What’s the next big thing? Will it be LED displays, digital lights, digital signage, or maybe digital salespeople? Will your company add a division for entertainment, content production, or perhaps cooking classes? Is there new business to be had by marketing to overseas companies or tapping into ad agencies? Does anyone else want to open an office in Las Vegas? How many hours have we all spent trying to think of new ways to grow our businesses?
Most folks recognize that, in order to grow their business, they need to increase their market penetration, expand their products and/or services, or move into new geographical areas. I believe that too many managers are fixated on the untapped market, new service, or innovation that will sidestep direct competition and lead them to greener pastures. For many companies, the next big thing is right in front of them: a face-off with your competition.
Generally there is a limit to how much work is available for a given skill set in a given market. For one company to grow, another will have to shrink. And that is precisely the point where many leaders start to check out of the process. Oftentimes regional competitors will settle into niches and carefully leave each other alone to avoid price or turf wars. Competing is hard, rivalry can be distasteful, and, most of all,
going against the competition seems inefficient. “It will lead to price wars!” is the inertia cry of non-competitive companies. And once companies have settled for market parity — as in everyone gets their share — it becomes harder and harder for them to break out and compete at a higher level. Here are three mind traps that keep companies from facing up to competitors.
They Must Be Losing Money
Everyone loses in a price war, right? That may be true, but if only one company engages in the price war, who is the real loser? The first mind trap you need to untangle is the notion that everyone has the same cost structure. “We’ve seen their prices and there’s no way they are making any money!” I hear this a lot. It is not unusual for a competitor’s quote to fall into your hands — usually from well-meaning customers — and sometimes their pricing doesn’t make any sense to you. But sometimes your rival is not playing a price game — it’s an information contest. A perfectly valid sales technique is to lowball the opening bid. Clever salespersons will leave out the bells and whistles and narrow the scope of work to be the price leader. Later, once the job has been awarded, the client will let the scope creep up, and the price will, too. Every little extra is charged and the project ends up costing what it was worth. Price shopping customers are particularly susceptible to this technique. Deep discounts are one way to suck in the “value shopper,” but keeping to a very narrow scope of work will keep the price down, too. The trick to this technique is careful customer management and good people skills. “Yes, we can add that, but it will require a change order. Let me send you a quote for the difference.” Buyers who shop on price alone usually don’t see any difference between you and the competition. Bottom line: If you are losing on price, perhaps the problem is really your sales approach.
Selling With Conditional Pricing
A mistake I see all too often is basing price on availability or other conditions that have nothing to do with the customer’s needs. For instance, if you have to charge more because you know you will need to sub-rent or hire a freelancer, then you are using conditional pricing. This limits your sales team to only sell to your perceived capacity. They will say things like, “I will need to have one of those shipped in and so it will cost extra.” The result is customers who become unnecessarily aware of other business you might have (or not). The solution is to base your pricing on what things are worth and stick to it. Pricing should reflect a reasonable amount of outsourcing that is inherent with selling just beyond your capacity. You can still apply reductions to the package price based on seasonal or capacity issues (i.e., deeper discounts in slow months or when the project fits very nicely into the schedule).
Focusing On Line Item Cost
One more thing I hear too often is, “We can’t afford to eat the extra cost on X,” where X is a projector that needs to be sub-rented or travel costs to bring in a freelancer for a project. This is the antithesis to the conditional pricing — a sort of conditional cost analysis. This kind of thinking will squash a $50K project because it may cost an extra $500 to pull off this time. On a good day, every line item should make you money, but isn’t the goal to make money on the job? Do we make the same mistake we accuse our customers of: Looking at the item cost and not the bottom line?
Sometimes it costs more to be the best, and other times it costs less. And if you can learn to set aside item cost and accept job cost, it’s a short leap to losing job cost and calculating customer cost.