Recently, I was helping out a friend by doing a survey on the trucking industry and found something rather interesting. The reason for gathering the data was to understand why there is such a shortage of truck drivers. What the data showed primarily was that first, there really does not appear to be as large a shortage as people perceive. Secondly, the major reason for any perceived shortage is not due to lack of manpower, yes, this includes women also, but the lack of compensation. It seems that trucking companies are involved in a race to the bottom by continually dropping their prices so they can win the business.
There is also a legal risk in lowering your prices in that you may be charged with ‘predatory pricing.’ This is where the product or service is set so low intending to drive competitors out of the market or to create barriers to entry for potential new competitors. By doing this, the predatory merchant then theoretically has fewer competitors or is even a de facto monopoly.
Some of the other dangers include, but by no means is the list exhausted:
1. Focusing on the wrong number. Your top-line revenue may look great and all of a sudden you can brag about the amount of revenue you made. However, what does the bottom-line number look like? That bottom-line that is required to stay in business. That little thing called, profit. What do you think happens to that number?
2. Not understanding the difference between margin and markup. Don’t laugh, there are many in business that does not know the difference. A quick review and why you need to know: The margin is based on the selling price. Markup is based on cost. Here is a real life situation: I changed the math to make it easier to understand, that I had with a client. The product cost $50.00 and he marked it up by 100%, which is a 50%
Here is an actual situation I had with a client (I changed the math to make it easier to understand). The product cost $50.00 and he marked it up by 100%, which is a 50% margin and then offered it at a 50% discount. I believe that you see the problem right away. By marking it up 100% it made it $100.00 and then he offered a 50%, the margin, discount, which brought it down to $50.00 which was the cost. Again, real life situation. Fortunately, I got in early enough to save his struggling business.
3. Not understanding value versus discounting. A 10% discount would require a firm to sell 50% more just to keep the same profit than before the discount. Instead of falling into the trap of matching or beating the lower price, why not keep the pricing and add value. See my previous blogs regarding the value and how to build the value into your product or service.
You won’t win every pricing battle, but let me ask you what is more important to you, winning the race to the bottom or protecting your profit margin?
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