Why Customers Focus on Price... and How to Fix It!

Your best salesperson has worked hard on converting a new customer. You can see the customer is really close to putting spend your way on the project they are about to start. Then at the last minute, the customer gets firm on price. “I need a better discount”, they say.

Sound familiar?

All Builders Merchant are subject to price pressure and although many believe that their particular business has unique pressures and therefore it’s OK to discount to secure the sale. The problem derives from talking about price and not about value.

Even the best Salespeople forget that if you discount without changing the deliverable, then every percentage point you offer as a discount eats gross margin. If you run a 30% profit margin and discount by 10%, you are discounting 33% of your profit.

Habits

Sales staff will often ask a customer "How much are you currently paying?" or will simply offer a discount when challenged. Either way, this is price focused.

I have heard merchants say that customers can be fickle, yet these are likely the same merchants who focus the conversation on price. A customer who buys based on price will leave your company when another merchant discounts under yours.

Try asking your customer questions to uncover what they like about other merchants, why they use them and what they wish they could change. You could even ask a question about their results: "0-10, how well is what you are receiving meeting your expectations?” If you focus on results, then they might just follow suit.

Sharing Information

There are several ways that merchants could better share information internally. Here is one key initiative to encourage information share and alignment that will help drive price

In supply chain, understanding Total Cost of Ownership (TCO) enables you to understand the true cost and value-add of a product or service before it reaches the customer. Too often cost price drives the sell-out price based on expected or accepted margins. However, for merchants who might have poor operational processes, space constraints, bad purchasing habits etc., material costs can account for only 40 to 60 percent of the total cost of many products. Getting your procurement, finance and operations departments together to establish TCO’s and sharing these with sales and marketing will help develop a growth mindset where value drives their thinking.

Sharing this will help your teams better understand their value inputs and how to improve them. It will encourage better dialogue with customers as well and it will help you understand how to promote to customers and prospects the value of doing business with your company. Ultimately, it will help your front-line trading understand the value of the products they are selling!

Pricing the Customer

Many merchants recognise that they do not provide a single offer for a single job type. Instead they recognise that they are a platform that allows multiple customer types to serve multiple market-segments for multiple jobs types.

Recognising different segments by customer and jobs types allows you to create different pricing options. These can be for individual products, product categories or job-lots. They can also be segmented by spend and commitment, call-offs, quantities, sale type, frequency and bundling. It could also take into account credit worthiness, site constraints and willingness to pay for value.

Recognise that cost is not relevant to your customers, only to you to see if you can run a profitable business. Recognise that price is not differentiation. Competing on price does not let you have a conversation about the value you add.

Identify what is “ownable”? What sets you apart? Is it defensible and unique and no one else can claim the same? Is it “ownable”? Identify that and make the marketing conversations about this and not lower prices.

Identify the different customer segments and the economic value for your products and services and the way you could package each. Offer multiple versions of your product/service, be it based on raw materials, upgrading, convenience, bundling, availability, guarantees or any other value add.

Finally, If you can define TCO’s, then you should also understand the total revenue including complementary sales and the total cost per customer. Using your system to drive TCO insights will enable you to feed this analysis. Knowing the cost to serve a customer will help the business decide the level of service to provide and determine whether or not that customer is profitable.

Developing system pricing

Almost all merchants operate price bands and most would agree that default pricing habits are rife, with the lowest price band, or worse, below the lowest price band, being the most commonly used price by their front-line staff.

Sharing information and training staff to understand the importance of managing the customer value conversation is only part of the story. Creating system driven pricing that is credible is fundamental to supporting your front line staff who need price confidence to trade but also feel that they have enough control.

Start by researching internally for price and price management processes (or lack of). Research current prices in the market (be careful, market pricing is often what someone in your organisation is willing to charge, not what customers should be willing to pay).

Take into account your market positioning and competitive advantage. Understand what each customer segment really wants and what their pain points are.

Choosing the right pricing strategies and restructuring selling bands is complex and risky. Run scenarios on existing products and customers based on your research to test the impact of pricing changes before you begin implementing anything.

The outcomes and rewards can be significant. It will give clarity to trading teams and the wider business about what is expected and strengthens the chance of achieving turnover and profit in line with company objectives. 2, 3, 5% gross margin shifts have been achieved.

Controls and Procedures

Putting permissions and controls in place to make visible, hide or mask costs, margins and selling bands is an absolute must if you want to have a chance of controlling and improving your margin. Having a robust escalation process and transparent sign off with senior managers is also necessary as will explaining fully why these controls need to be put in place and conformed to.

We have all been in a scenario where we will pay more for something because of the overall value and experience we want. Think of the car you drive, the phone you use, the paint you bought for the lounge. Why not do the same for your customers and become more portable and valued along the way!

Finbarr Doyle can be contacted at [email protected]