Depression. It’s not just about the economy. Depression slips into our collective
psyche. The markets fall in a downturn
because investors lose confidence. Fortunately, some of the things your company
needs to do in this environment will also lift
corporate self esteem and fight the psychologically dangerous side of a downturn.
“There are lots of opportunities for
improvement in this kind of a market,” says
Jim Lane, director of GBQ Redbank
Advisors, GBQ Partners LLC. “You have
some of the traditional barriers to change
now removed, in part because it’s become
more about survival instead of incrementally
doing better, but also because people are
more willing to change at times like this.”
Smart Business spoke with Lane about
value ideas and pricing opportunities that
can be used during a downturn, and the positive impacts they can have.
What value ideas should companies use?
Since some prices are falling, look at the
supply chain and procurement functions.
There are opportunities to get certain commodities at lower prices. Petroleum, for
example, was being sold at double or more
than where it is now just a few months ago.
Transportation companies fall under pressure and become more price competitive
during a downturn, so consider trading a
long-term commitment for a lower rate.
For many, variable costs will naturally be
falling as order volume is reduced. In those
situations, look to fixed and overhead costs
to make sure they are kept in line with variable costs on a percentage basis.
Surprisingly, this may be an excellent time
to launch new products and services, especially ones that are in tune with the times and
generate cost savings for your customers.
People are looking for new things and they’re
looking to change. Look at how your customers want their suppliers to change, and
then make those changes.
How has the economy affected pricing?
One of the biggest ways pricing is affected
is when company professionals get worried
about the future — giving discounts just to
lock in a deal, or overcompensating for customer service failures by giving things away for free. This behavior can be very destructive to profit. Sometimes we forget, but a 10
percent discount means selling 67 percent
more to make up the lost profitability. Pricing
is such a huge profitability lever — just a
1 percent improvement in price is equivalent
to an 11 percent cost reduction effort.
What can be done about pricing?
To move toward a culture of pricing excellence, you must first understand your value
proposition to your customers. Actually sit
down with your customer and ask: What is
our product worth to you? Does it lower your
costs? Does it enhance your performance?
Understand in real economic terms the
impact of your product or service on the
company or individual that buys it. Take copious notes and be sure to share this information with the entire company. It’s empowering for employees to know how they affect
the lives of customers, and this feeling of
making a contribution to someone else is the
beginning of a cure for downturn thinking.
What strategy can a business put in place to
move toward an improvement in pricing?
First, get a handle on discounts. There are a
lot of different things that actually turn out to be the equivalent of a discount, and people
don’t think about them because they’re
stealthy or hidden. They give away freight or
expenses as part of the deal, or they give
away accessories that go with the product as
opposed to charging separately for them.
They give friend and family discounts. They
give discounts that can be used additively, for
instance, reducing prices in January and
allowing customers to further reduce the
price by using leftover holiday coupons.
Watch how the various offers you have add
up and make sure that you’re consistent
about not doubling up on them.
Second, examine buying behaviors at the
transaction level. By examining the extremes
you can learn about company and buyer
behaviors. Ask why customers are able to
buy your product for so little and how you
can get them up toward the average. Then
ask why some customers are willing to pay
so much. What value are they seeing or what
approaches are you using that you could use
across your organization and customer base
to improve pricing? Again, looking at the
upper extremes of order values is healthy for
the corporate esteem.
Third, determine your pricing floor, which
is cost plus the minimum acceptable margin
for an order. Then compare that floor to current pricing behavior and price lists and
ensure that no order is accepted below the
floor. This typically requires a pricing control
structure and a chief pricing officer to
enforce compliance and approve discounts.
What are the benefits of implementing a pricing strategy?
The beauty of pricing is that although the
homework is daunting, implementation is
simple and it has a huge impact on profitability. If you get a 1 percent increase in price, it
drops straight to the bottom line. It is unlike
most improvement efforts, where you have
to apply some additional cost. In pricing, if
you get a price increase for the same product
without changing the product, all of that falls
to the bottom line. It’s an efficient way to generate additional profitability. In my experience, customers don’t even realize how
much discounting is going on, so they don’t
even miss it when it’s eliminated.
JIM LANE is director of GBQ Redbank Advisors, GBQ Partners LLC. Reach him at (614) 947-5257 or [email protected].