If the (perceived) value your products and services bring to your customer is virtually identical to your competition, then all you have left to compete on is price! And this is a very dangerous place to be!
In a separate article, I wrote about questioning your value add – that if the perceived value of the products or services you offer your customer is better than your competition, AND it a value your end-customers find desirable, more often than not you’ll win. If your operation costs are lower than your gross margins, then you might even make a little money. Easy, right?
How many times have you heard this one: “Don’t worry about the discount boss, we’ll make it up in volume.”
As silly as that sounds, I’m certain we have all heard this as a serious argument more often than we’d like to admit. It is possible to make up the margin dollars lost by discounting, through increases in sales volume, but there is a point of diminishing returns when lookihg at discounts and gross margins.
A Big “M” Marketing mindset establishes realistic targets for sales volume increases overcoming the discounted margin impacts, and compares “the need to discount” against these expectations – you may not be able to “make it up in volume” afterall.
If your company is lucky enough to be selling into one of those fabulously lucrative markets allowing you to make a lot of margin dollars on the products or services you sell (e.g. Luxury Goods or Celebrity Chef Restaurants), then your gross margin dollars are going to be healthy, and only slight increases in sales will be necessary to make up any difference from any discounts you may offer, if you need to offer any at all.
However, if you find yourself slugging it out in a highly commoditized market – like tablet computers, or smartphones, or just about anything else – then your margins are probably not able to sustain heavy or sustained discounting. If your margins are small, moving the sales needle enough requires an astonishing uplift in sales volume to recover even the smallest of discounts!
Be honest, the last time you ran a 20% discount did you get the 4x lift in sales on those digital cameras?
Admittedly, I’m not a consumer behavior expert, and the psychology of pricing is a very complex subject, but it is naïve to believe you can create real value in the minds of today’s networked-connected-savvy end-customer with your frequent “while supplies last” discounting strategy. Worse, once you get your customers in the habit of receiving discounts, it will be virtually impossible to wean them off (e.g. JC Penny, Bed Bath and Beyond, Wal-Mart). Discounts and rebates were once reserved for limited occasions such as getting customers to buy in early to your next new product (before it’s released), or finishing off an old one, or as a reward for renewing their annual service contracts with you. If you find yourself having to offer everyday rebates and discounts to continually drive sales, you have essentially lowered the price – so just lower the price already. If you can afford a rebate, then you can afford to lower the price because the cost to administer rebates, and the hassles you create for your customers far outweighs the benefit of these routine purchase enticements. My friends in the retail channel are probably nodding their heads in agreement with this statement right now, but they also have to help on this one too (more on this later).
So what is a Big “M” Marketer, stuck in the Commodity Corner supposed to do? You can’t continue to cut costs by firing all your employees, or shutting down facilities. If you are on version 3.0 or 4.0, you have probably already achieved the greatest savings from suppliers, manufacturing scale, or improvements to PCB component counts. A single end-of-month sale with a 20% discount will wipe out the measly 3-6% COGs savings your talented engineers spent a year or more developing. It should be sobering when you look at this way!
If your business model is not designed to handle a Low Cost operations model, consider more creative ways to add value in the form of a bundle with complimentary products, or enhanced service offers, or better warranties. Look at your products, channels, and yes even those customers that are not profitable. If your margins have fallen into single digits, you need to ask yourself where you might better invest your development, manufacturing, sales, and support dollars? This requires understanding the Economic Value you create, as well as how you are generating sales revenue, and yes, even the customers you are targeting for your survival.
If a product or service is really strategic to your lineup – meaning that your entire solution falls apart without it – then you have to find a way to minimize continued investments in it as you work out a better solution, or introduce an offsetting high margin service model, or form a gap-filling alliance.
If your sales channels are pushing you for double digit discounts, then maybe it’s time to re-evalutate your channel partners and move to more efficient channels, unless, of course, your channel delivers value that can be recovered by working together better. For example, turn your partners into your help desk and tie them into your call management systems. Offer incentives based on service level performance for Time-to-Answer Responsiveness, and First-Time-Call-Resolutions; it will be in your partners’ best interests to get those calls answered. Your support times will improve dramatically, your costs to handle those calls will be reduced, and your channel partners will be able to add more value than simple time and place utility – and most importantly, your customers will appreciate the support they’re receiving.
The next time your sales teams or your channel partners ask you for a better price, pull out the chart, and get them to commit to the increased volumes needed to recover the lost gross margin – margin you will need to run your business – profitably, or reinvest in the next valuable product or service offering you can bring to your customers.
You’re still not off the hook to manage your product and service offerings portfolio. Get into the cycle of introducing products and services that deliver real value to your end-customers, and harvest the ones that don’t. In the beginning your top-line may cool off a bit, but your bottom line will be super healthy, and that is what keeps you alive to fight your next Goliath.