Your customer tells you they can get a lower price from a competitor. How can you respond to maintain your profitability and avoid a price war? First, make sure it is a qualified competitive offer, meaning the customer has the product in stock, their products and service are comparable to yours, and you understand the order requirements and delivery schedules attached to the competing offer. Then structure your prices so the customer can get lower prices by purchasing from you in larger quantities.
In our business lives and personal lives, we all deal with the trade-offs between order quantities and prices. The price per can of Coke is lower if we buy a case of 24 cans, than if we buy a 12-pack. And the price per can is lower for a 12-pack than for a single can. When we buy office supplies, a case of printer paper has a lower price per sheet than a package. Those who shop at Costco or Sam’s Club can verify – the price per unit at warehouse stores is often lower, but you have to buy much larger quantities to get the lower prices. There are multiple reasons for the lower prices on larger quantities, but the main reasons are:
- the costs of handling the transaction are spread out over more units when the quantity is large,
- the customers are using their own working capital when buying in large quantities, and
- customers are using their own space to store the larger quantities.
So when faced with low prices from a competitor, offer comparable prices if the customer will buy in large quantities. That will enable the customer to get a better price, and it will enable you to reduce your cost to serve and protect your profit.
When is it appropriate to give a customer the large-order price on small orders? In general it is much better to stick to your guns – “I can give you the lower price if you buy a large enough quantity.” That preserves the incentives for your customers to buy in larger quantities, and it reduces the number of times the customer has to decide where to buy. However, there are situations where it could be worth making an exception. If the product is new to the customer and they are validating that it will work for them, or if it is a new account for you and you are proving the value of your products and services you might consider a trial period where you relax the order-size requirement. In these cases, tell the customer the price is good on small orders for a specific time period – enough time to validate your product and service. Following that validation period, begin to move the prices on small orders back to their appropriate level.
Another situation you are likely to face is the customer who regularly buys from you, but is buying a particular product from a competitor. When that customer asks you to match a competitive price, but without any rules on the size of their typical order, what should you do? If you give them the low price and they buy in small quantities, you probably won’t make money after considering the costs to process the order and pick, pack, and deliver the product. But if you don’t give them the low price, you will never get that volume. In these situations, it is important to have an honest discussion with the customer.
- Find out how much they buy in a year and how frequently they order.
- Work with them on consolidating their orders to buy less frequently in larger quantities.
- Remind them of the higher cost of small orders to them and your own company.
- Find out if there are other products they can add to help lower the costs per item on the order.
If you do give the customer the lower price and they promise to buy larger quantities in the future or combine new products, follow up and make sure they do it. If after a few months the larger quantities or new products don’t materialize, it will be appropriate to raise their price to reflect the orders they are actually giving you, the value of using your working capital and storage space, and your cost to serve them.
Leave a Reply
Want to join the discussion?Feel free to contribute!