Throughout the dot-com boom, we found our favorite media topped with daily headlines of the latest up-and-coming ventures started in a garage or a basement by a couple of entrepreneurs. We lived the irony, watching start-ups hit the headlines, attract seed, venture and public financing and go on to surpass the market capitalization of many industry giants.
In our present-day, “more realistic” and somewhat-sobering business climate, young companies are still making a go of it, albeit with less press, less funding and more of a bootstrap approach. Long after the headlines and celebrity CEOs have faded from memory, many entrepreneurs still pour heart, soul and all available capital and credit into building their dreams.
Day after day, these entrepreneurs invest their sweat equity. When the hard work begins to pay off, resulting in more clients, referrals and the attention of the media, the focus shifts from surviving to thriving. When this happens, do you leverage your success, scrape together the financing and seize the opportunity for growth, or do you play it safe and secure, growing only as quickly as your current capacity allows? This issue's dilemma asks: How do you know when it's time to grow your business?
Outgrown the anxiety of building a business? Let us know what keeps you up at night. What dilemma do you take with you when you leave the office? Your peers would love to help. Write to us and ask our SWOT Team about your dilemma. Tap into the collective strength, wisdom and experience of this group. It works, and you could win a free copy of our book, A Marketer's Guide to e-Newsletter Publishing.
Revisit our previous dilemma—read below for your peers' best advice on raising prices after a long history of discounts.
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This Issue's Dilemma
SWOT Category: Internal Weakness
How do we know when its time to grow?
My partner and I started a small technology business three years ago. My partner focuses on developing the technology and supporting our clients, while I focus on business development, marketing and sales. Bootstrapping a business has taught us to be very frugal. To keep costs down, we have always opted to hire junior staff to help with things like accounting, office administration and reception, site maintenance, etc. After three years of steady growth, we're considering bolstering our sales force.
The question is, Do we continue with our junior hiring strategy? Or do we look for more experienced sales people who can close the deals? By hiring junior reps, we can continue to fund our sales operation without taking on additional debt or financing. On the other hand, hiring more experienced professionals would likely require additional funding or debt, but would accelerate our growth. How do we compare the investment in growth and increased sales potential versus the risk of acquiring funding?
—Anonymous, Technology Software Partner
SWOT Category: Internal Weakness
Can our prices be raised to reflect the real value of our products after an extended period of discounts?
I recently joined a company as the sales and marketing co-coordinator. Part of my job is to develop pricing strategies and improve loyalty. I am faced with a legacy of deep discounts as standard practice. These discounts have diminished the perceived value of our product and are now expected by customers all the time.
What's your readers' best advice for returning pricing to market levels without losing or alienating our customers?
—Anonymous, Sales and Marketing Coordinator
Summary of Advice Received
Anonymous, you find yourself in a unique situation. Your predecessors made the pricing decisions, and now it's your job to clean them up. (Okay, so your situation isn't that unique!)
We found your fellow SWOT Team members ready and able to provide their wisdom and expertise on developing a strategy to recover prices from the deep discount hangover. Here's what your peers suggested:
1. Consider the dynamics of the market.
2. Reposition your product's value image.
3. Adjust the offering/price balance.
4. Let go of unprofitable customers.
5. Offer varied pricing for old and new customers.
1. Consider the dynamics of the market
Attempting to alter price without changing some other aspect of your marketing mix is a distinct challenge. Your existing customers have an established value perception and price comfort level. Many of your peers feel it's most important to focus on the question of whether your market will support your new pricing strategy.
An anonymous SWOT Team member notes the importance of understanding how your product creates value for your customers:
You need to know how your customers use your product. Determine how it creates value for your customer. What are the potential substitutes and with whom are you competing? This will help you to establish if the market will support the product at your target prices. With this information you will be in a better position to come back to your customers, and explain why they should buy your product at the new price.
Keiron Sparrowhawk, principal of PriceSpectives Limited, asks:
Do your market segments value the product? Look at the market segments where the customer values your product with or without a discount and remove the discount. Reduce the discount in segments where competition is unlikely or unable to respond, or where customers would not baulk at a price increase.
You may want to consider withdrawing your product from markets where you believe sales will be adversely affected by increasing prices. In the future, always consider alternatives to “price reductions.” They are the easiest way to train customers to expect more product for less.
Saliba Hanania offers a four-step approach for assessing the impact of a price change on your customer segments:
1. Identify your target audience.
2. Assess customer segments according to their contribution to total sales.
3. Consider the impact on each segment if you eliminate the discounts.
4. Find out what your rivals are doing; this may also be helpful.
Another anonymous SWOT Team member reminds us that a change in price may require re-education of the market:
The first question you have to answer is, “Is discounted pricing typical within the market?” If your competitors offer a product that is 90% similar to yours, then you're stuck with pricing that's within 90% of theirs. Second, ask yourself, “What is our position in the marketplace—demonstrably better product, superior service/support, etc? How does this position relate to customer value and translate into a better price?” Third, ask the hardest question, “How much time and money can we expend to ‘re-educate' the marketplace?” You need look no further than the automotive industry to see the damage caused to the value of products, and corporate profits, by heavy discounts and rebates.
