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Recession Question
By: Brittany Glenn
Issue: 2008aug
Dear Economy:
Can we talk? Things just aren’t the same anymore. Lately you’ve been spouting off a lot of negative messages—gas price hikes, a sinking mortgage market, unemployment rise, credit crunch! The pressures increase daily. Can’t we just go back to the way things were? We’d like to avoid a recession. Please?
Yours Truly,
Business Owners and Customers Worldwide
At $4 and more a gallon, the price of gasoline in the U.S. is at an all-time high. Oil is twice as expensive as it was a year ago, a fact that is potentially nudging an energy crisis to a head. Then there’s the housing market: In the first quarter of 2008, the Standard & Poor’s/Case-Shiller National Home Price Index fell a record 14.1 percent from last year. As a result of the mortgage market crisis, banks are raising rates and lowering ceilings on credit cards. Everyone is feeling the pinch—from consumers to airlines, automobile plants, textiles factories and plastics manufacturers.
In the promotional products industry, both suppliers and distributors face rising pressures in today’s market. Suppliers are contending with the rising cost of raw materials, higher price demands from Chinese exporters due to rising labor costs, soaring commodity and energy prices, the rise of the yuan and Beijing’s cancellation of tax rebates for exporters. Add to that the rising cost of shipping: transporting merchandise from China to the United States requires oil. Meanwhile, promotional consultants are dealing with clients who are complain about reduced marketing budgets and handle an increased amount of work due to the number of administrative and support positions being eliminated.
In a tanking economy, how can companies adopt a downturn-proof pricing strategy?
Pricing Strategies
Mark R. Burton, co-author of Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table (John Wiley & Sons, 2008), describes the three different pricing strategies companies use.
“First, there’s skim where I price high relative to the competition,” says Burton who is also co-founder of Holden Advisors, a consultancy that works with B2B firms to implement pricing strategies that increase profitability. “Second, there’s penetration where I’m pricing low relative to the competition and I’m trying to make price the deciding factor. And third, there’s neutral where I’m pricing close enough to my competition that my customers see our prices as about equal—so value is the deciding factor for customers. Most businesses should get much better in playing the neutral-pricing strategy game.”
Largo, Florida-based supplier Corvest SPV, LLC—which owns It’s All Greek To Me (UPIC: GREEK), Adva-Lite (UPIC: ADVALITE) and Toppers (UPIC: TOPPERS)—employs a neutral pricing strategy that combines both competitive pricing with value-added services.
“I think leading with price is one of the worst pricing strategies,” says Sam Rossa, Corvest CEO. “There has to be a balance between being price-competitive and providing value. Our approach has been shifting our sales focus to consultative selling. We’re doing more bundling now—for instance, we’re combining a teddy bear with a pen in a Toppers bag. When you can do a combination item, then it’s very hard to get so focused on the price; you’re more focused on the product.”
In fact, bundling is one of the tactics recommended by Burton. “Bundle your products and services, which enables you to appease both cost-conscious and value-conscious customers without cutting prices,” he says.
Corvest recently leveraged economies of scale by consolidating its three brands into one headquarters in Largo, FL. Originally Toppers was in New Jersey, It’s All Greek To Me was in Simi Valley, CA., and Adva-Lite was in Largo. “Instead of having three HR departments and three warehouses, we now have one mega-center,” Rossa says. “We’ve hired more than 200 people. Now that we’ve got the last move behind us, the incoming orders have been very strong.”
In a recessionary period, one of the worst strategies a company can take is an undisciplined approach to discounting. “You can’t chase business on price,” Burton says. “As quickly as I can cut costs, so can my competitors. There’s only going to be one low-cost competitor. Everyone else is going to have a higher cost structure and therefore is going to have to find a basis other than price to compete with. Realize you have to hold the line on price. There is much more to value than simply a low price.”
Mary J. Kilburn, president for Westminster, Colorado-based business services provider DinoMar, Inc. (UPIC: DINOMAR), agrees. “The worst thing a supplier can do in a souring economy is be reactive,” she says. “They need to hold the line on prices.”
Value-Added Benefits
Instead of slashing prices down to the bone, Burton recommends developing services and benefits that will enable companies to get away from price.
