Category Archives: Struggling business

Why selling on price is a bad thing (and why differentiation is a good thing)

Last year Apple revealed their profits had increased by 37% to $18billion.
Is this because they are the cheapest?  Far from it.

The new iPhone 6 is twice the price of other companys’ phones. Xiaomi’s Mi3 costs $320 compared with Apple’s iPhone 6 retailing at $649. That’s not to say that Xiaomi aren’t having great success – they are, but Apple can still sell its product successfully at that price point.

A common argument used by our clients is that they need to compete on cost. They feel they have to cut their prices to win business. At The Chameleon Guide we strongly encourage our clients to resist selling on price.

Here’s a cautionary tale on trying to win business based on cutting prices. A cupcake maker agreed a deal with Groupon (one of the discount voucher sites) and hadn’t done her sums properly. She was tied in to making up to 102,000 cupcakes as part of her offer at a 75% discount off her normal prices (and when she normally only made 100 cakes a month). She had to get in 25 agency staff to help her fulfil the deal, failed to deliver a good result to many and made a loss of £2.50 per box of 12 cupcakes.  That’s 8,500 boxes of cupcakes at £2.50 loss per box, totaling an overall loss of £21,250. She nearly went under.

5 good reasons not to sell on price

  1. It’s an easy thing to do and easy to copy, so your competitors can simply drop their prices to undercut yours
  2. You end up in a price war. Tesco’s profits have suffered from trying to compete with Aldi and Lidl
  3. Unless you have economies of scale allowing you to offer your product at the cheap end, it’s not really a sales strategy because you won’t be the cheapest
  4. You will be perceived as cheap and cheerful or worse. If that’s your strategy, go for it, but there is usually a suspicion that your product is likely to be of poor quality. You may get a sale, but if the product actually is poor quality, people are unlikely to buy from you again.
  5. For smaller companies it’s not a sustainable strategy – it won’t give you a long term competitive advantageGilbert cartoon on price

If you are going to reduce your prices for a one off push for example, make sure you do the sums.

Here are a couple of examples of the impact on profit reducing your prices may have. I’ve adapted the examples from this article

Example one – profit from selling the same number of products at a discounted price

Normal price Discounted price
Selling Price per item £100 £90
Cost per item £80 £80
Numbers sold 50 50
Total revenue £5000 £4,500
Total cost £4,000 £4,000
Profit £1000 £500

In this example, selling the same number of products at a 10% reduction has reduced the profit by half.

But of course you would be expecting there to be an increase in sales which would counteract the loss of profit.

Example two – How many more you need to sell to get the same profit as the non discounted price

Normal price Discounted price Discounted price
Selling Price per item £100 £90 £90
Cost per item £80 £80 £80
Numbers sold 50 60 100
Total revenue £5,000 £5,400 £9,000
Total cost £4,000 £4,800 £8,000
Profit £1,000 £600 £1,000

You would need to double the sales volume with a 10% discount in order to reach the same profit level as if you hadn’t introduced the discount.

This is a reasonably extreme example, because hopefully your costs wouldn’t be this high relative to the selling price. But it illustrates the point nicely.

There are of course times when it’s worth doing this. For example it’s end of line product and you’ve already broken even and you want to get rid of the stock. Or maybe there’s been a drop in the cost for some reason (drop in oil prices reducing transport costs for example) so you would be able to get a good margin still with the discounted price.

So, what does it look like when you don’t sell on price?

If we go back to look at Apple in a bit more detail…

They do not sell on price. They deem their products to be luxury items for which they can charge a premium.

This only works, because they do actually have a superior product. They create desirable products. The design quality is superb, it has an awesome brand, and it has the top Net Promoter Score in its industry across all three of its products. All three scores are in excess of 65 with their competitors trailing by at least 10 points. Given a cross industry average NPS of 15, this is an outstanding figure.

People who buy Apple do so because they buy into the Apple vision hence why each time a new version of a product comes out, there are massive queues to buy the new version, even if the old one is still functioning perfectly well.

Not all of us get the Apple phenomenon – I’m an Android/Windows lover through and through, but I can’t fail to be impressed with Apple. What’s not to be impressed about?

So how do you differentiate your product or service to attract buyers who will pay more for your product and stay loyal to you; buying from you time and again?

