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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Negotiating on prices – what's your business model?

Business processes word cloudHere’s an amusing, but remarkably effective, tool that graphically demonstrates the choices that have to be made in negotiations over the supply of goods or services.
When a potential customer meets this businessman they will see a wooden block and two wooden pegs on his desk. The block has three holes in it labelled quality, cost and speed.
The purpose of the pegs becomes clear as negotiations proceed.
Suppose the customer emphasises really high quality, but also wants the lowest possible price.  The pegs go in the cost and quality holes. The customer’s needs can be met, but only within the current capacity of the company’s production schedule.
If the customer wants their order delivered fast, however, the pegs would go in the speed and quality holes. The businessman knows that to produce high quality goods at speed will mean rearranging his company’s existing schedules or increasing working hours, so speed + quality would increase the production costs.

There is always a trade-off between quality, cost and speed of delivery

While customers inevitably want all three, the fact is that generally there is a trade-off. Indeed everyone knows that overnight delivery is more expensive than second class post, but customers often need to decide what their priorities really are.
If a business is well known for the quality of its goods and services it is likely to be not only successful but also working to full or near-full capacity.
It will not want to compromise this reputation so the businessman’s little wooden block is a very effective way of demonstrating the compromises that may have to be made to satisfy a customer’s requirements.
In Europe, for example, many factories will not change their production timetable but sell their capacity. Customers know what quality they will get, what price they will pay but must wait for the next available slot on the production line. This is in fact a very efficient way of producing high quality output at a reasonable price since it allows for planned production and avoids the mistakes that can be made by disruption.
Businesses need to consider their business model and decide whether they will sell their capacity, i.e. goods at a fixed price, and to have a system for providing quality goods and services. The alternative is to offer speed but recognised that they will need to be flexible to meet customers’ demands.
The one area we believe should never be compromised is quality since this relates closely to the values of the business.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)

Categories
Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Getting the price right is all about quality and a personal service

Price and fee setting are thorny issues for SMEs.
Who has not been advised to “stick to your guns” when a client or customer tries to negotiate a lower quote and been assured that they will not lose the customer?
Who has not been told by some guru to “put your prices up” as an indicator that you’re offering a superior service in which you have faith?
Then there are those customers who ask for free or heavily discounted work on the “promise” of further contracts or the loss leader that’s supposed to hook the customer into buying more.
It is easy for the consultant to give advice but how often do they amend it to suit prevailing conditions?
And right now, in most sectors there is an oversupply of most businesses and services and not all the existing businesses will survive.
Those that do will be those businesses that have been wise enough to understand and employ an astute mix of marketing and pricing models that may well include discounting, loss leaders or a range of services at different price points from basic to premium to keep the orders flowing in and the customers happy.
But more than that they will only survive if they can demonstrate quality and a personal service that is the hallmark of many SMEs by comparison with the bigger fish.