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How To Compete -- And Win -- When Rivals Cut Prices


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#1 Amanzi

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Posted 03 September 2012 - 04:08 PM

This is worth a read: http://www.entrepren...article/222519# by BRAD SUGARS

If there’s one piece of advice I’d offer to any entrepreneur starting out, it’s this: Never
discount—no matter how much you may be tempted to— always look instead to add value.
Many seasoned entrepreneurs discount as a way of doing business, without ever really looking at their numbers or the real costs of cutting their prices. They’ll point to “discount” success stories like Wal-Mart or complain that the competitive landscape forces them to cut prices. While Wal-Mart, one of the great retail success stories of all time, has built its brand on low prices, most business owners don’t see the very real distinction between “low price” and “discount.”
Related: Death by Coupon

First off, a company like Wal-Mart knows every margin to the “nth” degree and can deliver low prices because it has created scalability based on the huge volume of products it sells. But very few companies have such pricing power. Unless you do, there are better ways to play the retail game than looking to compete against Wal-Mart.
If you don’t really know your margins or have any scalability on the cost side, straight discounts are a ticket to disaster, not only in terms of finances but also in people costs. In a discount environment, you are essentially setting your team up to work more for less money.

Here’s how …

Let’s say you’re selling a widget for $10 a unit, and your net cost is $7. Your net profit on each widget sold would be $3. If you sold 10 widgets at full price, your net profit would be $30.
Now let’s say you decide to have a sale with a 10% discount offer. After selling 10 widgets at $9, you have revenue of $90. The net cost for widgets remains constant at $70, but your net profit has decreased to $20.
That doesn’t seem too bad. Until we realize we need to sell 50% more widgets just to keep our profit dollars even, at $30.
Take a look: 15 units X $9 = $135
$135 - $105 = $30 profit
The numbers look worse the more we discount. At a 15% discount, we’d have to sell 100% moreunits (a total of 20 widgets) to keep our profits at $30:
Example:
20 units X $8.50 = $170
$170 - $140 = $30 profit
Would you really want to run a company where the pressure is on day-to-day to sell 100% more units just to stay even?
Now you can start to see why failure rates of businesses that continually discount are so high and why the burnout rates of their owners are equally bad.
Playing the discount game means you’re literally going into your company everyday to price yourself right out of business.

Related: Groupon, Other Deal Sites Not a Good Deal for Small Businesses

So what’s the solution?

1. Know your numbers and margins and protect your margins at all “cost.”
This simply means you need to know your cost basis at every level of your company andlook to lower it where you can. Then, at least, if you decide to offer a price incentive, you’re not cutting your own throat to do it.


2. Add to your value proposition at every opportunity.
While you shouldn’t discount, you should always look to add value, both real and perceived. That could mean bundling options or packages, or it could mean a better customer service experience. People are more willing to pay for good service these days than ever before.

3. Develop a growth rather than discount mindset.
The reality for any business is that you won’t ever be able to cut your way to success. You can cut costs only so far before some aspect of the business suffers. Growth is really your only option. So start to think of ways you can leverage your current resources in new or innovative ways. Reposition products or services, for example, with a private label at a higher price point.

Whatever you do, think twice about the ramifications of running a 10% off sale, unless you got a really great deal on your inventory. Just remember that “small” 10% discount means someone in your organization has to work 50% harder to earn the company the same dollars. At least in the beginning, that person will most likely be you.
Don’t fall into the trap of thinking if you don’t give discounts, you’ll lose sales. Look to add value and deliver an incredible experience for your customers. You’ll discover new ways to increase profits, while others find themselves caught in the discount trap -- and soon out of business.

Edited by Amanzi, 03 September 2012 - 04:10 PM.

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#2 JLMnwlks

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Posted 03 September 2012 - 04:46 PM

Great post! Maybe this should be pinned.

#3 Fern

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Posted 03 September 2012 - 08:24 PM

Good Post!

Can you and others elaborate on examples of adding value instead of discounting. Ecspecially when your in an area where craigslist is so popular and seems to be a mainstream of free advertising for inflatables.

In the Dallas area craigslisters are renting bouncers for an average $75 and as low as $60. I do not advertise on craigslist frequently, but when I am slow or low on rentals I do. I only post the unique inflatables that I have and the cragslisters dont.

