I wrote this article for the Stationary and Office Products SA Journal, and it appeared in their August 2004 issue. Here it is, for you, edited especially for the Congruence Newsletter readership. If you're a Key Account Manager or run your own business or somewhere in between, this is a "must read." If you aren't, this may give you some insight into some of the issues affecting the supply chain before goods land with a plonk on your doorstep.
The clang and the clatter just gets louder and louder. It's all about price these days. Our margins are being eroded. The pressure of parallel imports is killing us. The strong rand is crucifying us. And so it goes on. And who's to blame? Well, it's them of course isn't it? Or it's the Reserve Bank!
Actually it's us, because we routinely get suckered by the oldest trick in the book - price pressure.
Permit me to explain. Let's take the motor industry. They may be rubbing their hands together at the margins they're making on new car sales at the moment, but that hasn't always been the case. Where have they made their biggest margins in the past 18 years? Not on new car sales, but on parts. And how have they kept generic equivalents or copycat parts out of the profitable segment of the market (vehicles under 7 years old)? By touting the term "genuine parts" at every turn, and invalidating warranties where "non-genuine" parts are used. Are the "non-genuine" parts inferior? Probably not, but what is the perception of the market? That they are inferior. So is it about fact, or perception? Get the point?
As you know, my public seminars are R495 per person for a 3 hour session including a meal (breakfast or an evening finger buffet) and a goodie box. Often people phone in and ask "If we book X number of delegates, what's the discount?" Our answer is "zero" - the seminar is fairly priced. In the last year we've lost only one booking as a result of refusing a discount, and the seminars have been well attended, with some events being sold out. Why? Because there is a perception of value. How do I know this? Because our delegates tell us this on their evaluation forms. You see, we know that the price thing - which incidentally works most of the time, is nothing but a bluff!
What is a person's standard response when a retailer/client requests a discount or a keener price, as they are in the habit of doing these days? One usually breaks out into a cold sweat, losing control of all bodily functions while hastily whipping out the calculator to work out how much of our hard fought margin we're prepared to give away this time. Why? - because we're afraid of losing the deal, and because our margins are now so pinched we can't afford to lose a thing these days. The consequences of the discount are quite horrendous. If you give a 10% discount on a product with a 20% profit margin, you've just chopped your profit in half - theoretically, but not quite. You see, because you have to move double the stock to make the same "profit" you now have to rent more warehouse space, employ more staff, purchase more machines...I guess you get the picture. In reality, your 10% discount has practically wiped out your entire margin. Your margin was previously calculated on two main premises: One, make some money, and two, stay competitive. Gradually eroding margins achieve the converse.
So, why not take a different angle? How about educating your retailer, buyer or customer about the "real cost" and risks of the parallel import as opposed to the "real cost" and security of using your genuine product over the long term? There's not much you can do about a currency - but there's a lot you can do about building a strong brand, a good reputation and strong business partnerships. For instance, is the real price of a forklift truck the price tag, or the operating cost per hour over the lifetime of the machine? So where are you positioning your business, at the bottom of the food chain, or somewhere near the top?
When we give away a chunk of our margin, we subtract value from our product in the eyes of the buyer, and we set a precedent which becomes difficult to reverse. The buyer then expects to be able to negotiate a "free" discount with you each time. (A free discount is when they get a discount and you get nothing). The client perceives himself as clever and you as stupid. But when we learn to add value to our product and service instead of subtracting value from our margin, the perception of our product and service is enhanced, the clients feels you're giving more and is prepared to pay for it.
Business partnerships take time to establish, but they make business sense, good profits and secure end users. Price wars are a short term strategy aimed at eliminating opposition. But they make suppliers and retailers weaker and give no tangible benefit to end users. In the end, they'll put you out of business. Better we start educating, adding value, building brands, and establishing long term relationships.
And stop subtracting value by being suckered into discounting.
Paul du Toit (August 2004)
