16 out of 17 businesses fail and most of those in the first 2 years. The average life expectancy is around 7.5 years until a business fails. The following article is based on Larry Steinmetz book: How to Sell at Margins Higher Than Your Competitors: Winning Every Sale at Full Price, Rate, or Fee
Of course, the reason why businesses fail is pretty obvious: it’s a result of not making money. You have tons of competitors out there from extremely successful companies that do not compete on price and others are slashing their prices like crazy hoping they can generate more sales and make up the price cut in volume.
Remember that business is a GAME OF MARGIN. This is the difference between what you sell your product for and what it actually costs you to produce it. This includes the people you have on payroll, people making too much money, spending, or any other expenses.
It’s for this reason many companies look to spend in certain quarters and not in others to show better profitability. It’s the game they play! (I hate it as the transparency sucks).
As for business, customers need something that is worth more to them than the price they pay. (Such as a $500 dishwasher is worth the time and energy they don’t have to spend on washing dishes by hand).
On the other hand, business owners need to be able to produce something at a lower cost than what people are willing to pay for it.
Your product is the gateway to your customer’s problem, issue, lack of confidence, and whatever else! That’s all it is.
So you need to make a product is of high enough value to the customer and make up your entire gross margin. This means sell it to where you cover all your expenses and make extra money to profit or life on.
I usually say you need at least a 10:1 ratio. What this implies is that if a product costs you $1.00 to produce you should sell it at $10 to cover your costs. So for a $100 product, it should cost you less than $10 to produce. However, for the end user, it should be worth $200 or $300 (this will make it more enticing for them to purchase it). Since it gives them so much value!
5 Ways to Compete
Typically most inexperienced business owners will focus on competing on price. It is the default way to compete, however, there are 5 primary ways to compete in business and you need to understand which ones to focus on and which ones to neglect.
You may want to compete on price, but I have found this is not the best strategy. Usually, a business survives or excels because it does one of the followings really well: (these being the 5 ways you can compete).
- Sales Capacity
Price is typically the default that we compete on. Think of when you go overseas and everyone dangles toys or souvenirs in front of you. Then they scream out a price. Their goal is to win you over with a low price. There is nothing else in the transaction besides you looking at the object and feeling good about the price and what you get.
However, if you’re looking for a sustainable business and you are competing on price alone, it can hurt your business. Larry mentions that cutting price is a self-inflicted wound. It’s false that many people buy on price alone. If that was the case we would all be driving the cheapest cars, eating the cheapest food, and dressing the same. (Obviously, this does not happen).
Price is usually in the mind of the seller or business owner than it is for the buyer. In fact, the buyer sometimes buys the more expensive items because they think (or perceive it) to be better. If you say your prices are low or things are cheap, then it can mean to the buyer that the quality is low, or the service is poor.
So be careful competing strictly on price! I do not recommend it for the long-term.
If buyers are competing on price with you, but they still want your product this is typically because:
- They can not get it at the lower price they are mentioning
- They want to get it from you possibly because the other place does not offer the same delivery, service, or quality.
- It really is not the same product or service
- Maybe they can get it there but they can’t pay for it in the same way (payment break–down).
One last point about prices. Do not be scared to raise your prices. There are three things that can happen if you raise your prices.
- sales stay the same
- sales go down
- sales go up
On two out of three of those you win. If sales go up (because buyers perceive it to be better for its higher price) or sales stay the same you win! And even if sales do go down, depending on how much you raise them, they can go down on average of 30% and you would still break even.
Service is a great way to keep in touch with customers and build a relationship. Tom Monaghan created Dominoes Pizza which he sold for $1 Billion. His premise was all based on the service to compete where the pizza was delivered in 30 minutes or less. They even made movie segments in “Teenage Mutant Ninja Turtles” that played in on this service promise.
The one thing about service is you have to personalize it which means it does take time. No matter what, customers or clients will either take your time, energy, or money. These are the resources we have at our disposal. If we want to provide a great service to our customers, we have to use one of these resources.
Whether we spend money on sending them gifts or sending them a package quicker, give our time to contact and see how they are doing with the product, or energy by helping them when they are struggling.
Don’t under-estimate the power of service. It can make or break your company if you are not giving your customers a great service.
Delivery is the one place you want to get it right. If you mess up the delivery which is from the time people give you their credit card information to the time they receive the product or service – mess it up in the delivery and then it can screw up your relationship for a lifetime.
People don’t want to worry after they pay you. They don’t want headaches, they want their items as fast as possible. If they can’t get it then they will go somewhere else. You need to DELIVER.
It’s not just about being on time, but also the presentation. Think of the famous Tiffany jewelry box. Everyone recognizes it. This is the way the product is delivered not only to the buyer, but the person receiving the gift.
It’s the salesmanship that sells the product. This includes marketing, advertising, customer relationships, and many other things that lead up to the point of sale. The more knowledgeable you are in the sales department or how to win buyers over the greater advantage you will have for your business.
Take the time to educate yourself on selling and marketing. Purchase a book about selling, read some blogs, attend the seminar, or watch a DVD program. Your education is the number one thing that you can use for the future over and over again – so take the time to invest in your education!
You can also compete on quality. However, the thing about quality is you need to have the quality to be able to compete on quality.
The thing is, though, even if your product is not of high caliber, you can still compete in terms of quality as long as the quality matches or out matches your price and what you are offering. Basically, the quality has to be in line with your price.
So if you are selling a dishwasher or $40 bucks brand-new, but it’s made out of plastic and it doesn’t last 10 years or 20 years like other dishwashers, however if you guarantee that lasts one year or you replace it free of charge then that’s just pretty much unbeatable because you’re getting a decent dishwasher in terms of quality for the price. Yes, it may not be the most durable dishwasher out there but it will work for most people, especially those people that are renting houses.
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