client/customer gets the product or service they require and the supplier gets the revenue to help them survive and make more. Covey, in fact, goes one better when he suggests that in business one should be willing to ‘Win-Win or Walk Away’, i.e. if you can’t reach a mutually beneficial result, both parties should walk away from the deal.
That’s a difficult concept to apply in business today. Most business owners (as mentioned earlier) will do anything to make a sale, even sell at a loss. This is not a long term solution and can be very damaging to a company’s reputation.
The client mentioned above, had difficulty adopting this concept. Two things changes their opinion:
- Listing all of the costs associated with their various services really served to hit home just how much things cost and eliminated the risk of selling at a loss. It also gave them the potential to adopt their service to suit their customer rather than cut prices.
- They actually had a customer who came to them for their service and tried to get the price cut to what would effectively have been a loss for them. The client took a decision to offer to amend the service rather than cut the price and after consideration, the customer bought their services.
In the current environment, ALL business owners (B2B and B2C) are under pressure to attract and retain customers. In these circumstances, the temptation to offer products or services at reduced rates can be too great to be ignored. However, before you go down this road remember:
Cutting prices to cost = You are working for Nothing!!
Cutting prices below cost = Paying your customer to buy from you!!
Instead, you should:
- Identify, list and apply a cost to ALL the elements of your product or service (including mark-up).
- Use the list as an ‘Á La Carte’ menu for your business.
- When a customer challenges a price for the product or service they have specified, offer to adjust the specification as a means of reducing the price.
Try it…And Good Luck!!
Until next time….