#4 Dk-Rents

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Posted 03 September 2012 - 08:43 PM

you can also look it from the other side: if you take it into account from the beginning than it isn't a problem.

something like: I want to give return customers a better price (small discount), put your initial price a little higher, that way you have some margin from the beginning.

And yes, I rather give a small bouncer for "free" to get a deal in, instead of giving them a bigger discount. Setting up those small ones (like a wacky mini bouncer or so) is rather quick.

#5 dbrigs

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Posted 03 September 2012 - 10:52 PM

Or raise your prices by 15% and give out 10% discounts.
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#6 PLC

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Posted 04 September 2012 - 05:02 AM

Good post.

#7 The Starz

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Posted 04 September 2012 - 06:27 AM

Very Good Post! Thank You

#8 ACP

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Posted 04 September 2012 - 06:49 AM

See, who needs college. Just read these types of articles! lol Thanks!

#9 Spoiled Rotten

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Posted 04 September 2012 - 07:30 AM

This is a great post, Thank you Amanzi!

Everyone and their dog can talk about service and clean units along with insurance and state inspections. I have never had a customer ask for or even ask about the insurance and state inspection part so that "value" to me is very limited at best. And if you have a 15x15 castle bouncer what makes your castle bouncer so much better than the castle bouncer the guy down the street is offering for $25 less? Sadly, in the customers eyes, a bouncer is a bouncer is a bouncer, no matter how much you brag about service, it is still just a bouncer in the customers eyes. Sometimes they learn from a bad experience but the memory is short and next year they don't even remember who they used so the cycle starts over.

To me, value adding can come from having the right assortment of products for their event. You can even contract with vendors outside of your primary focus to add value, such as offering a pizza party event with pizza from a local place. Offering the pizza party doesn't sound like it puts money in your pocket, however if you can offer it in a package with a 10x10 tent, tables, chairs, quick covers, misting fan, and a trash can with liner then with a package price you can hide your markup on the pizzas. So, say you break even on the pizzas, you just added the tent, tables, chairs, and a few accessories to a jumper order so the overall order value increased substantially and you are providing something to your customer that no one else is offering. A lot of people are offering bubble machines and goody bags already filled, for summer rentals if you can find a deal on squirt guns then buy them and package them with the bouncer and then let them keep the guns. Oh I know, "the evil of water around my bouncer"......it's summer, it will probably dry before you get there to pick up and honestly, you are going to clean it anyway, it beats having it sit in the garage!

Value adding in this business is fairly easy if you can offer more than just the jumper. I see so many building and building their business by adding jumpers and combos and more jumpers and more combos and that is fine, but if you want to add value to your offerings and increase your per order value you also need tables, chairs, tents, concessions and things like that. Make the value to your customer that it is basically a "party in a box" so it is much easier for them to plan a party with fewer headaches.

Be creative and do some off the wall things, customers love variety.
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#10 hophop

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Posted 05 September 2012 - 08:33 PM

I love it when people start discounting! That let's me know they are hurting for rentals and in a year after they have killed themselves working for peanuts and not made half the profit they thought they would, and not saved any money to grow their business they will be ready to get out of the business and I can buy their equipment dirt cheap and grow mine! There is always a bright side to everything!
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#11 PTBounce

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Posted 10 September 2012 - 05:40 AM

Good Post!

Can you and others elaborate on examples of adding value instead of discounting. Ecspecially when your in an area where craigslist is so popular and seems to be a mainstream of free advertising for inflatables.

In the Dallas area craigslisters are renting bouncers for an average $75 and as low as $60. I do not advertise on craigslist frequently, but when I am slow or low on rentals I do. I only post the unique inflatables that I have and the cragslisters dont.

In regards to the Craigslisters, flag the dog$hit out of them. Flag from work. Flag from home. Flag from your IPhone. Flag from your IPod. Have friends and family from out of State, flag. The more flags the better

#12 Amanzi

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Posted 22 October 2012 - 05:08 PM

I don't believe in discounting. Everyone who rents out inflatables has a primary colored castle moonwalk. It is safe to say everyone of my competitors have one, even the craigslisters at $75.00 for all day. I have 6 primary castles that I rent out at $125. Just in October I have the 6 castles rented out for 48 times total. I made $6,240.00. By the time the craiglisters rented that moonwalk at $75 for 48 (time frame prob more than a year) times their total revenue is $3,600.00. Don't even want to compare the Net profit. There must be more to it..... and discounted pricing is not the answer.

