by Paul Hunt – President
If your client is sipping champagne when they paid for beer, it’s time to establish a pricing strategy.
If you haven’t walked away from a piece of business in the past six months, then it is very likely that your company doesn’t have a pricing strategy.
In other words, you are trying to be all things to all people, and that is not a strategy. In fact, it could have a detrimental impact on your business because it means that highly price-sensitive customers will infiltrate your company and obtain pricing that is well below what your loyal customers who value your offering pay.
I’ve learned that it’s not the best customers who get the best price; it’s the best negotiators. We call them “system beaters.” They know where the holes are in your pricing — how to get premium products at discount prices, or secure special discounts by making your salespeople feel guilty or afraid of losing their business. They might also negotiate free delivery, demand an unusually high level of technical support, pay bills late — the list goes on.
So how do you deal with customers who have champagne tastes but want to pay beer prices? If you want to ensure that your company’s pricing integrity is not compromised, you must walk away from them. By doing so, it energizes your company to focus on the opportunities that will grow your business — and, most importantly, increase your profits.
Before you fire an account, it’s a good idea to do a customer-profitability analysis. That will enable you to identify which accounts are unprofitable, so you can reprice or fire them.
Recently, I was talking to the president of a successful company that had lost an account that represented 25% of its sales volume. Sounds like a disaster, right? Wrong! Even though sales went down, profits went up! This is not an unusual story. Most companies have many customers that are unprofitable, and the best gift you could give the business is to fire these accounts. Some of them may be willing to pay the higher price, but don’t fret over those that won’t; let them take their unprofitable business to your competitors. Be prepared, however, for resistance from the sales force, particularly if they are paid commission on volume. (We’ll talk about that topic in our next column.)
We recently had a client who was selling a seasonal product to a large chain retailer, while the volume was outstanding, the profits were unsustainable. They had a negative margin on the product, meaning that the more they sold, the more money they lost. The retailer had convinced them that no other suppliers had taken a price increase.
Looking at the data, we found that the rest of the category had been increasing prices while our client had been offering more and more, effectively decreasing their prices. We put together a sound business case to support a double-digit price increase and worked to bring the account team on-side. The manufacturer felt they deserved the increase and their conviction to the business case resulted in a successful presentation to the retailer.
If you are not prepared to fire customers, an alternative is to offer versions of your product or service offering. Take, for example, a company that specialized in storage. It had premium clients in the pharmaceutical industry that used its storage facilities because of the high level of security, temperature control and 24/7 access it provided. However, it also had low-priced accounts that appreciated the superior offering, but were not willing to pay for it. Consequently, the pharmaceutical customers asked for the same prices as the lower-priced accounts. A potential disaster!
In order to do business with both types of customers, the company built a separate storage facility for low-value products. By doing so, it reduced its cost to serve and was able to offer lower prices profitably. The pharmaceutical companies were not interested in this option because they valued the superior security and other benefits, and so the problem was resolved.
Whether you choose to walk away from your unprofitable customers, or provide versions of your offering, don’t let them sip on champagne when they paid for beer.
-Paul Hunt is president of Pricing Solutions Ltd. His pricing column appears monthly in the Financial Post.
Read more at the Financial Post