“We recently rolled out a new website that allows all the subsidiaries to merge into a single entity,” says Mark Holland, Corvest vice president of marketing. “You can look at Toppers bags and at the same time look at an Adva-Lite pen and combine that into a single buy. There are a lot of cool features about the website when you bring the three brands into one environment. We give distributors the ability to browse within a branded environment. If they’re comfortable with Adva-Lite, that’s the brand they can browse within. But then they can switch over to Toppers and It’s All Greek To Me as well.”
In addition to focusing on value-added services, Burton recommends expanding product lines to include lower-end products that fit economy-crunched budgets. “If you focus on the low-end products today, that protects prices on the high-end products tomorrow as you come out of the downturn,” Burton says. “This sets up an umbrella for the brand. It allows [suppliers] to command higher prices at the top end while still simultaneously being competitive at the low end and protecting the brand at both ends.”
Rossa says that Corvest—through its three brands—has more than 2,500 SKU’s, running the gamut from modest to expensive. “Business is strong for us,” Rossa says.
Bart Christenson, business development director for Huntertown, Indiana-based business services provider Certified Marketing Consultants, Ltd. (UPIC: CMCLTD), agrees this is a good strategy. “Expanding the range of products—the range of price points—can be an especially effective strategy in tough times,” he says. “So if somebody needs 1,000 units with a budget of $5 a unit, and your lowest price point is $10, you’re not going to get the order unless you offer a broader range of products. You can have new and innovative items at a wider range of price points.”
Don’t Worry, Be Happy
If you’re a promotional consultant who’s feeling nervous about the current economy, heed the words of Kevin Montecalvo, president/CEO of Newburyport, Massachusetts-based distributor firm Proforma InPrint Management. “You can actually grow your business through the worst of economies,” says Montecalvo, who has been in the industry for 33 years. “We’ve hired salespeople who are looking for better opportunities and we’ve also acquired other companies in bad times. On the client side, the phones are ringing more and more now. People that we’ve been trying to break into are all of a sudden starting to call.”
Why the sudden increase in sales calls coming to him? “Clients are looking for alternatives because they have budgetary concerns,” Montecalvo says. “So they’re hoping they can find ways to cut their budgets. Visit all of your clients and show a genuine interest in helping them save money.”
Like Corvest’s Rossa, Montecalvo believes it is important to take a consultative approach to selling during a recessionary period. “Find ways to be creative and make programs more cost-effective,” Montecalvo advises. “This way, clients can still carry through some of their marketing plans without having the resources they had prior to this economy.”
Christenson notes it’s important to see things from the buyer’s perspective. “Many times these companies have downsized, and the buyers don’t have administrative assistants or coordinators to watch the details,” he says.
That’s why, especially during a souring economy, it’s important for promotional consultants to get closer to their customers. “You have to understand your customer’s business,” Burton says. “You need to understand what drives their costs and what drives their revenues. Then begin to develop offerings that help them cut costs and/or increase the rate at which they’re deriving revenues.”
Service Success
Montecalvo suggests devising various services you can provide that may not even be related to promotional products. “You might want to consider setting up a reporting function to keep track of their spending, thereby becoming a major resource in helping them control their spending,” Montecalvo says. “We provide reporting to show them what they’ve been spending and show them ways to cut back on those things. For instance, the products we provide them—we offer them cheaper alternatives. We go over the whole budget with them.”
Even if it doesn’t mean an order, Montecalvo asks his clients to involve him early on in marketing discussions. “We tell the marketing person to call us anyway—that we want to be in on the ground floor, we want to help with ideas on their marketing,” Montecalvo says. “This kind of commitment goes a long way. We find our opportunities that way too.”
Montecalvo agrees with Burton that price should never be the deciding factor in a buyer’s decision. “You’ve got to get around the price issue,” Montecalvo says. “Never bring price into the conversation.”
Once again value is a much bigger piece of the pricing strategy pie than price. As Kilburn puts it: “Every distributor is going to be able to come up with the same prices as everybody else. We’re all connected to the same products through the same suppliers. The question is what value do you bring to the table?”
