Turn the Ship Around – Go From a Leaky Deathtrap to a Luxury Yacht
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And here’s your host, Matt Hardy.
Today I want to talk about protecting your profit margins.
The more generous title is: “Turn the Ship Around: Go From a Leaky Deathtrap to a Luxury Yacht.”
It’s a common problem among anyone in sales.
Whether you sell online, in a store or toe to toe – you’ve probably run into a customer or two who’s looking for a deal.
A few bucks off of the price.
And what do you do in this situation?
Do you waffle under the pressure?
Do you figure you’re already making enough money that you can afford to take a bit of a haircut on this one?
Maybe you justify giving them a discount by thinking that you’ll make it up on a future deal.
Well, my friend, if that’s your “go to” move then you’ll want to listen carefully to what I’m going to tell you.
I’ve run into this type of person before – “The discount seeker.”
My days working in retail sales as a store manager and then in manufacturing as a project manager gave me a lot of practice dealing with people looking for a bargain.
There were always a few customers who came into the old hockey shop who wouldn’t buy anything without getting a deal.
And let’s be honest – with the amount of competition these days, you can’t afford to just give away your already dangerously thin profit margin.
Anorexic profit margins are never sexy.
We like them as big and fat as possible.
So, what to do?
During my time as a store manager, I figured the best way that I could combat this sort of problem was to infuse more value into the deal.
So, rather than giving someone 10% off their order, what I would do is offer them an extra product for free.
And, funny thing, the product I would give away was ALWAYS something that we were making a lot of money on.
Let’s put some numbers to this.
Say someone wanted to buy a $200 hockey stick.
Yup – fairly pricey right? But we sold piles of them. And they’ve only gone up in price since then.
So if a guy wanted a $200 hockey stick at a 10% discount he’s wanting about $20 off the stick.
Now, rather than give him the discount, I’d offer him a pair of hockey socks that sold for $15, or a package of hockey tape for $10 or something like that.
I gave him these options because we at least doubled our money on stuff like hockey socks or tape, so I was giving away a hard cost of between $5-7.5 on the sale rather than the $20 discount he wanted on the stick.
If the guy went for it, we saved between $15-12.50.
And while this may not seem like a lot, it adds up throughout the year.
Especially since we sold between 2-4 sticks per day.
On the low end, that’s a savings of about $750-1500 PER MONTH or $9000-18000 PER YEAR.
This sort of savings would cover wages for one or two part time employees for the month or for the full year.
Just by making a simple adjustment in sales tactics.
And the guy buying the hockey stick would be happy because in his mind, he saved the retail value of $15-20 on something he’d have to buy at a later date anyway.
I would run into the same situation dealing with supply chain managers and purchasers in the manufacturing world.
These people often needed a lot of different parts just to complete one project.
So if they were working on a few projects at the same time that ALL needed multiple parts, their stress level jumped exponentially, as each part needed for the project needed multiple steps in order to have them made.
This being the case, now they had to keep their eye on multiple timelines in order to make sure the project could be finished on time.
For example to make a part you had to buy the material, cut & machine it to size, weld it and then powdercoat it.
Each step in the manufacturing process involved sending it to a different company.
This meant that now you had to babysit the part and deal with a raft of different companies and schedules to try and get the part made on time.
So if the part is late and you need it ASAP, you would have to find out where it is and then start making phone calls.
The first call was to yell at the machine shop for being late, the second would be to the fab shop to ask them to hold you a spot in their schedule and the third call went to the powdercoating shop to beg and plead for them to do you a solid and coat your parts ahead of everyone else as soon as they were ready from the fab shop.
Can you see how this gets pretty crazy when you have multiple parts and multiple projects that YOU are now responsible so that the project succeeds?
When I was dealing with these supply chain managers, I quickly learned that if I was able to consolidate these different steps for them, it created a HUGE amount of value for them.
Value proposition 101 – if you can make things easier for people, they will love doing business with you.
Now they could just hand me a list of parts to make and know that I could handle it from start to finish.
It was like I became a project manager for them, which made their life much easier.
Then if things were late, they only had one person to yell at – Me.
They no longer had to deal with multiple shops, co-ordinating conflicting schedules and so on.
And what did I get for all this additional responsibility?
In providing a service like this, I was giving them back some of their sanity and simplified their job.
Sure, if we couldn’t do everything they needed in-house, I would sub it out, get it back and send it to my customer with a bow on it.
Done to spec from start to finish.
One phone call. One quote. One bill. One shipment.
And this set us apart from the competition.
Now we weren’t just quoting on parts or a piece of the project – our quote involved the project management aspect as well.
This made comparing our prices with the competition nearly impossible – as it was no longer an “apples to apples” comparison as the alternative was trying to piecemeal 3-5 different quotes together to arrive at the one complete quote from us.
And I knew that this was worth more money.
So if they complained about pricing, in most cases, there was no need to offer a discount due to the amount of extra value my service brought.
Our quality was better than the competition and I was making their life much easier.
Oftentimes it was as simple as that.
Some guys would go with the competition from time to time, sure.
But they would ALWAYS come back to us.
When they went back out there and tried to do it all themselves, they realized they couldn’t handle it.
That’s not to say that they weren’t good at what they did – they were – but with so many moving parts and different schedules on top of whatever else they were responsible for, at times they seemed to be doomed to failure from the start.
So after they got a taste of how much easier it was to just delegate it to me, they were hooked.
To have someone like me in their corner helping streamline the process and lessen their workload was well worth the couple extra bucks.
In most cases, the cost I quoted them was just passed along in their final bill to their ultimate customer.
It was all absorbed in a sea of a million other parts and their management fee.
But the value I added helped decrease their lead time, increased their level of quality and removed some of their day to day stress.
The other thing that is often overlooked about adding value to a deal rather than giving your customer a discount is that you’re training your clients for the future.
You’re training them not to expect a discount every time they phone you and this goes a long way in protecting your margins.
If your default move is to just drop your price, your customers will come to expect it from you EACH AND EVERY TIME you deal with them.
And the more you do this, the more it erodes your profits and their perception of the value you and your product have to offer.
I’d rather not have a business model built on volume and razor-thin margins.
Because if anything goes wrong, or there’s a bit of a slowdown, you’re in for a world of hurt.
If you are basically trading dollars with very little profit being made on each job and you have a machine break down – where will the money come from to replace it?
If there’s no money in the till, you’ll have to get another bank loan or take out another mortgage against your house.
Or close your doors.
And as those aren’t good options, I suggest avoiding that business model at all costs.
Healthy profit margins will give you a bit of a buffer that you can spend on engineering and developing new ways of adding even more value to your customers.
Here’s to saving your profit margins by adding value, not slashing your prices.
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That’s it for now, thanks for listening.
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