www.mercuri.net

For more information contact: Richard Higham

Tel: +44 1932 844855 or Richard-higham@mercuri.co.uk

Handling price

pressures

A Mercuri International White Paper

Challenging times

In tough economic conditions most clients expect more

for less As their customers put them under pressure

they in turn bring pressure to bear on their providers. The

rise in the power, scope and skill of procurement has also

exposed new areas to price pressure.

Sharpen your skills

It is worth sharpening our price handling skills and

reminding ourselves of the steps we can take to reduce

or manage price resistance. The three main things to get

to grips with are:

1. The principles of price 2. The process of price handling 3. The presentation of price

The Principles of Price

Few companies set out to be the cheapest in the market

or to use price as their main differentiator. There are

exceptions but they tend to be in mass markets like

supermarkets, newspapers and fast foods and most price

wars are intended as short sharp shocks to hit weaker

competitors.

The downside of heavy discounting cannot be over-

stressed: In July 1994 Wills launched Horizon 30s in

Victoria Australia, in direct competition with Philip Morris'

Peter Jackson brand. Wills priced their new packs at 52

cents less than Peter Jackson. Philip Morris retaliated by

discounting prices in South Australia, (Wills' stronghold).

At its height, the discounting war was costing the tobacco

companies an estimated $8 million per week. As a result,

profits and share prices of both companies dropped.

However cheap you go it is likely someone will be willing

to go cheaper. As John Ruskin put it in the Nineteenth

Century:

“There is scarcely anything in the world that some man

cannot make a little worse, and sell a little more cheaply.

The person who buys on price alone is this man's lawful

prey.”

When you look around most offices there is usually little

evidence that price is the main driver. Just look at the car

park, what the buyer is wearing, the coffee in the coffee

machine, the quality of machine tools or computers. Few

buyers buy solely on price (even fewer buyers admit they

do!). The exceptions are in one-off consumer purchases

e.g. price comparison sites for buying a fridge and very

transactional deals on products perceived to be a

Winning growing and keeping clients Page 2 (4)

www.mercuri.net

For more information contact: Richard Higham

Tel: +44 1932 844855 richard-higham@mercuri.co.uk

commodity. In hard times the trigger point does move.

This is the point at which the raw transaction price

becomes more important than the value of the longer

relationship.

It is quite acceptable to respond to a price challenge with

“Is price your only criteria?” If the answer is yes you

probably shouldn’t be there!

Be confident in your pricing. Understand it and support it.

You may feel yours is the highest price in the market but

is it really? Don’t allow yourself to go into price

discussions saying to yourself “Yes you’re right – our

prices are too high”. One way to analyse your pricing

strategy is to use the grid below. Assess your quality and

price levels. The low quality (left hand column) is unlikely

to be an option. If you assess your quality as medium

then it will be hard to defend high price levels. If your

quality levels are high then beware of underpricing.

From principle to practice

But clearly, appreciating the principles alone is not

enough. We need to have robust processes. The

processes might include:

Differentiation: How do we demonstrate that we are genuinely different from all those (cheaper) competitors

Timing: Do we aim to deal with price early or late?

Analysing components: What are our variables? How much can we move? What is the relationship between their cost to us and their value to the client?

Building business cases: What is the best way of demonstrating how our offer brings value to the customer?

Thirdly we need to work on the way we present price.

This is partly about structures such as the sandwich, the

LCD and the equivalent. Partly it is about language –

avoiding negative phrases such as “I’m afraid it costs a

lot” and using neutral language such as “figure”, “rate” or

even positive language. Part of it is about behaviour –

showing confidence but not arrogance, dealing with

challenges calmly and cooperatively not with anxiety and

aggression.

Handling price challenges is not easy, especially in a

demanding economic climate but if we can master the

principles, refine the processes and improve the

presentation of price our businesses will prosper rather

than perish; our people will fly where others fall

Richard Higham

Global Practice Leader

Financial & Professional Services

Mercuri International