2. Reposition your product's value image
The same anonymous SWOT Team member continues with advice on a specific approach for repositioning your product/price:
If possible, develop a new position and product statement that reflects the premium pricing you want to achieve. Second, survey your customers to make sure they are willing to pay more for the added value as defined by the new product/position. Third, begin marketing the “premium” product/service line aggressively. Maintain the “standard” product line (using “standard” discount pricing) as your answer to competition. Finally, never discount the premium product/service. Offer the “standard” product/service as the customers' only alternative.
Over time, your new “premium” product/service, if positioned properly, should gain sufficient traction in the market that will enable you to sell the “standard” at less of a discount. While the “premium” will not match or replace the sales of the “standard,” your improved overall profitability should make everyone happy.
Sanjay Bahl, assistant marketing manager of LML Limited, offers this remedy for refocusing your customers away from price and onto benefits:
You can add value to your customers by playing on the benefit side of the price-value map. Increase the benefits. Bombard customers with benefit messages rather than price messages. Help your price-sensitive customers gradually shift to the value side. Once you have a superior value proposition as perceived by the customer, you will be able to charge a premium for the additional value. Add value to the customer and squeeze value for yourself from the surplus created.
3. Adjust the offering/price balance
One way to manage the issue of value perception and price is to adjust the product offering. An anonymous SWOT Team member offers these helpful suggestions for adjusting quantity or product features:
As an arts organization, we have used two strategies to increase prices without alienating our consumers. One was to reduce the size of the subscription (from 8 concerts to 5), without an equal reduction in the price. We then increased the number of concerts with a matching increase in price.
The other approach we used was to present big-name soloists as the grounds for a significant price increase. Obviously, these options may not translate directly in your situation, but altering the product in size or performance ability (e.g., an “ultra” version) will give you some pricing options.
Erik Ferland, a fellow sales and marketing coordinator, suggests offering non-cash incentives that have a high perceived value for your customers:
Build loyalty and sales programs/promotions that will take the attention away from discounts and provide incentives to buy. Choosing the right type of program could bring renewed excitement to your reps, management and customers. The important thing is to select premiums/rewards that offer value for your type of customers. They do not necessarily have to be gifts or prizes, although these can generate great results when the probabilities of winning, the quality of the prizes and the perceived value are high. You could use sales training courses, management courses (if it applies) or technical training, which are often underestimated as sales incentives and loyalty generators.
Rob Marcus of The Wharton School also believes that adding a new feature or a special bundle can help you overcome price resistance:
If you can or must increase the price (assuming the volume boost from the discount is not worth the margin loss), try offering a new feature that will justify the price increase. Keep in mind: you may lose sales depending on price elasticity of demand. Perhaps position it as a line extension or a “new and improved” launch, with promotion/communication support. Another option is to raise the price and create a “special pack.” I am not sure if you are selling soap or a durable good, but you can add a slow selling (or extra inventory) product as a giveaway, which gives the perception of more value.
If you cannot increase the price, look into shaving costs. Perhaps you can save on an aspect of the product the consumer does not value. Consider a simple conjoint analysis to determine what features are most important and what features are not. Or, dig into your supply chain and look to share materials or speed lead-time to save costs. Worst-case scenario: you can raise the price of another product in your portfolio to cross-subsidize.
4. Let go of unprofitable customers
This dilemma sheds light on a common problem: deciding when it's time to let go of unprofitable customers. In cases where customers are unwilling or unable to support a price increase, it may be an important opportunity to let go of the ones that you can no longer serve profitably.
M. Barber offers insight into considering the profitability of customers:
First up, Should the business actually be attempting to retain “all” of its current customers? The reality is that some customers do not contribute to your business in a profitable way. Get rid of those that don't, as they'll be a debilitating drain on your company's resources. Secondly, if you choose to retain all customers as you shift your prices upwards, you need a way to ensure that they actually add profitability to your business. As a rule of thumb, the old Pareto's 80/20 rule works pretty well—80% of your customers will give you 20% of your turnover, whereas the top 20% of your customer base will deliver 80% of your turnover (and profit).
Initially, I'd recommend that the business recognize losing customers is a normal part of the business cycle you don't need to lose sleep over. What you DO need to lose sleep over is the “type” or “quality” of customers you lose. If customers can be identified as “unprofitable” when looked at in terms of the way your company chooses to do business with them, then move them over to your biggest competitor and let them deal with the loss. You also have to consider what it means to your business IF you could turn them into profitable customers. What would it take, how would you enable that to happen? Do you have the time and resources that will let you carry them for an extended period?
5. Offer varied pricing for old and new customers
The issue of price is far from black or white. The range of options to help ensure your company's profitability is varied and wide. You may, in fact, be able to introduce a new pricing schedule without alienating existing customers. An anonymous SWOT Team member offers these final suggestions for developing two different pricing schedules for existing and new customers:
- You should leave pricing unchanged with your existing customers, or at most, implement a gradual change. Keep existing customers on the old scheme, and charge new customers the new prices. Or if the industry and nature of the sale permits, send existing customers a voucher entitling them to the current discounts, but with a closing date. At the expiry of the voucher, send them a new voucher with a smaller discount amount, and some small token gift. This will work if you're not trying to raise prices above what competitors are charging.
- If you must raise prices to stay in business, combine the price increase with an increase in service levels that doesn't cost as much as the perceived value. At the very least, your customers should receive personal phone calls to explain the price increase, and to offer something in the way of increased service.
Way to raise the bar on this one, SWOT Team—thanks again!
We did our best to provide a thorough overview of your responses to this timely topic. All of the advice we received was insightful. Thanks for your participation. We appreciate it!
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