Situation: A key customer just asked for a price reduction. Our raw materials costs have increased and eroded our margins. What is the best way to respond?
Advice from the CEOs:
- Are you selling a commodity or a unique and differentiated product?
- Commodities rarely command a premium above market unless you can bundle with differentiated delivery.
- Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
- The customer may have valid reasons to request a lower price.
- Counter with a combination lower price and lower level product to retain your margins.
- If the sale involves service, assign less expensive resources in return for a lower price to preserve margins.
- Define the trade-off to the customer so that it becomes their decision, not yours.
- Adjust your terminology. Use “run rate” vs. “price,” and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
- Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.
- Do NOT share your cost and margin information – as company policy.
- Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.
Key Words: Price Reduction, Margin, Costs, Commodity, Differentiation, Counter-Offer, Resources, Terms, Delivery