BackSlashing prices is another form of marketing myopia
Clients may push for price cuts and suggest that one should compress marketing costs but this would be short-sighted for any business that expects to outlive tough times and thrive.
PremiumWhenever we launch a new thought leadership event, the first thing our sales partners and salespeople ask is what discount slabs are planned based on the number of delegates companies nominate. They argue that most corporate clients ask for a discount in order to buy. This is the norm in positive times, so imagine the pressure salespeople must be putting on managements in today’s circumstances. The Reserve Bank of India’s Consumer Confidence Index is at a record low of 48.5 (100 is the level that divides pessimism from optimism). Given the economy’s prolonged slowdown, prices are being negotiated downwards, even as sales forces play along, asking managements to forgo long-term market strength for short-term growth.
From the chats I hear on the sidelines while driving strategy execution processes at client companies, it appears that purchasing and supply-chain managers are dangling larger orders as a carrot for unit price reduction. This isn’t new. But what they say is intriguing. They tell small vendors that they could offset their smaller gross margins by cutting “needless" marketing expenses. “Who needs that additional business promotion?" they whisper, “Our large contract ensures that you will make optimum use of your production capacity." It happened to one of our clients, an auto-ancillary market leader that’s fighting higher input costs with fewer sales. In markets where consolidation is rapid, where the big get bigger just by swallowing also-rans, such self-serving ‘advice’ from fewer but more powerful buyers is hard to resist in uncertain times.
If you are in the marketing-services business, you are likely to grumble, blaming customers and their customers for cutbacks. If you are a business-to-business supplier, how can you avert succumbing to the persuasion of your sales team on price reduction? Can you train them to out-negotiate those demanding discounts? Before taking a decision, it would help to consider the following:
If a customer approaches you with a lower price in mind, think hard. You might have valid competitive reasons to adjust your price, but not needing a marketing budget is not one of them.
Price concessions made today will be hard to reverse tomorrow once the economy recovers. Big customers will want to control your pricing as much as their power lets them. When you acknowledge and cut ‘unnecessary’ expenses, you turn control of your cost structure over to their approval.
Even if your customers are organizations, remember that you are selling to individuals in the purchase-decision hierarchy. These executives come and go to new jobs in other companies. This happens in good times and bad. Therefore, you need to keep educating newcomers about your brand and capabilities even at the same customer organizations. You need their names and responses to your marketing communications recorded on your website. And your salespeople need contact leads as well as the confidence that your brand holds equity among customers who value what it delivers and will pay for it without hesitation.
Crucially, you also need the marketing expenditures that sustain your company’s customer relationships. Bundled services and support options raise switching costs for customers, build inter-personal relations, differentiate your offerings, raise barriers to competition and keep you top-of-the-mind with purchasing influencers, all of which are critical loyalty factors that price concessions cannot buy. An industrial-products client recently invested in a new technology to help customers place orders and track these directly on its internal systems, for example, thus offering them convenience and cost advantages in terms of better planning of their production cycles and reduced wastage and delays.
Any client-pushed neglect of your marketing function could leave your business over-dependent on current customers whose fortunes might wane or preferences shift as they find lower-cost suppliers.
Rather than reduce prices, you need to demonstrate to customers the value of your products and services. You must show them what justifies your pricing. Even in the consulting business, charges vary in a wide range and it is value demonstration that sets premium service providers apart from others.
Staying too close to current customers and their needs, without actively scanning the market for new users, trends and upstart innovators through aggressive selling and market research, could leave your business blindsided to future opportunities.
Finally, if you cut your marketing budget, will your competitors do the same? Unlikely. If you are tempted to make a sale by cutting price and protecting your net margins by crimping marketing spend, do look around for flab that needs to go. But don’t let powerful customers force it upon you. Remember that it’s in their interest to keep your business dependent on them and keep squeezing your margins. At some point, this could jeopardize your supply quality and reliability.
If profits are being squeezed, find a way to insure your future, sweeten your offer package and turn your company indispensable to clients. This simply cannot be accomplished with straightforward price cuts.
M. Muneer is the co-founder of the non-profit Medici Institute and a strategy execution expert. His Twitter handle is @MuneerMuh
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