It’s about two things:

  • Finding your niche or point of differentiation
    and then
  • Finding the customers who value that niche or differentiation and will pay good money for it

7 differentiators

  1. Customer service
    As covered in a previous blog, many companies believe they offer superior customer service. Reality would say otherwise.
    But 8 out of 10 people said they would pay 25% more for a superior customer service (Source: Drum.com, 2013)
    So, if you can truly offer top customer service, you really will make a big difference and it will give you a sustainable competitive advantage because so few companies are able to deliver consistently high customer service. And it’s difficult to replicate.
  2. Unique product
    This is difficult to achieve unless you truly do have a unique product that no-one else has. But you may for example have the sole distribution UK rights to a product, or a pharmaceutical company brings out  a new wonder drug for a condition that will be on patent for anywhere between eight and 20 years before it can be replicated.
  3. Quality product
    Apple don’t make many things. But what they do make have superb design and work brilliantly. The number of colleagues and friends who tell me I should just give up get and AppleMac/Air/Whatever because ‘they just work’ is too many to be a coincidence.
    They are selling luxury.  But sell it in spades.
    Others such as Rolex not only sell luxury, but also exclusivity. How many of us could afford a minimum price tag of £3k for a bottom of the range Rolex?
    These products are about more than just quality – it’s a statement about the kind of person you are.
    Car sale
  4. Delivery/Reliability
    You deliver. On time, every time. This is of vital importance. A client provides safety products to the construction industry. And one of the key things their clients value is that they know if they place an order, it will be delivered in one piece at the timescale stated. And the clients are informed every step of the way. If a product isn’t available, they will be told, given alternatives and sometimes that even means pointing them in the direction of a competitor. Because it’s about delivering to the client.
  5. Information
    You are a source of knowledge about your product and act as advisers to your clients/customers. They will come to you because they know you will give them best advice, which sometimes means giving them something cheaper than they thought they might need because that’s what will work for them.
  6. Social/environmental
    Your products have a positive impact on the environment or supports social causes.
    Either directly or indirectly. For example you give x% of your profits to worthy causes, or you manufacture your products using recycled materials.
  7. Price
    Is a differentiator – but not for smaller companies (as covered above). This niche is strictly for the big boys who have purchasing power to keep their costs down so they can stack ‘em high and sell ‘em cheap.As a slight tangent – One could argue about the ethics/morals of this. For example, having clothes made offshore by piece workers who get paid subsistence wages and are forced to work in terrible conditions just so we can have cheap clothes. Who can forget the Rana Plaza disaster in Bangladesh in 2013 – when the building collapsed killing over 1,000 people and seriously injured a further 2,500. The added horror is that the employees said they didn’t want to go into the eight storey building because of the cracks that appeared, but were forced to go in or have their wages docked – not just for that day, but for the month. And it’s taking a lot of pressure to get some fashion houses to pay compensation…
  8. Add in your own…

What you need to do is identify from your top customers/clients what it is they value about you. It may be one or more of the above that are just what your customers want and are prepared to pay more for (other than the Price one obviously!). Having identified your magic ingredients and who your top customers are that pay for that recipe, you’re on your way. You now have a product/service offering that is based on value not price and you know what your perfect customers look like so you can go and find more of them.  Beware the – our product is for everyone – you’ll have a weak marketing message and are likely to end up falling between two stools. Far better to be brave, identify who those most valuable customers are and what they like about your product and laser focus on getting those customers.

And you never need to sell on price again.

If you’d like more information on how to identify your sustainable competitive advantage, drop me an email – karen@thechameleonguide.com

http://www.thechameleonguide.com

How to sell the way your customers want to buy

One of the key questions we ask our clients when we work with them is ‘ What business are you in?’  Most people will tell us they are the thing they sell, so for example, this week, I had ‘a financial adviser’, ‘an events planner’, ‘an accountant’, and ‘a sales trainer’.

But is that really what the customer is buying? The customer using the financial adviser may be looking for help to ensure they can retire with no money worries, or the customer using the events planner may be trying to organise a surprise 50th birthday party so will be looking for a memorable experience.

When you buy a drill, you aren’t buying it because it’s a drill, you’re getting it to make holes in order to hang up pictures or put up shelves.

At The Chameleon Guide we work hard with our clients trying to get to what it is their customers are buying off them because this will affect the marketing messages they use.

