In the 1970’s, a Swedish manufacturer of mining equipment, sold worldwide, could not supply a much needed rubber grommet for its hard rock drills. When the situation became desperate, one resourceful area manager went off in search of an adequate replacement, in order to keep the customers’ drills working. After a few enquiries, the area manager was directed to a rubber component manufacturer in Vancouver. When he produced a much worn example of the grommet and asked if they could make this for him, he was astounded to be told that they had, in fact, made the original he had in his hand. He was even more astonished to learn that the over-the-counter retail price to him was less than 10% of the price he would normally have paid the mother company. Based on cost to manufacture, this small item warranted a low price. But in a drilling equipment application the replacement grommet was costly simply because it was a microscopic portion of the total machine price and an even tinier percentage of the dollars per hour lost when the grommet failed and the machine stopped producing. Therefore, the price reflected not a cost to make, but need in that market segment.
A common mistake made by business owners is to assume that their purpose is to set a price for a product rather than for the customer segment. Identical products or services can be sold at many different price and profit levels.
In a current example (2012), the price of rare earth metals has risen as China restricts exports. Niobium is essential in every cell phone on the planet but the sharp rise in price has not had any impact on the price of cell phones. This is because only a ¼ of one cent’s worth of niobium is used in each phone. Sellers of niobium, whose customers manufacture cell phones, have vastly increased prices and profits but the price of cell phones has not risen.
Purchasers can and do evaluate your product or service in terms of reputation, durability, reliability, after-market service, freight costs, installation, inconvenience, and payment terms. Your business and your sales offering, need to address important factors like these, in a way that means something to the customer. Otherwise price becomes the sole, only and determining factor that makes a customer buy from you instead of the competition.
The following three steps, with accompanying examples, illustrate how to do MISSION IMPOSSIBLE. Every businessman’s dilemma can be overcome using innovative solutions and will result in increased sales, increased profits and more customers.
Analyze your customer and press the hot button
In 1954, DuPont introduced a new polyethylene resin used in pipe manufacture. Until that time, all polyethylene pipes had been made from a by-product of off-grade resin. While the new pipe looked exactly like pipe made from off-grade resin, it had a longer life than competitive pipe material and could withstand greater pressure.