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Sunday, 4 July 2010

We Can Only Compete If We Are The Cheapest! Really??

When I was a part-time visiting lecturer at a Business School, I was waxing eloquent in a session with business leaders about the need to increase rather than decrease prices.  A student in the front row sat there with a grumpy expression and arms folded and I knew that I had an impending discussion on my hands.

"Rubbish!" he said: "We can't possibly compete in our industry unless we are cheaper than anyone else" (he also said that "it's different in out industry")

"What's your product quality and service like then?" I asked

"Best in the industry" he said.

 I pointed out that there seemed to be something of a mis-match here and he subsided somewhat.   Perhaps the point got through because some time later he asked me to do a marketing study for him.

For a start I checked on the listed prices of all his competitors, 75 in all, and guess what;  he was smack in the middle, neither the most expensive and certainly not the cheapest.  In addition, the acknowledged brand leader was right at the top of the pricing chart and was the largest and most successful player in the industry.

This is a salutary lesson.  In many research programmes, price has been shown to be as low as no. 5 in a list of preferred attributes of a sale.

Furthermore, reducing prices in order to increase sales is seldom checked as to its likely result.  Typically, if you have a product with a 50% mark up (or 33% margin) then a 10% reduction in the selling price would require around 40% more sales just to achieve the same result.  What is more, a 10% increase in the selling price would mean that you would be able to lose 17% of sales before the exercise showed a loss.

If it all sound complicated I have a couple of price/margin templates which show the full range of possibilities when either reducing or increasing prices.   If you would like a copy just email me.

There is a good deal of fear in increasing prices; fear that you might lose business, fear that the customers will rebel altogether and just fear of telling people.   There is, of course, a vital need to ensure that all the other criteria which encourage people to deal with you are in place, so that you are delivering the highest possible quality in terms of product, service, delivery, promises fulfilled and general relationships.

On that basis, price becomes, if not irrelevant, certainly far less of an issue in the mind of a purchaser.

One of our great Vistage speakers, Malcolm Smith. says:  Ask your people "“Why aren’t we putting up our prices this month?”   

Now there's a thought for the day.

For more information visit www.vistage.co.uk and www.vistageblog.co.uk.
To contact and to request the price/margin templates, email to ivan.goldberg@vistage.co.uk

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