Financial Data
Updated 26 Feb 2020


Why you should never compete on price

If you want to avoid the slippery slope of price commoditisation, you need to change the conversation you’re having with your clients. 


Nadine Todd, 05 March 2017  Share  0 comments  Print


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Nicholas Bell has been on a growth binge. He’s taken his business from a R28 million turnover to R116 million in three years, and he’s just getting started.

He’s used a number of strategies to achieve his goals, but one of the key tactics that has been essential to his market positioning has been the ability to ensure his product and service offering hasn’t been commoditised.

Related: What price for success?


TAKE NOTE

Price commoditisation is accepting business at a lower price to make the deal, or because your competitors have set the bar, and you now need to remain competitive. To avoid this, you need to be making the case for your customers to pay a higher price, instead of them pushing you to accept a lower price.


Too often companies are forced to compete on price, and then as prices get pushed lower and lower by the competition, so you become commoditised. Bell refused to allow this to happen.

“Our problem was that we’re an SME competing against big global brands,” explains Bell. “Even though our offering isn’t the same, when your competitors are driving the conversation, they set the price that the market then compares you to. In business, you’re always measured against who the market perceives to be your peers.”

Breaking the mould

In Decision Inc’s case, this meant being compared to tech providers, even though the company is a consultancy. “It doesn’t matter what you actually do, or what your real differentiators are, what matters is what clients think you do,” explains Bell.

“This was our problem. We were constrained by the market’s understanding of the service we delivered.”

In reality, Decision Inc has a very customer-centric focus, offering professional services in the information management and business intelligence space. These services are backed by technology platforms, but the company’s IP rests with its people. “We did not want to simplify down to the cheapest common denominator. If we allowed that to happen, our margins would have been destroyed.”

Bell realised that he needed to find a way to show the market that the company’s differentiator is unique. To do that, he needed to go back to the drawing board. As a business, you can’t articulate who you are if you don’t fully understand it yourself and so Bell began by answering the question of how Decision Inc is different from its perceived competitors.

Related: Price your products right

It’s all about value

Value -added -service

“We’re not a typical IT provider, because we don’t just sell products,” he explains. “We’re also not consultants like McKinsey, Deloitte and Accenture, who are expected to charge high prices for their IP and human capital. As a tech company, we’re expected to charge commoditised prices. The reality is that we sit in the middle. We have products and IP that we bring to the table.”

The question Bell needed to answer was straightforward: How could he show Decision Inc’s value in such a way that the company was able to distance itself from its competitors?

First, they needed referrals, and to draw on their track record. “We’ve done 500 projects, we have a 90% customer satisfaction rate, and 250 clients are billed annually,” says Bell. “We needed the market to be very aware of these stats.”

This helped, but it still wasn’t enough. “It’s all about the bottom line. If you don’t want to be having a conversation centred on price, then it needs to be centred on value. You need to be able to prove the value you bring to an organisation’s bottom line.

Closing the deal

“Today, when we go to a client, we’ve done our research. We’ve worked the numbers, and we’re able to say, ‘We can save you R50 million, and charge you R500 000 to do it.’ And we can quantifiably prove it.

“That’s the conversation we’re having with clients. We’re not letting them compare hourly rates with our competitors, and we’re not having conversations around price. The ability to have this conversation has made a huge difference in how we engage with clients, and ultimately on our bottom line and growth trajectory.”

Related: 3 Strategies for raising your prices


NEXT STEPS

What is your differentiator? What value do you bring to your clients? Do you have the data to quantifiably prove this? If you cannot answer these questions, you cannot expect to charge the price your business needs to maintain its margins, and you will be commoditised.

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About the author


Nadine Todd


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