Edited by Amanzi, 22 October 2012 - 05:11 PM.

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#13 Bountiful

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Posted 22 October 2012 - 05:48 PM

I don't believe in discounting. Everyone who rents out inflatables has a primary colored castle moonwalk. It is safe to say everyone of my competitors have one, even the craigslisters at $75.00 for all day. I have 6 primary castles that I rent out at $125. Just in October I have the 6 castles rented out for 48 times total. I made $6,240.00. By the time the craiglisters rented that moonwalk at $75 for 48 (time frame prob more than a year) times their total revenue is $3,600.00. Don't even want to compare the Net profit. There must be more to it..... and discounted pricing is not the answer.


They think its great marketing and getting their name out there. I think allowcating the $3,500 they lost to other areas of business would make more sense. I don't consider low ballers competitors.

#14 bouncyclown

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Posted 23 October 2012 - 01:08 AM

I don't believe in discounting. Everyone who rents out inflatables has a primary colored castle moonwalk. It is safe to say everyone of my competitors have one, even the craigslisters at $75.00 for all day. I have 6 primary castles that I rent out at $125. Just in October I have the 6 castles rented out for 48 times total. I made $6,240.00. By the time the craiglisters rented that moonwalk at $75 for 48 (time frame prob more than a year) times their total revenue is $3,600.00. Don't even want to compare the Net profit. There must be more to it..... and discounted pricing is not the answer.


They think its great marketing and getting their name out there. I think allowcating the $3,500 they lost to other areas of business would make more sense. I don't consider low ballers competitors.


Well, I think it would depend on how many low-ballers you have in your immediate area with like for like units. 1 or 2 OK, but if you start getting 5 plus then you will start to feel the pinch.
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#15 cas

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Posted 02 April 2013 - 09:25 AM

I always hold my prices, I only discount on a large order. I try to set myself apart by diversifying my offer, this way they cant go elsewhere and get it all. Not very many people will take different party items from different party suppliers. In our area there is a lot of price cutting ( about 12 new companies in the last 2 years everybody seems to thinks it's an easy business to run out of your garage!) they have all lowered their prices....will see in 2 years who will still be around....


#16 Karscotdotcom

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Posted 02 April 2013 - 10:19 AM

Sound advise!

Zig Ziggler covers this in the Cost versus Price questioning technique when a prospective customer says "the price is too high!"



#17 KeepitBouncin

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Posted 02 April 2013 - 10:31 AM

Sound advise!

Zig Ziggler covers this in the Cost versus Price questioning technique when a prospective customer says "the price is too high!"

Zig and Brian Tracy address this issue very well. Unfortunately, some customers only see the sticker price.



#18 Karscotdotcom

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Posted 02 April 2013 - 10:38 AM

Agreed! And that's where the questioning comes in, asking the right questions and more importantly waiting for the answer, leads the client to see the only course of action to take, but in that instance the obvious decision was the customers idea and not the salesperson's, and so carries more weight, such is the psychology of the sales interview.



#19 Karscotdotcom

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Posted 02 April 2013 - 10:42 AM

I should have added that no you cannot win them all, but having a good background in the psychology of selling and how to question and get over "objections" will ultimately increase your closing sales ratio. I think Zig Ziggler is a master at this and recommend his books, audio's and videos to everyone even if you're not in sales his techniques can be used to make you a better negotiator and enhance your interaction with people on a daily basis.

Continually asking the "right" questions is where its at.


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#20 fulltime

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Posted 02 April 2013 - 12:36 PM

This article http://www.entrepreneur.com/article/222519# which
is the pinned post

This is an online article about production costs for a "widget" (product). 
 

  We don't sell, we rent, and our margins change, by volume and other factors.                                                          


                 

We don't pay 70% to manufacture product. I routinely discount for large orders,


primarily because my variable costs go down. Fixed cost percentage per unit is
reduced by the number of units rented at each location also.


  Obstacle course $500, 2 obstacle courses same


event gross $1,000. Give them 10% off, gross is $900, 10% off second course only;
gross $950.  Profit increase by any metric you use.


   Warehouse costs, and utilities, insurance, all fixed costs stayed constant. Labor did go up 1.5 man

hours, fuel a bit for extra weight...






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