Tuesday, May 1, 2007

Be the High Price Leader

"Business is a game of margins, not volume" (How to Sell at Margins Higher Than Your Competitors," Steinmetz and Brooks).

If you are tempted to cut your prices by just 10%, you might think that you can make up for it by increasing your sales volume by 10%. This is NOT true! Assuming you earn a gross margin of 30% (after all directly related costs are considered), you would have to increase your sales volume by 50% just to return to your previous gross margin. In other words, a 10% price reduction means you have to do 50% more work just to recover from the price reduction.

In down markets, your competitors will often drop their prices to try and gain a competitive advantage. You will be tempted to follow suit if your business has slowed and you are worried about covering your overhead and other fixed costs. You should deal with a slowdown in business by reducing your overhead and fixed costs, not by cutting prices.

According to a recent survey, only 13% of consumers feel price is the biggest influence on their loyalty to a company's product or service. 85% derive their loyalty from service and quality (Survey conducted by Genesys Telecommunications Labs - Printed in USA TODAY, May 2007).

Improvements in your customer service and quality will typically pay dividends for years to come, mainly because you can keep your prices higher than most, if not all, of your competitors. If you can successfully be the high-price leader, your bottom-line will be your reward.