Your costs are rising and your margins are declining. Worse, your retail partners are demanding greater margins and it’s a scorecard measure. You need a price increase but you run the risk of triggering a line review or losing placement.
Let’s start with a basic premise: our job in Sales and Marketing is not to merely generate volume but rather to generate gross margin. How then can we overcome pricing issues?
Profitability without growth will only serve to create an environment with no opportunity. Growth without profitability only serves to create a poor performing large company. Profitability without growth will only serve to create an environment with no opportunity. Understanding the balance between volume and price is your job!
Survey after survey of retailers, dealers, distributors, contractors and homeowners shows that price is rarely the key driver in the decision process. In fact, it is usually 4th or 5th.
When you buy a shirt or blouse, what factors do you consider?
- Is price the key?
- or style, color, fit, brand, or image?
How many of you buy clothes or anything else based on price as the #1 criteria?
Let’s take another example: a motorcycle helmet. Is price the deciding factor? Who buys the cheapest motorcycle helmet?
Business is a Game of Margin – Not Volume!
Too many companies believe that volume and market share are the secrets to business success. Yet regularly billion dollar corporations file for bankruptcy in the U.S. When financial trouble comes, companies “cut price” in an effort to drive top line sales.
Remember, it is the buyer’s job to discount your value, while simultaneously securing it.
Your goal: Implement a pricing plan that provides leadership to the industry and communicates your desire to . . .
- Stabilize the market
- Capture your value
- Incentivize your customers to trade up
- Earn a reasonable return
To maximize your pricing and profitability you must:
- Take a leadership role
- Understand what price is
- Sell your value
- Recognize that being competitive is more than just price
It starts with pricing leadership. You must take a leadership role…
- Price leaders generally have brand preference.
- Price leaders generally have the largest and strongest distribution system.
- Price leaders generally have a technological advantage or leadership that customers generally want to be associated with.
- Price leaders generally have scale.
- Price leaders generally have created either real or perceived value for their goods and/or services.
- Price leaders have a competitive cost position.
Finally and most importantly,
- Price leaders have the courage to lead.
The ultimate goal in managing price competition is to create a stable competitive environment where you can earn the best possible sustainable return on investment.
The forgotten elements of price
Most everyone thinks of the invoice price and terms. But these are the forgotten values of price:
- Growth rebates
- Promotional allowances
- Show specials
- Advertising allowances
- Co-op plans
- Pallet configurations
- Price protection
- Builder rebates
- Contractor rebates
- Parade of Home/Model Home allowances
- Pick-up allowances
- Guaranteed service cycles
- Merchandising allowances
- Customer accommodations
- And more that are unique to your industry
Each of these elements makes up your pricing – and your value – to the buyer. Don’t forget them when negotiating and remember they all are eating away at your account profitability.
Sell your real value
Your real value to your customer is the incremental advantage they get from doing business with you. This list is generic, but you can use it to start building your own:
- Deep customer relationships
- Intimate customer knowledge
- Shopper Knowledge
- Broad product lines
- Facilities nationwide to provide service and consistency
- Technology and innovation
- Outstanding quality
- Packaging leadership
- Brand awareness
- Retail expertise
- Merchandising and promotional ability
- Lead generation
- Customer service support
- Web-based dealer portals
- Industry integrity and financial clout
- Multi-product accessibility
- Accessibility to senior management
- Online consumer education and support
- And others unique to your company and position
You should already have an idea based on the market. YOU own the process. Homework is critical, so ask a lot of questions…starting with what do we get for making the price move? That’s the biggest question of all!
Being competitive is more than just price
Another key question is to ask what’s the competitive situation? Don’t just shout “we’re not competitive! to the product manager or your sales manager. Being competitive is more than just price. Competitiveness is in the eyes of the beholder!
- What’s the customer’s commitment to us — 25% or 100%
- What’s the overall volume compared to other customers in the market?
- What’s the competitive price on “like” product?
- Who’s the competitive manufacturer?
- Who is the distributor involved who quoted the price?
- Is this the price on the invoice?
- Is freight included?
- What’s the price after all rebates, discounts, etc.?
- Is this one time only? For a job? What’s the duration of the quote?
- How does the competitor go to market? Do they have brand identity, service programs, marketing support etc. What does the customer like about the competition?
- How will the competitor respond if we make a price move?
- Will the competitor respond by taking our new price offer to accounts we do not have positioned at this price – in other words, lateralize the offer?
- What other of our customers will be affected by this lower price?
What added value can you offer?
- What else can we bring to the party other than price?
- How can we help grow the customer’s sales?
- How can we lower their cost?
- Can we use any of our unique capabilities to keep from cutting the price?
Marketing is all about 4 P’s, one of which is Price
Make sure you spend as much time understanding pricing as any other one of the P’s. Pricing deserves respect, attention and creativity. You will be rewarded with greater profitability and be more competitive in the marketplace as a result.
For other Channel Instincts posts on pricing, see What Does “Your Price Is Too High” Really Mean? or Is Pricing Making You Go Bananas?
For a Channel Instincts post on expanding the 4 P’s of marketing to 13 P’s, see The 4 P’s of Marketing Aren’t Enough Anymore!