Is Low Price the Only Way to Lure Customers?
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When ever I ask businessmen “How is business?” One of the prominent complaints I get to hear from them is “We get business only on low price”.
Is this really true? Or it’s an escape route for our inability to understand why our customer buys from us? And if the answer is only low price; then the biggest question is - how long we will be in a position to sustain in this low price business game?
Look at it from this way, if our customer is only looking for low price, then at any given point of time in any market only one company can offer low price, and that supplier should be flooded with all the orders. But that is not true, as many players including you are getting business in the same market.
So it is not only price that the customer is looking for, he also has some other parameters for buying. Of course price is one of the important criteria and is used as a strong negotiation tool, and most of the time when we are dealing with large and informed customers; they effectively uses this negotiation tool with us, claiming that they have many other suppliers who are willing to serve them at lesser price or they have cost saving targets from their top management.
Let us understand the background of the problem. Most of the entrepreneurial ventures start with offering a product or service at a competitive price that is how they get business and grow business. In the initial period, it is possible because the costs are low, the infrastructure is meagre, overhead costs are insignificant as all the key members are working on multiple tasks for stretched hours to make things happen.
As business grows, to support the growth we invest in infrastructure, add on people and create systems to manage the increased load of business transactions. This all adds on to the costs, which needs to be compensated either by improved selling price or by reducing the costs (which seldom happens as we fail to get the required economies of scale). If this continues for a long time, then the existence of the business comes in danger.
If we are experiencing this kind of problem what do we need to do? According to me 2 things:
It’s time to take a pause and introspect on “Why is customer buying from us?” This simple question will lead to lot of insights about what our customer’s value? What we are good at delivering? And very importantly what kind of customers we need to target?
If we have answered the first question well, then we should ask “What should be our business model to improve our margins?”, this will throw open a big question of what should be our costing formula – cost plus or on the perceived value that the customer is deriving from our product? If we need to target the right customers and deliver them what they value (which is our area of strength), we need to learn to switch to the value driven costing model.
You will think; what kind of simple question are these? We know what we are doing that’s why we are running a successful business.
My simple appeal to you is just ask yourself these questions and try to give honest answers. You will discover very different answers. This will help you find a specific niche’ that you need to focus on. If you cannot create barriers to entry, you won't be able to retain or grow your profitability.
If you believe that your company is unable to differentiate from what the competitors is offering, then you have to manage the costs well and offer the lowest cost to grab the market share to retain your profitability. If your business is unable to do this then you will have no option but to fall prey to your customer’s demands and get into a vicious circle of unsustainable business model.
Most of us are under a wrong notion that business is all about having more market share; hence we mostly focus on only generating higher sales. We have a strong belief that if sale improves everything else will be taken care. This is a myth. Business is always about having better profitability. Having more market share does not ensure longevity of business; having better profitability does.
After all business strategy is all about making choices. When we make one choice, it means that we are choosing not to pursue other choices. It is deciding on what to do? And what not to do? This is the secret of running a successful business.