He sat at the front of the class of Managing Directors that I was taking at a Business School, arms folded and a belligerent look on his face as he said: “We won’t stay in business if we don’t quote the lowest prices in the industry”.
There were two fallacies there. Firstly some research uncovered the fact that his prices were about mid-way in comparison to the rest of the industry, and secondly, in the end he increased his prices and didn’t go out of business.
It all came to mind as I listened recently to a radio programme when a Managing Director of a German engineering company was being interviewed. As is usual with radio interviewers, he was asked how difficult it must be to remain “competitive” in a world market.
The response was illuminating and demonstrated a totally different attitude and possibly even culture. Slightly surprised by the suggestion, the MD said: “We are extremely competitive because we manufacture to very high quality.
Our customers know that they can buy cheaper in the Far East but they prefer quality and reliability so they come to us. Because of this we can charge higher prices and we are very busy”.
Slightly shocked, the interviewer went banging on about “being competitive” without realising or even accepting that being competitive does not necessarily imply low prices. In fact, research has shown that when considering a purchase, price can come about fourth or even fifth on the list of purchasing priorities.
The fact is that lowering prices by, say, 10% can mean that you need to sell nearly 50% more just to stay the same and there is no value in that exercise. On the other hand, Vistage speaker, Malcolm Smith, demonstrates that only a 5% increase in prices and a 5% decrease in costs can double the bottom line.
The problem is a deep seated one and is cultural. Very few items are truly price sensitive although conventional thinking says that we must reduce our offer to obtain the business. In fact we often think, as did my student, that this is the only way to generate business.
In my consultancy days I had a client who manufactured testing machines for concrete and was also responsible for the maintenance and calibration of them machines.
He was losing money on all these peripheral activities and I suggested that he should double the fees for the service.
When he recovered from the shock and after some discussion he said that he would try it out. In the end the only customer to contact him asked if he would postpone the fee increase for a couple of months so that they could include it in the next budget.
Take a leaf out of the German MD’s book. Purchasers demand great service, quality and reliability right across the board from a supplier and we need to be brave and charge a price that reflects that fact. That way leads to success.
If you would like a digital copy of the price/margin matrix just make contact and I will send it on to you.
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