If you’re thinking about undercutting the competition, make sure it’s not your blood you eventually slip on.
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Being undercut by a competitor that is pricing at an unsustainable level is nothing new — it’s been happening for centuries. And often the competitor eventually exits the industry, but not until a lot of blood has been spilt by all players along the way.
“One of the biggest problems we have is trying to steer our guys away from the ‘big sale’ which is at 3% (margin). And when you have a look at the bad debts of the other companies, it’s amazing … I am amazed what the competitors do. They will sell to anyone at ridiculous margins, and at the end of the year you hear that their EBIT margin is like 2.5% or 3% and it’s just absolutely ridiculous.” (101-300 employees, Sydney).
“Sometimes we find that a competitor will go in at cost or less than cost just to get in front of the customer.” (101-300 employees, Sydney).
One of the keys to avoiding price wars is to educate customers and emphasise the non-price variables in any equation of value (that is, responsiveness, delivery reliability, turnaround time, credit terms etc).
While customers talk about wanting the best price, it is widely accepted that you get what you pay for. Our research almost always shows that buyers want a good price, but not necessarily the “best” price. How well do you know what the key variables are in your customers’ purchase decisions?
Ross Cameron, of Cameron Research Group, provides marketing research and strategy services to over half of Australia’s 10 largest companies, guiding their interactions with small and medium sized businesses. Prior to this, Ross was a project manager with BIS Shrapnel.
Rod Drabsch writes: We are battling to produce Australian made products. We’ve found through our research most people will buy Australian, but only if it is close to the cost of the competitors’. Our problem is the base costs of design and manufacture, not even being close to the set up costs overseas. No wonder Australian manufacturers are heading elsewhere. We would consider selling a product near cost if we thought it would bring in more sales in other areas.