Bob Shaw of Forbes.com discusses how companies can grow in tough times by tuning into consumers' pricing and discount sentiments.
Shaw observes that managing for profitability becomes a real challenge when the cost of raw materials and energy has spiked but customers are in a deflationary state of mind.
He says: "Chasing market share to grow revenue is one logical step, but it's hard to do when the economy is still in recovery mode. Even if it works, growing the top line may not add to the bottom line if it comes at the expense of margins."
However, Shaw offers a more effective alternative: "In the fog of competition, many companies overlook the hidden extra profit that's already in their businesses and could be teased out by performing triage to weed out unprofitable lines and customers."
He adds: "The key to this is pricing – finding the right combination of price, discount and volume to yield the largest profit on the most revenue. This may sound like entry-level capitalism, but many companies become so focused on the revenue side they overlook the possibility that some of their biggest customers and lines of business may actually be cheating the bottom line."
Shaw has identified five steps towards realigning a company's pricing to capture hidden profit:
1) Price by numbers. The author says: "Make sure front-line salespeople and their managers have the information they need to make confident decisions. Detailed profitability information about customers should be available and maximum allowable discounts set."
2) Save as they go. Calculate discounts on purchases rather than estimates or unenforceable commitments, with customers earning higher discounts on increased business.
3) Reward good behaviour. Offer customer benefits for the behaviours you want. Eliminate discounts on low-margin, scarce or highly differentiated products and offer pricing and discount schemes to encourage sales of higher-profit products.
4) Look between the ears. Shaw explains: "Pricing is as much about psychology as it is about economics. The goal is to identify which pricing variables will trigger the least negative responses."
5) Make it personal. Communicate your schemes to customers effectively. Shaw says you can reduce defections by introducing the changes to "select groups of small customers". Then you can roll them out to wider groups once they prove successful.
He adds: "For your largest accounts, focus on improving each one's profitability by, for example, reducing costly services, eliminating discounts and adding service charges for small-volume orders or for orders shipped to remote locations."
When Profit Margins Stall, Try Customer Tough Love