This is my tagline whenever I speak with my clients or referrals about pricing issues. Somehow in the asian contact like Singapore, business owners have the tendency to compete with each other with price as the main weapon. They try to under cut each other and are happy when they turn up as the winner with the lowest price, like in the case of bidding for projects whether government or private. What they did not realise is that they have just planted a WMD (Weapon of Mass Destruction) that can possibly kill their business in an instant.
If what you just read did not scare you, then read on.
I was consulting to one of my clients in the engineering industry. I noticed that before I started my service with them, I realised they were already using Cost-Plus pricing to price all their products and engineering services. “This is their first mistake,” I said to myself. And their margins averaged 30% per sale.
Later I learnt that, in the interest to boost their Gross Profit, the management decided that the best way is to reduce their COGS, meaning they went out of the country to look for cheaper raw materials from other countries like China, India, and Vietnam. To most business owners, they are doing the right thing. But not to me. I see a disaster coming to this engineering company. Can you see the consequence? I am still keeping quiet.
If your answer is “No”. It is OK. No need to blame yourself. Only about 15 to 20% of business owners can see through this mistake. To cut the story short, every $100/- they saved on raw materials would result in $130/- reduction in the selling price. They were literally cost-cutting their way to business failure.
Over and over again, I see businesses commit this error over and over again. Whether in retail, distribution, or manufacturing. The result is the same. Cost-cutting themselves out of business.
Frankly, cost-cutting is a way to boost profits but it must be done in a strategic manner and it must be done in tandem with other factors that affect the financial health of the company as a whole. By itself as a strategy it may not deliver the results as promised.
Luckily, after some analysis and many meetings with the top management as well as the HODs, we have reversed our client’s profit situation, revamped their pricing strategies into different tiers, and increased the margins to about 65%.
I certainly hope that with this article, all readers and business owners would seriously look into your pricing strategies, costs, and margins as 3 interrelated factors to boost your profits even in an economy downturn.
Should you have any questions, I can be reached at firstname.lastname@example.org.