But not only is it important to understand why they are buying off you, your other challenge is to find out how your customers like to be sold to, and where they can be found for you to get them to buy your product or service.

Percentage of customers who will buy from us

In order to find out these things – you need to talk to your customers (see my previous blog on the importance of communicating with and keeping your existing customers).

In my quest for understanding how best to communicate with customers, I came across a book by Kristin Zhivago called ‘Roadmap to Revenue – How to sell the way your customers want to buy’.

It’s split into three parts

– Discover – Finding out about your customers
– Debate – Analysing  and discussing what you’ve learned to come up with a list of priority activities that are most important to your customer
– Deploy – Work on the delivering the action plans you came up with in the Debate section

I’m going to briefly cover off the ‘Discover’ bit – the finding out about your customers.

Kristin recommends an in-depth interview process – here are the top tips summarised:

  1. Identify the customers you want to interview
    Your top customers are a clear option, but if you can do more, so much the better. If you have multiple channels or services, try and get a good range across all the different areas.
  2. Email requesting the interview
    The email needs to be either come from the top or be shown to be endorsed by the owner/CEO/MD i.e. this is an edict that has come from the top.
  3. Interview process
    a. Only do phone interviews – you will get much more information from people as they aren’t being put on the spot by you facing them
    b. Record the phone interviews – this allows you to concentrate on the call totally
    But still take notes
    c. Confidentiality – let the customer/client know it’s completely confidential. This must be followed through even after the process and someone internal thinks they know who an interview belongs to. Do not let on as to who it is.
    d. CEO/Owner led calls – It’s highly recommended that the owner/CEO does the first five interviews as this will really give you a feel for how your customers/clients are feeling. You may end up wanting to do them all! After that, it’s better, if possible, to get an external agency to do the calls, but you may not have that luxury.
  4. Handling customer/client complaints
    If the customer complains at all, do not try to tell him/her how things have improved. Acknowledge the issue and thank them for their honesty and that it’s really helpful information to know.
    Do not get defensive – this will put the customer off and make them less inclined to share honest information with you.

She suggests a structure for the questions which are deliberately written in such a way as to get the best from your customer/client. These questions are far more focussed on understanding how the experience was for the customer – you will get far more valuable information this way. And they will feel much more valued rather than you asking if they’d write a testimonial. Come back to that a later stage after you’ve interviewed them if they’ve been particularly glowing – but do not ask them in the interview because you’re back to ‘what’s in it for me’ rather than what’s in it for them..

If you have any key suppliers or partners, it may be worth interviewing them as well.

The information you get from the interviews will inform all aspects of your selling, from customer service, to the website to the information you give customers etc.

The questions are very customer-centric and you may well get resistance internally, particularly from sales people who always want to ask more direct questions about getting more business or shy away from asking the hard questions. Resist them! Her structure really works. One of my clients used the technique and got some tremendous feedback from his clients, including some more business.

Questions include:

  • What do you think of our service?
  • Have you had any interaction with our staff? How was it?
  • If you were John Bloggs (the CEO) tomorrow, what’s the first thing you would focus on?
  • What problem(s) were you trying to solve by using our service?
  • How did our service help you solve your problem?

There are a total of 12 and they are all based on open ended questions which may well result in sub questions being asked hence why the interview can take in excess of an hour to complete.

If you’d like a sample of the questions with tips and template emails to send out, let me know and I’ll email it to you (karen@thechameleonguide.com)

Clearly, once you’ve done all the interviews, you need to do something with it!

This is the Debate phase of the book, where you analyse the information in-depth and report it back to the management team.  Essentially, you will be identifying and prioritising the results in terms of what you need to focus on. This could be very broad ranging, from your website, through to how you sell and to how you manage your customer service. The book covers off how to manage this process in great depth before going on to the final phase of Deployment (actually implementing the changes). It’s rather less easy to summarise here, so I recommend the book – ‘Roadmap to Revenue – How to sell the way your customers want to buy‘ * if you are keen to follow the process through as she describes it.

What she proposes, is not a quick solution unlike Net Promoter Score. It requires a lot more effort, planning and commitment of the organisation, but is very powerful and will help you map how to match your customers’ buying process so they buy more from you. Resulting in happy customers and happy you.

For more information on how to grow your business email me – karen@thechameleonguide.com

http://www.thechameleonguide.com

* I get no commission from book sales