You see pricing specials (“sales”) all the time. Maybe a sale will entice you (and a lot of other people) to try a new product or a new store or a service you (and they) have not bought before; or maybe to try a brand different from your favorite. Sales can bring in new customers in at least some markets. Sales also help move excess inventory.
Yet sometimes, they just mean less profit for those running the sale. Sometimes, these sales are for merchandise that you’d buy anyhow; or for services (e.g., haircuts) that you’d get anyhow.
Is mark-down pricing appropriate for your business? As a tactical tool, maybe. And we’ll look more closely at that in a moment. As a general strategy, no. And we’ll look at that right now.
Many managers or owners of a small business, especially if the business hasn’t been around very long, believe that beating the competition on price is the way to grow. It’s not. This strategy is the way to go broke. To grow, you must determine what your distinctive competence is, and then you must clearly articulate that to potential customers.
Simply being the low-cost shop means you bottom-fish for the worst customers. Yes, you’ll get the job that you’re willing to do with what amounts to a pay cut. But the customer who chases the cheapest price won’t stop there. This customer will keep asking you for freebies, make unreasonable callbacks, and do other things that eat up the pitiful margin you had planned on making.
Nor do you want to be the shop that takes any job “no matter how big or how small,” or how poorly planned, complex, outside your core expertise, or rife with potential problems. Stick to what you know how to do profitably, rather than taking on something that can destroy your business. The reward just isn’t there for the risk you’re taking.
So what about tactical price lowering? This can be effective when done in a specific circumstance for a specific customer.
For example, your sales rep visits a plant where you’ve done a few installation projects. You want to get maintenance work with this customer. You have a Level II thermographer and a skilled ultrasonics specialist. Because of the company’s tight discretionary spending limits, the plant engineer would need a capital project approval to let your people conduct plant-wide testing.
The plant engineer can spend only $200 on his own discretion. But you’ve empowered your sales reps to provide limited scope engagements and keep the mobilization costs out of the quote. You let them use the “loss leader” concept at their discretion.
So your sales rep discusses with the plant engineer what “proof of concept” would be compelling enough to get a capital request approved for a thorough thermographic and ultrasonic analysis inside the plant.
The goal of this project is to show the value of this kind of work. Your sales rep asks the plant engineer to produce a list of five or six motors where a bearing failure will cost the plant dearly. Your ultrasonic specialist will start with those motors. The plant engineer will then be able to quantify the savings of early detection and intervention, thus making the capital request almost impossible not to approve.
What is not happening in this instance is a price break for the larger project. The plant engineer might ask for it, but if the plant engineer provides the correct mathematical analysis in the capital request you gain nothing by lowering your price.
What about lowering your price to match the competition? In some cases, that may be warranted. But if you’ve correctly estimated and arrived at a correct price then you may be better off letting your competitor make less money while you pursue more profitable work.
If this particular customer consistently hits you with “But ABC beats your price by 10 percent, can you match that?” you probably need to “fire” that customer.