Tuesday, June 14, 2011

Building Business Without Cutting Prices

Price-cutting competitors are like rust on a steel tool: as soon as you clean it off, it starts forming again. And, just like insidious oxidation, price-cutters can’t be ignored. If you don’t pay attention, they’ll erode your company’s business. One way to respond to price competition is to meet or beat it at the lowball game. Unfortunately, there always seems to be somebody willing to go even lower and your bottom line suffers as a result. Is there any way one can respond to this unrelenting competition? Two automotive shop owners have found alternative solutions.

One way is to diversify so that you can afford to pass up a job or two without worrying about its impact on your bottom line. Pete Bennett, owner of CoachCraft, Inc., in Lexington, Kentucky, provides as many automotive restyling services as he can think of in a successful effort to build revenue and fully use his shop’s capacity. “As long as we’re promoting quality and being fair about pricing, I don’t worry too much about our competitors,” Bennett says. Volume is important, but not at the expense of quality. According to Bennett, who believes better work supports higher prices. “The quality speaks for itself. “

Bennett not only tries to attract many different types of work, he also maintains a balance between retail customers and dealer subcontracts. He estimates that his business is split just about equally between the two. Retail jobs generate a higher profit margin, of course, but the dealer business provides volume to maintain capacity utilization. Because he has both, Bennett can afford to maintain his prices, even to dealers.

Lee Muntean, owner of AAA Convertible & Sun Roofs in Costa Mesa, California, has adopted exactly the opposite strategy for beating the competition. He targets a niche market and does one thing—but he does it very, very well. This approach provides a strong floor under his prices.

His pricing for dealers and general repair shops isn’t driven by a need to beat the competition, but there is another factor he takes into account: the dealer’s margin. When it comes to pricing work subcontracted to him by body shops and garages, he’s careful to allow them to make a profit without undercutting his retail price. “One thing I don’t want them to do is give the jobs away. That hurts me,” Muntean says. In the ideal situation, the garage’s customer would pay the same if he came directly to Muntean and vice versa.

Any business owner or manager will tell you there is always somebody willing to undercut your price. One way to respond is to make a knee-jerk price cut of your own. As these two successful business owners demonstrate, though, that’s not necessarily the only way to build your business.

Dave Donelson distills the experiences of hundreds of entrepreneurs into practical advice for small business owners and managers in the Dynamic Manager's Guides, a series of how-to books about marketing and advertising, sales techniques, hiring, firing, and motivating personnel, financial management, and business strategy.

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