In my last blog, I introduced Vistage speaker, Sam Bower’s new world of buying. Here is his diagram of it, with a brief explanation, comparing the new world with the old:
Customers on the right side of the diagram see your business as unique, not as a commodity. As a result, you receive higher margins, because clients actually pay you for solving their problems, not just for your product. You convince the customer that you can solve their problem and then devise a solution. A drawback of this approach is that it creates very high start-up and selling costs. Prevailing theory holds that these “right-hand side” clients are more profitable. In reality, the your higher prices simply cover your higher costs of start-up and customer acquisition.
Customers on the left-hand side of the diagram view you as equal to, but not better than, one or more of your competitors. Although your margins here are lower, you have higher volume. Once your customers lump you in with your competitors like this, you become a commodity, and now price is your sole differentiator.
The old thinking was never become a commodity! In the new economy, however, the goal is to become one of the providers who are good enough to be considered by potential customers. This goes totally against the old way of thinking. In the future, you’ll need to use marketing and branding to be on the list of potential customers; not to differentiate yourself from your competitors. Productivity, efficiency and innovation will move you up the list and (maybe) help you get the sale. Although your prices are forced down, volume should increase because your market is now global.
On the right-hand side, you sell to prospects. On the left-hand side, prospects buy. Once most of your customers are buying, you can reduce your costs by eliminating selling. Most companies have been taught to push hard on the selling side to convince the customer that “We’re special and we’re different.” In the new economy that’s a complete waste of time, because the customer still sees you and your competitors as equals. Because of their research, they say “I know who you are, what you do and how you do it. I know two other companies that can satisfy my needs as well as yours can. What is your price?”
Buyers’ access to knowledge pushes you from right to left. With the advent of the Internet and universal availability of knowledge, first time buyers are destroying the knowledge quotient before you can ever use it to your advantage. As a result, they often commoditize your product or service before you can even make the first sale.
Like it or not, the right side is disappearing. In some industries, it already has. This shift is inevitable, irreversible and it occurs 100 percent of the time.
Every business has a point on the line where costs exceed revenues and they stop making profits. Most companies don’t know where their line actually is. This point is called the “Kenny Rogers Line” (know when to hold ‘em and know when to fold ‘em), because you have to know when to walk away from business when you can’t make a profit.
As your clients push you to the left, stop thinking about what more you can do for them, and start thinking about how much less you can do. Go from the world of selling to the world of negotiating. Sales people give things away to make the deal. Negotiators won’t make a deal unless it’s good for their company.
Instead of fighting this process, start to think about how you can lower costs so that you can lower your price. When customers try to move companies to the left, most companies automatically increase their selling activities. Yet, as they push you to the left, customers don’t want or need increased selling activities, and they aren’t willing to pay for them.
Increasingly, when clients come to you for bids, they will ask to see your P&L. They will scrutinize every line item and make you take out any costs that don’t directly apply to the product or service that they’re buying. They will keep going until they squeeze out as much cost as possible so that they can get the absolute lowest price from you. They expect full, open disclosure of your accounting so that they can remove any costs that don’t apply to them. You can’t survive in this kind of world unless you continually work on moving your “Kenny Rogers Line” to the left.
Sooner or later, your market will demand a lower price. If you continue to provide the same level of service at that lower price, you will eventually go out of business.
In my next blog, I will review accounting and cost structures for these old and new worlds