Christenson says the way to differentiate yourself in a world where price is not part of the equation is through value. “Buyers’ budgets are crunched so they’re going to look for the best value for the money,” he says. “If you let the customer just shout ‘price,’ which is often the mentality of a purchasing agent, they won’t look at the total value of the transaction for the money. By never compromising on the service, quality and ideas that a client is looking for, you will be able to make and keep profitable customers.”
In the Business of Knowledge, Not Products
Demonstrating hard business value is a must if in the past your products have been perceived as commodities, Burton says. He goes so far as to say that promotional consultants are “no longer in the products business; instead, they are in the knowledge business.”
Christenson agrees. “Customers buy products; clients buy ideas,” he says. “You need to add value with ideas and solutions that justify a fair price. Learn to sell benefits.”
Technology can be used as a marketing tool to justify pricing, according to Christenson. “With virtual samples, you can e-mail samples all around the world instantaneously and buying decisions can be made,” he says. “You speed up the decision-making process with virtual samples.”
Montecalvo’s company looks at which vendors they have been giving much of their business to see if there are services they can utilize to help their clients. “One thing we could offer is a bill-as-ship model to help the client’s cash flow,” he says. “For example, the client orders 1,000 mugs, but they only pay for them as they wish to receive them—such as 50 at a time.”
“Also print on demand is big right now, and it’s fairly new—it’s just come about in the last year or two,” Montecalvo continues. “With print on demand, the plants actually embroider shirts on demand—six of these, seven of those. They just keep the customer’s logo on file. That way, the customer has a lot of flexibility.”
In the end, it’s the relationships that consultants build that make the difference between success and failure.
“Consulting in general is a relationship-driven business,” Burton says. “If you’re a consultant, you’re not going to sell your services through responding to an RFP. You’re going to sell yourself through sitting down with people, looking them in the eye, talking with them about their business issues and about how you can improve their promotional effectiveness.”
Montecalvo agrees. “You’ve got to prove that you’re the go-to person to the client every day,” he says. “This type of relationship sell is something you build up in the good times, and you keep proving it during a recessionary period.”
“Clients are going to give you their business based on your knowledge of their business,” Montecalvo says. “You’ve learned about their company, you know when their tradeshows are, you know what their marketing plans and initiatives are, and you’ve become a very valuable part of their culture. People want to do business with people they like and that are knowledgeable. If the client likes to do business with you and you make it easy for them, they’re not going to change for a couple of pennies, even during a recessionary time.” PPB
Recession Pricing Dos and Don’ts
Pricing during an economic downturn or recession is tricky. Too often, companies simply cut prices to attract more sales. The right pricing, however, can help a company compete and even thrive during difficult economic times. Here are some pricing dos and don’ts for a recession:
DO
• Do define the value you offer to your customers. Any knowledge of the value you deliver to your customers gives you greater control and confidence in your pricing. Interview your customers to find out how they view your products and services.
• Do create a range of low- to high-value offerings. Bundle your products and services—and establish price accordingly—which enables you to appease both cost-conscious and value-conscious customers without cutting prices.
• Do control company costs and reduce inefficiencies. Streamlining your company’s processes and expenses is good for business in any economy. Reducing prices to generate more sales will not improve your business in the long term.
• Do invest in innovation to offer something unique. Funnel funds into research and development so you have new products and services that give you negotiating flexibility with customers and sales growth. Innovation gives you an edge when customers are seeking something new to lift up their own financial prospects during an economic downturn or when coming out of one.
DON’T
• Don’t discount your products or services in order to compete. Getting into a price war with your competitors—without adjusting the value of the product or service—will just send you and your competition swirling into a downward pricing death spiral where no one wins.
• Don’t reduce prices on your high-value products and services. During a recession, a better strategy is to keep high-value products priced appropriately, but focus on selling more low-value products and services.
• Don’t play poker with price-driven customers. When cost-driven customers threaten to take their business elsewhere, either: (1) confidently point out the unique value your product and service offers, which justifies the price you charge, or (2) let the customer take his business and badgering to your competitor instead.
Source: Reed Holden and Mark Burton, Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table
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