Competing on price is easy, differentiating is difficult, how is it done?
By Guitze Messina*
We always hear that "our market is a price market", the truth is that it is a price market because it is the easiest way to compete, if my competition sells at 10 I only have to sell at 9 and I am different.
The problem is that the margins have fallen to a level where it is not feasible to follow this path and many times we think that the fault lies with the manufacturer "that does not help me compete". The reality is that to differentiate ourselves we have to do things differently, and we will see several examples with questions that will allow us to identify areas of opportunity.
Personnel:
1) When was the last time your warehouse staff, sideboard sales, customer service, phone sales, purchasing, systems, etc., took training that would allow them to be different, better, more skilled, faster, or efficient?
2) When could the store manager or sales manager see and implement the most advanced techniques in the HVACR industry to catapult the results of their work?
3) What is the turnover of our employees in various areas?
To be different we have to start with our people, it is impossible to be the best footballer without training constantly, the same happens with our employees. Staff turnover is a good indicator of how bad we are in diverse areas, if a specific area has a lot of employee turnover, we must find out what we can do to incentivize those people to grow. No one stays where they don't grow.
Inventory:
1) Does your warehouse staff know about Warehouse Management Systems?
2) Are inventory rotations, unfilled orders, lines per order handled per operator per day, delivery speed measured?
3) Do we have a product classification A, B, C, D based on demand and margins?
It only improves what is measured, if we do not measure the key factors of inventory management and the failures we have in sales and service for not handling it properly we will not be able to differentiate ourselves in that aspect.
Operations:
1) Can we deliver orders from any customer within 2 hours?
2) Can we guarantee that 98% of our orders are delivered the same day?
3) Can we deliver to the customer error-free orders of parts and quantities 99% of the time?
4) Do we have a system that allows the client to do more services in a day?
To be able to make this type of differentiation our operation has to be more efficient, fast, accurate, managed by systems and with highly trained personnel, this is not easy to do, it takes work, training, effort and time, competing on price is much easier.
Sales:
1) Have our margins increased or does the price war continue to reduce them?
2) Does our telephone sales staff know telephone sales techniques?
3) Do we measure the % closing of visits, calls or number of visitors to the store?
4) Do we train our staff to answer sales objections?
5) Does our sales staff know how to handle price objections?
6) Do our sales and store managers know about professional consultative selling?
No doubt the sales area needs a lot of support in the companies we have visited, the sideboard area has a very high level of rotation and little or zero sales training, most of it is technical training. It's hard to train constantly, it's easier to compete on price.
Accounting, compensation and price management:
1) Does our staff know how to calculate discounts?
2) Do our staff know the impact on our earnings of a 1% discount?
3) Do we all know the impact on net profit of increasing gross margin by 1%?
4) Do we have a reward system for employees for increasing margins?
An entrepreneur's worst enemy is believing that he knows what he doesn't know. We conducted a survey where 91% of companies did not know how to calculate discounts, much less the impact of discounts on their profits. This makes price competition much worse because many do not know the consequences of their decisions and are taking the company to the precipice. Our people must know how to calculate discounts, margins and consequences to the profits of discounts.
On reward systems, in administration there is a maxim: "tell me how you measure me and I will tell you how I will behave". If we don't reward employees and especially salespeople for increasing margins, people will continue to do the easiest thing, reduce prices. Being able to investigate what is important to a client and position our advantages, takes time, is difficult and must be rewarded so that it is done frequently.
Marketing:
1) Is there a strategy between marketing and sales to attack a target of customers?
2) Is there a strategy between manufacturer and distributor to attack a customer target?
3) Is the strategy based on market research or on the opinions of managers?
4) Is the strategy based on "selling an incredible price of a type of product"?
5) Are marketing and sales managers measured in the same way?
6) How do both sales and marketing managers get along?
This is undoubtedly an area of a lot of opportunity, what we have seen is that there is not much marketing in most companies, when there is it is not carried with sales and it is certainly not measured by the same results. Worse still there is no common strategy, what we see is a lot of price marketing, if we announce price, that is our difference, that is the easiest.
The worst thing is that market studies are not done to decide strategies, for example, while we were at the AHR Expo in Mexico we did not see the Marketing managers enter the stands of the manufacturers to listen to what their customers said. One of the complaints we heard the most was: "Where I get this product, because my distributor does not have it since he says it is very expensive". If we make decisions for customers without doing an analysis, we can never differentiate ourselves.
Use of the internet:
1) Are we getting at least 20% of our sales online?
2) Are we helping our customers get online sales?
In a research we conducted with Google analytics, in any city in Mexico with more than 500,000 people, every month on average more than 5,000 of them search the internet for "Air Conditioning". How many of them call you to your business? What are we doing to get a piece of that cake of 5,000 customers that will increase every day looking for solutions online?
Shopping:
1) Do we buy based on discounted quantities or based on system data and sales analytical behavior?
2) Do we measure purchasing staff for discounts obtained or inventory shortages?
3) Who buys is the owner and continues to buy as he did before since he is who knows?
4) Are information systems used to aid in decision-making or are opportunities sought?
Here we will notice where much of the aspect of the competition in price is born, because many times we buy more than necessary to "get discount", however we lose sales because we do not have enough of another product. In order to fulfill 98% of orders, we have to have a diversified inventory, our capital is finite and we must maximize it not only in discounts but in types of products according to sales. When there are inventory shortages it is important to see how we reward purchases, inventory shortages are a symptom of poor purchasing practices.
Conclusion
When we decide not to train our employees, not to measure our service, not to strategize, not to use systems to make decisions, not to question what we do today, we are deciding to compete on price. Competing on price is easier, does not take time and does not require investing, but it leads us to minimize our profits.
There is a lot of opportunity for those who begin to differentiate themselves: delivering faster, helping their customers to sell more, giving guarantees of having the product, offering better training and customer orientation, with sales staff that closes more than the competition. Whoever manages to differentiate themselves will be more profitable and will guarantee their future in the industry, whoever continues to compete on price will be better off achieving operational efficiencies well above their competition or being left out of the game.
We have proposed many of these questions here embodied for a whole year in Mexico and Latin America, we begin to see that some companies are listening, there is much to do and implement, changing dozens of years of misconceptions will take time. If you want to know more about how to implement these ideas and changes in your company contact us at [email protected] or on our page: www.hardimex.org
* Guitze Messina. Executive Director, Mexico. Heating, Air-conditioning & Refrigeration Distributors International (HARDI.) For more information on HVACR industry best practices visit www.hardimex.org or email: [email protected]
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