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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