The only way to compete in the new economy is to improve your quality and systems so that you can lower your price and still make a profit.
Unbundle your prices, with the lowest price representing the minimum of service or product that you will provide. Start your negotiating with customers at your lowest price. As customers ask for more, provide them with those corresponding prices. Activity-based accounting will provide you with an accurate picture of what those extra services cost, so that you can make money on every customer and every product/service. In this way, your customers are paying for only those items that they truly want.
When big clients put you under pricing pressure, do not jump to increase the level of service and add more features and benefits in the hope that they won’t ask you to lower your price. All that does is increase your costs. No matter how much value you add, your clients are still going to ask you to lower your price anyway. What are you doing now that the client no longer values, wants or is willing to pay for? Identify those things and stop doing them. This goes against traditional business thinking, but it is the only way to survive in a commodity world. If you figure out what you can eliminate, for a while you might be able to increase profits. When your clients put pressure on, you can respond in a meaningful way.
Marriott’s suite of services is a great example of this pricing and cost structure, offering different brands at different price points, or tiers.
Their lowest cost offering is the Fairfield, a basic hotel with no frills. The market is bigger for the low price, so Marriott has built more of them and vice versa for The Ritz. Moving up their brand tier, each hotel adds services. As services increase, Marriott’s costs also increase.
My next blog will address sales and marketing.