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Business Insights from Andrea Hill

But the sale prices we see today are the desperation moves of companies that have run out of ideas for getting customers in the door. Margins are essential to survival. Always.

Guilty Pleasures

03 June 2009

Software & Service Links

The links below are for services offered by Andrea Hill's companies (StrategyWerx, Werx.Marketing, MentorWerx, ProsperWerx), or for affiliate offers for which we may receive a commission or goods for referrals. We only offer recommendations for programs and services we truly believe in at the Werx Brands. If we're recommending it, we're using it.

Shopping on sale in the midst of a recession is akin to indulging in a delicious vice. You know you want to do it, indeed, you’re going to do it. But you also know it’s wrong.

OK, maybe you don’t think that shopping on sale is wrong. But from my perspective, it’s like smoking a cigarette or having an affair. Why? Because every business that drops its prices to get customers in the door is doing so at the expense of their business safety and future. Who among us would decide to go into the sugar, flour, facial tissue, or copy paper business? Yet that’s what we do when we reduce our business premise to offering the best price. Price sensitivity is the nature of a commodity business.

Margin is essential to survival. Without margin you can’t pay the vendors, pay the rent, pay the taxes, pay your employees, or pay yourself. Every sale price you mark comes at the expense of margin. This is not to say that there’s never a good reason to have a sale. To score big wins, business owners must take regular measured risks, and those risks frequently result in excess inventory. Eliminating such inventory while making customers happy is smart, and sales based on those conditions are wise.

But the sale prices we see today are the desperation moves of companies that have run out of ideas for getting customers in the door. Margins are essential to survival. Always.

There are two ways to maintain margin. If a company wishes to compete on price and still maintain margin (note: if a company wishes to compete on price and NOT maintain margin, that company is out of business), it must reduce costs sufficiently to protect margin while reducing the selling price. Make sure you know how to reduce those costs before you reduce the selling price! One of the most common business mistakes is to assume that once a company has additional volume, the costs will come down accordingly. They drop the selling price to build the volume. Voila! They shrink the business. Make sure you have purchase commitments from customers and cost reduction commitments from suppliers prior to making that move. Even if you have figured out a failsafe way to play the price-reduction-with-margins-game, learn what Wal-Mart already knows: cost reduction is ultimately a zero-sum game.

The second way to maintain margin is to (drumroll here) maintain your prices. What? Not reduce them? But everybody’s reducing prices! How are we supposed to compete if we can’t get the customers to consider us because we’re not as cheap as everyone else. 

The only way to maintain prices is to offer something that makes not only your products, but your business, worth more to your customers. The phrase, “you cost more, but you’re worth it” has always been music to my ears. It is the ultimate compliment, an endorsement of a company’s value and a commitment to help the company stay in business.

The biggest impediment to achieving that valuable customer endorsement is the ubiquitous industry trend. Actually, the trends aren’t the problem. If all your competitors get caught up in the trends – and you successfully avoid them – it would be good. For you. Which industry trends are a problem? All of them. Product trends and service trends represent ideas that are being offered simultaneously by everyone in the industry, and when something is offered simultaneously by everybody, it leads to price trends. Instant commoditization.

Bucking industry trends is not easy. It requires an understanding of the concept minimum standard necessary to compete. As each industry develops, standards evolve over time. These standards relate to customer service levels, speed and quality of delivery, and quality of products. Every business must operate at the minimum standard necessary to compete. A good example of this is shipping times. In the early 1980s it was common for direct marketing businesses to offer 6-8 weeks for delivery. Within a few short years, same week delivery was the standard, and any company that could not offer the new standard lost market share. 

Every company must honor its industry’s minimum standards necessary to compete. To buck the trends and maintain margin, it is essential to offer something unique, something beyond the minimum standards. Each business must analyze its strengths, consider unmet or poorly met customer needs, theorize on emerging market conditions, and find a way to set itself apart. At one time, product differentiation was synonymous with corporate differentiation. Today, differentiation depends increasingly upon creative ways of building relationship value with customers.

The biggest danger to a business owner is lack of originality – generally demonstrated by virtue of getting trapped in his or her industry’s trends. Industry trend following simply turns your business into a commodity business. Avoid the trap and maintain your margins. When you do it well, your customers will gladly trade the guilty pleasures of sales prices for a superior offering.

© 2009. Andrea M. Hill