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May 12th, 2010Don’t Discount Your Way To A Slow Death
February 24th, 2009As we all know, times are really tough, as tough as they’ve ever them. Sales are down for many, if not most, businesses and the drop-off is causing severe cash shortages. Most companies are being forced to lay-off staff and expansion is completely out of the question. While tightening the belt is absolutely the right thing to do, cutting prices to get business is the worst mistake you can possibly make.
When business slows down and you need every dollar of cash you can get your hands on, the pressure to discount becomes relentless. Yet this is absolutely the time when you can’t afford to cut prices. You think, “how can I sell in this economy if I don’t discount. My competitors are cutting their prices and my customers know I’m desperate. They expect me to cut mine as well. If I don’t cave, they’ll go someplace else.” You probably also think, “I really need cash. I can’t make payroll or pay the rent without it. How else can I get the cash I need?” That’s wrong thinking!
Here’ the reality
Your customers don’t know whether or not you’re desperate unless you tell them so. Many buyers have learned that they can often get a price concession simply by asking, so they throw out a trial balloon to see if they can get lucky. They say, “I know the economy is tough, business is off and you need the work. I’ll pay you $X for the job,” a significant discount from your normal price.
Your skill as a marketer determines whether or not you get this sale and, even more importantly, whether or not you make money on it. If you agree and give them a discount you’ll have given up all, or nearly all of your profit on the job. Instead of caving say, “I know some of my marginal competitors are in trouble, but because of our excellent track record and large customer base, we’re really busy.” Then go back to talking about the benefits they get from buying from your company. You’ll overcome nearly every one of these price challenges.
Remember, they called you instead of someone else for a reason. Whether it was a referral or your ad in the phone book, they chose you because something told them that you were one of the best, if not the best choice they had. Also remember, they almost certainly wouldn’t have called you if they couldn’t afford to buy.
Your skill as a marketer determines whether or not you get this sale and, even more importantly, whether or not you make money on it. If you agree and give them a discount you’ll have given up all, or nearly all of your profit on the job. Instead of caving say, “I know some of my marginal competitors are in trouble, but because of our excellent track record and large customer base, we’re really busy.” Then go back to talking about the benefits they get from buying from your company. You’ll overcome nearly every one of these price challenges.Remember, they called you instead of someone else for a reason. Whether it was a referral or your ad in the phone book, they chose you because something told them that you were one of the best, if not the best choice they had. Also remember, they almost certainly wouldn’t have called you if they couldn’t afford to buy.
Here’s the bottom line
When sales slow down your fixed cost per sale goes up. For example, assume your rent is $1,000 and you normally sell 1,000 items a month. At this level, only $1 from each sale is needed. If you’re now selling only 500 units a month, $2 from each sale is needed to pay the rent. This means that discounting is even more damaging in these tough times. If your gross margin is thirty-five percent and you cut your price by only five percent, you cut your profits in half and have to do twenty-five percent more business to earn the same profit as you would have if you hadn’t cut your price. A ten percent cut means that you’ll earn nothing on the job and you’ll never make up the lost profit.
In a slow economy you simply can’t afford to discount. It may seem expedient, and the cash is really inviting, but if you cut your prices you’re only hurting yourself. What you’re actually doing is slowly eating away your assets, especially your inventories, and growing your payables which takes you further into debt. Sooner than later, you’ll find yourself in the position where you have no inventory and no cash to buy more.
Price cutting is the result of fear. Don’t let low prices rob you of the cash flow you need to run your business and make it a success. Your lifestyle depends on it.
Stop Paying Your Unprofitable Customers!
October 3rd, 2008Stop Paying Your Unprofitable Customers To Keep Coming Back!
From 15 to 40 percent of your customers are money losers for you, costing you cash out-of-pocket every time you sell to them. Identifying and eliminating these upside down transaction will significantly increase your company’s net income, oftentimes doubling it.
Study after study, including those conducted by prestigious institutions such as the Harvard Business School and top-flight consulting firms, have proven this conclusively. Others have shown that up to 140 percent of a company’s profit comes from as little as 15 percent of its customers. Yes, your profitable customers – and ultimately YOU – are subsidizing the rest.
The pressure on management to increase both profitability and market share is tremendous. Most managers have been taught from their first days at business school that increasing sales is the number one way to improve their bottom line and build market share. They push their sales forces to chase sales with abandon. Unfortunately, this strategy often backfires, resulting in decreased profits.
There are several reasons why profitability goes down as revenue increases.
To build sales, many, if not most, companies try expensive special-offer programs. They dole out premiums in the forms of trips, or prizes, or quantity discounts, all of which cost a significant portion of the revenue that might be earned from any new sales. Other companies cut prices, requiring significant volume increases just to earn the same profit as was earned before the price cut. To make matters worse, most times competitors match any price cuts so that nothing is accomplished in the long run except that everyone in the industry ends up selling the same amount of product at lower prices. Finally, chasing sales tends to bring in marginal customers who can be bad debt risks or who demand extraordinary levels of high-cost service.
One of the easiest and surest ways to increase net income — to simply stop selling to unprofitable customers — is seldom used. Restructuring relationships or ceasing to do business with money-loser customers will quickly and substantially grow a company’s net income. Yet very few firms make the effort to determine the profitability of each one of its customers.
Start by putting in place a regularly scheduled review of customer profitability. Do it as often as makes sense – maybe quarterly, but at lease once a year. Apply the same standards to all. (You might well want to factor in allowances for some customers because of referrals they make to you or the potential for higher profitability in the foreseeable future. But remember who you’re working for.
When you see the results overall, develop a sensible – and profitable – strategy for keeping and encouraging your best customers, and for finding the best way to stop losing money on the rest without causing your organization long-term damage.
Today, proven technology and processes are available that make it possible for a company’s management to accurately know how much profit or loss comes from each of its customers, and to do so on a real-time basis. The use of these customer profitability tools can quickly and significantly increase profitability and cash flow to the tune of several thousand to even millions of dollars per year.