Especially for SME’s – 25: Time.

02 February 2022

Mr. Lowe: We were talking about the need to have a lower limit and an upper limit for the price of every product that we are quoting for. Let us discuss how to do it.

We defined, earlier, that value added by us = selling price including taxes minus variable cost. We talked about variable cost as the sum of costs of raw materials, bought out components and taxes.

We also mentioned that first, value added goes to recover our fixed expenses like employees’ salaries etc. and whatever value added remains after recovery of fixed expenses is the profit we make.

Can you quote a price for any product below the variable cost “v”of the product?

SME 1: That will be suicidal, as we are recovering nothing out of the fixed cost at all.

Mr. Lowe: You used the right word, suicidal: If you quote a price below the variable cost v, you are spending out of your pocket an amount = variable cost v minus the selling price to run your business! Should you be spending out of your pocket to run your business, or should you get some money into your pocket by running your business? No customer wants you to spend out of your pocket to service him because you cannot sustain such a service and he himself cannot do his business this way.

So when you would say No to a price, this way of convincing the customer works! Particularly when you explain to him with facts and proofs for your variable cost v for any product.

Before you tell No to the price below v, explain to him as above and then say No. Don’t first say No and then explain to him why! This explaining why first and then telling No makes a lot of difference to the end-result, which is customer agreeing to your price, when it is near about the variable cost.

SME 2: Have you ever seen an entrepreneur doing this, selling below v?

Yes, it is rare and I must share that rare experience in an SME retail store in Baroda that was selling auto spares. It was running in loss of 10 lakhs a month when somebody referred the owner to us. Normally we locate the root cause of such problem in a day or two, but in this case we could not imagine the retailer selling his goods for less than the purchase price, and so we took 4 days to locate this. Once we located the root cause, we asked him why he is doing this. The answer from him surprised us even more:” I need cash every day to buy stocks of these items. So I had instructed my counter salesman that no customer would leave our premises without buying even a single item!” The owner placed himself in the counter sales area and would call the customer about to leave without buying and ask him why he is leaving without buying. Invariably it was the price or the money he has was insufficient so he would take the money the customer can afford, which happened to be lower than his own purchase price. And if an item was out of stock, which was happening regularly with a stock module software that he was using, he instructed his people to buy from the nearby shops and give it to the customer. His neighboring shop owners were not as “enterprising” and so they charged him the normal market price and he used to sell it at a much lower one. His shop was doing maximum business in the entire area auto parts retail area and was always full of customers obviously! Yet it was making maximum losses in the entire area. The more he sold the more loss he would make. I have known the need for cash flow management by managing the receivables effectively, but not putting money from one’s own pocket, unmindful of whether he is making profit or loss! We set it right the very next day restraining him form quoting a price not less than 10% of his purchase price that was available in a printed book containing more than 3,000 items he was selling. The very next month onwards he was making a profit of 10 lakhs! ………………….contd.