Setting The Right Pricing In Any Environment
Dec 21, 2008
In the current environment, many companies are putting pressure on their suppliers to reduce prices, extend terms, provide additional services and make other costly concessions to the customer with nothing given in return.
Many time the owner feels he or she has no choice but to comply. This, of course, is the worst decision the CEO can make. They are communicating to the customer that their goods and services are not worth what the customer has been paying and that there may be room for further price reductions, leading to a downward spiral and possibly the ultimate demise of the company. How do we avoid this pressure and create a cooperative relationship with this customer?
Several steps, involving the personnel of the entire company can help achieve this goal:
- Take charge of the pricing process. Establish clear pricing structures for products and services that can be substantiated to all employees so they understand the need to maintain the current pricing levels. Make sure your sales people can react to market conditions but reserve final pricing considerations to the owner/CEO. Above all, make sure your pricing reflects value
- At the same time, be sensitive to the fact that the value of your products meets what the market is looking for, if you want the volume of a Ford, don't produce a Bentley.
- Incent your sales people based on margin rather than volume. Often I see companies pay sales people based on sales, giving them all the incentive to cut prices to secure the sale, and therefore their bonus. Instead, establish a margin amount that they are expected to attain, and give them a generous bonus for exceeding that expectation. Make sure you do not deviate from paying on increased margin, thereby communicating to your sales people that increased margin, not increased sales, is your main concern.
- Make sure your pricing of products reflect the market segment of your product line. If you are selling Bentleys and Fords, don't expect a uniform profit for each product sale.
- Finally, spending time with the right customers and supporting them pays dividends and helps support your pricing structure. Spending time with the wrong customers can cripple a company. As a CFO of a successful turnaround, I implemented a plan to resign 60% of our customers. In doing so, we reduced our sales by 8% but created the first profitable year for the company in six years. This was a company that was losing $20 million annually. After that customer reduction, we were able to grow the business off the profitable base and never had an unprofitable year again.
Hiring a B2B CFO can help you to implement these practices and more to resist discounting pressures and grow your business. Log on to http://www.b2bcfo.com/ to find the one most appropriate for you, or give me a call at 757-344-7462 to help you grow your business.