The Bottom Line

Beating the Competition with Price, But Not Always How You Think

Last time I wrote about one of the risks associated with price strategy, specifically on an internal analysis that aligns customers with your sweet spot with respect to margins.   It may seem obvious that pricing decisions factor in a deep understanding of how you make money, but as our founder Steve Anderson likes to say, the devil is always in the details.  In this case, it’s the variability cost-to-serve that presents opportunities to drive more revenue from existing relationships (using higher prices) to improve your bottom line.  This is great news times like these where finding new sources of revenue seems all but impossible.  However, that’s not the only thing you should be worried about. What about external pressures?

It turns out that there is plenty to worry about, too.  According to CEB’s James Fitzmaurice, competitor infringement on a company’s core market was cited in 13% of the cases as the root cause of the decline for the Fortune 1000’s top 200 companies whose market value declined more than 50% between 1998 and 2009.  That trumps both compliance issues and financial mismanagement!  What’s worse is that most companies have no way of determining this risk exposure.  That’s pretty scary stuff.

How does this happen and what can you make sure it doesn’t happen to you?  Let’s assume you’re a reasonably sized company who’s got four different revenue categories of customers: small, medium, large and national accounts.  Given that differences in volume for customers in each of the categories, it seems reasonable that you might provide more favorable price concessions to those that represent higher volume and greater revenue, so you’ve established a segmented pricing strategy for your various products, each with their own target price for that particular segment.  It’s a simple strategy that’s worked for many years at most companies.  So, what’s the problem?

 

Now let’s take a look at what actually happens during the course of most competitive situations.  Your sales team may need a special concession to win a deal over the competition or meet their sales goals for the period.  If you’re like most companies, you have a price desk, whose responsibility it is to review these concessions and make sure that these concessions don’t fall below the floor price for that particular product and segment combination.  This probably happens many more times than you imagine.  If you were to examine the products purchased by your customers using a band graph (see above), you’d probably expect to find tightly grouped bands with perhaps a few outliers.  In reality, you probably have fairly wide bands for a variety of reasons.  In many cases, you’ll find customers who are paying more than the average price so they represent a very lucrative relationship to your company.  In other cases, you’ll find customers who are paying far less than the average price so it stands to reason that these customers are probably not the best fit because you may actually be losing money on them. How much is anyone’s guess.  So, how much can what you don’t know actually hurt you?

The answer is plenty.  Here’s what’s likely to happen.  The companies who are paying more than the average price are significantly at risk of going elsewhere and one of your competitors would be more than happy to let them know how much their overpaying to earn their business.  The worst part is that you may never know its happening until it’s too late.  The further they are away from the average, the greater the risk. It gets worse.  Armed with a detailed analysis, such as the one above, that same competitor may actually steer customers on the lower end of the band to your company.  That’s right; they are willingly conceding their most undesirable customers to you in hopes that it will accelerate your demise.  The worst part is that you don’t even know about its happening until it’s too late.

I can’t tell you how many times I’ve had conversations with our clients who have shared a story where they actually referred an undesirable customer to one of their competitors because they were confident that eventually they would be able to win back that business on much more favorable terms.  Pricing is a powerful competitive weapon, especially in these times.  However, you have to know how to use it effectively to gain the edge over your competition.  Knowledge is the key to success.  How much do you really know about yourself and your relationship with your customers?  Can you really afford to wait any longer?