Saturday, December 5, 2020

An Anthropological Look At Discounting - A Case Study

 

As a small business consultant I have seen this discounting mentality operating at the micro-firm level to the detriment of the small business owner. The fear of a perceived competitive pricing threat, often misplaced, is the driving force.

 A few years ago I was consulting with a local (RI) family owned jewelry firm. Like many such firms, this client had a number of different related businesses going under one roof. All of these were being done on a small scale. This "farming" practice, or diversification, provided a comfortable cash flow, but resulted in poor information about the individual business operations.

 One business was manufacturing stainless steel ear-ring blanks for costume jewelry manufacturers. Imported nickel plated blanks from Asia were selling at half the price my client was asking for his stainless steel blanks.

In response to the perceived pricing threat, my client developed a new process for stamping out his blanks. The process cut his production costs in half and making him competitive, he felt, with the imports.

 In addition to the foreign competition, he faced competition from two domestic competitors who also made stainless steel blanks. These competitors competed by selling their products at a slight discount to my client's price.

 Federal regulations were in place to limit the use the nickel plating in ear rings because of health concerns. This was going to have an impact of the domestic use of imported blanks in domestic ear-ring manufacture.

 My client used his innovation to immediately dropped his price to slightly higher than the imports, or about a 45% discount. He did this hoping to remain competitive with the imports. This also drastically undercut his domestic competition.

At the time I met the client, he was concerned because the imports had just lower their prices by half and his revenues were down. He felt he could not compete with their new pricing. What could he do?

 After listening to him, I discovered that he had no strategy. He failed to see the true value of his product and the environment in which he was competing.

 Based on discussions with his customers, I learned that his product was considered to be of high quality and fairly priced. His customers appreciated the price cut. According to several customers, the imports while costing 50% less per gross had quality issues. Close to 50% of the imported blanks had to be rejected for poor quality.

To the customer, the real price for imports was about the same as what my client was asking for a better quality product. The real problem they mentioned was my client's lack of capacity to fill orders in the volume and time the customer needed. This, more than price, drove customers to buy imports or his domestic competitors' product.

 The client failed to understand who and what his competition was. He failed to understand the value of his product to the customer. Instead, he responded to a perceived pricing threat with a discount pricing strategy before he first reviewed his original value proposition. As a result, he lost all of the advantages his innovative process created. He had the opportunity for windfall profits and to make inroads into his domestic competitors' market, instead he chose to lowered prices too quickly. All the benefits of his innovation went to his customers in the form of a substantial discount without resolving his problem.

 It is critical, especially in times like these, to re-examine and confirm your value proposition before taking the discount road. You can always ask for less, but it is very hard to ask for more once you lower your price.

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