What Cutting Your Price Means, To Others

In a recent HBR study CEOs of large and medium companies were brought in for a study on the outcome of a business game that would lead to a price war and despite massive amounts of education, job experience and generally knowing better, the majority fell into a price war all the same. My point is not that these people are less competent than they should be; my point is that avoiding price wars is incredibly difficult. Arguably even more so at the speed of a sales rep. But just because price wars are difficult to avoid, does not diminish the importance of avoiding them at all costs.

How It Happens

For the CEO in a boardroom or a general manager who has time to analyze the situation, maybe even consult with inside or outside support the decision tends to happen in a way that at the very minimum can be justified as an intelligent response. For outside sales reps, it’s likely more of a question of having a sale disappear right in front of you. This can mean everything from spite for your competitor, wanting to save face in front of your customer, or simply not wanting to lose the commission. The pressure can be enormous and to just say don’t cut your price is missing the point.

As discussed in last week's article, profit margins are extremely important for the viability of a company (in other words the ability for the company to pay your salary and make the necessary investments to continue to do so). So with the massive pressure to lower prices at all times and the absolute requirement to not only protect margins but raise them, how do we actually do it?

How To Fight A Price War

A price war is night and day different from a real war, but the name exists as it does for a reason. Two camps are competing out in the field in what seems like a zero-sum game in which the intelligent application of resources, human, material and time, plus luck likely will lead to success. So since the name war is used to describe the situation, let’s go to the most ancient and respected of texts on war, Sun Tzu.

In Sun Tzu all sorts of advice have little or no bearing on business but one line stands out: “To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill.” The point is that avoiding battle is the ultimate aim of an army. It is possible most times, and the outcome is by far the best with the fewest casualties. Goals everyone should aim for. So how do we do this?

Prevention

A show of force is not a tactic that should be used in sales, but an acceptable version would be to make it clear to competitors that the strength of your company means you could win a price war, you simply don’t want to. The irony is that the larger company likely has more resources to fight a price war, but is disproportionately impacted by one. Typically the larger company has a larger market share. So the smaller company cuts prices by 10% and loses tens of thousands of dollars in doing so, but when the larger company matches, they lose hundreds of thousands of dollars due to the size of their market share. Again, everyone loses.

Side note: the customer wins in a price war, but only in the short term. If the customer reacts to the new prices and budgets accordingly, they are in for some trouble when the price war ends, which it eventually has to for the industry to survive. In the mid to long term, the customer loses because the only reason you could provide the products and services reliably to your customer is that your profit margins allowed you to invest in necessary infrastructure and equipment, and you are motivated to do so with good salaries and commissions.

The best way to avoid a price war is to know your line and hold it. Every organization should know they’re value to a customer, and act accordingly. A part of that means not giving big customer prices to small customers just because they shop more and negotiate harder. Countless tiny firms get phenomenal pricing and concessions way outside of they’re buying power simply because they ask and push. Which leads to step one. Never give a concession just because someone asked for one.

What To Do When Asked To Reduce A Price

The first thing you must do when asked for a better price is ask why. It’s amazing how often the answer is some form of “I want to pay less”. Yes… we all do. There’s absolutely nothing wrong with saying no. It’s a fair price, there’s no reason not to charge it. If you give in to this, the customer will press on every single order costing you not just profits but valuable time as well.

If the customer says they have a better price from a competitor, why did they give the price? Is it really comparing like to like? Is the quantity of the purchase the same? The expected delivery time and conditions? Payment terms? There’s a lot that goes into a price. It’s not just cost divided by .7 all day because it’s easy. You have to have a strategy. The strategy influences your costs which informs your cost and therefore pricing strategy.

Let’s assume that in this case, which is rarer than you may think, your competitor is offering the exact same product, to be delivered on the same day and time, in the same way, for the same quantity, and with the same payment terms. You have two choices. You can drop your price signaling to your customer that they could have gotten a better price, should have negotiated a better price, and have likely been overpaying for a long time. And signalling to your competitor that they should have gone in lower still. The latter, in case it’s unclear, is the beginning of the price war. Choose this option and congratulations you’ve entered a price war everyone will lose.

The Alternative

With a new account, you will typically begin as a supplier of last resort. The A, B, and C suppliers couldn’t so the customer is going to you. Or, to be nice, they’re throwing you a bone, giving you a chance. Either way, you’re starting small. That’s okay. Whatever product or product line you begin with is your anchor. Your regular point of contact and what your new customer will continue to buy from you. This needs to be your foundation and used as such. What do you do with a foundation? You build on it.

Cross-sell and upsell based on this product or product line piggybacking off this order to build your orders. An often-overlooked method of improving the profitability of a distributor is by making each order pick and delivery more profitable by making the dollar amount larger. You increase the dollar amount of each order by adding more items.

Here’s a tangible example. Let’s say the first sale you make to a customer is an air valve. You happen to be well stocked in air valves. Use this good first experience to point out the other air valves you can offer. You don’t have to be very inexpensive but you do have to charge in line with how much you charged on the first sale. Very few of your competitors are using velocity pricing. After this you want to tell your customer that you’re regularly supplying them with air valves, let’s add the fittings you need to the order and get them all in one place easily. Most buyers associate a product group with a supplier. So your next offer will be airlines, etc. Keep to the theme. Then choose another one.

Choosing another line to go into is the same process as what you should be doing with an existing customer. Begin today with the idea of anchor lines. What product group or sub-group is the customer buying from you? Continue with picking up weekly orders and working promotions but choose one line for each customer, or one line for all customers and start building!

Conclusion

This is the recipe for good sales and does not require a top-down formal strategy such as cost leadership, delivery leadership, knowledge leadership, etc. Very few distributors have a strategy at all, so I’m not saying you need to build one today other than to choose a product, or product line/group, and start building. Anyone can do it, and you can succeed with it.

Drive safe,

Kevin Gauthier