Especially for SME’s – 26: Time - Telling no to customer-price.

09 February 2022

SME


SME 2: So what you are telling is that the lower limit below which you should never go while quoting is the variable cost v of the product.

Mr. Lowe: Yes, exactly. But note that you will take longer to recover your fixed costs in this option, but at least you are keeping your nose above water till you get to a time when you can start recovering your fixed costs as well.

SME 1: How do you fix the upper limit for the price of a product?

Now it is a little more difficult to fix the upper limit. But you can use the same variable cost, v as the means to define the upper limit also. But this needs a little brake on our avariciousness! We need to impose self- control on ourselves if we are not to create our own competition.

We have found that the total price should not exceed: v + x times v representing fixed cost+ v as profits when there is just normal competition or maximum 2v when there is minimum or no competition. But no more than 2v as profit even in the most favorable circumstances to charge any price.

X times in the above equation for fixed cost recovery is normally 1 or 2; for example, for Food & Beverages in hotel industry the price for the item is : v+ v representing fixed costs relevant to the restaurant and v representing profits. So price of an item is normally around 3 times variable cost of that item. However, for rooms, as the fixed costs are 90 to 95% and the variable costs are just about 5%, the formula could be v+ 15-20 times v and the profits per room that you want to make with a self-imposed restraint.

SME 1: I will try to work this way and compare the prices I am getting currently for my key products.

SME 2: You said there is one more situation where we may have to tell NO to our customers. What is that?

Mr. Lowe: This situation is when the customer asks details about the expertise that goes into your product or service.

Every business has got very few key secrets – technologically or commercially or in both areas- that normally remains within the family in the case of an SME. This set of secrets is like the private aspects of one’s life. They should not be shared. Like I was narrating the story of a ball manufacturer in Vadodara. Areas of your factory also should not be open for all, as also the few vital few tasks and processes. If any body asks for details of these, you can politely say No. Here also you can frankly say why first, how sharing that with anyone can shake your business’s foundation and then say No.

A corollary of this is when even a vital few customer of yours wants to change some aspect of your unique expertise. If his logic arguing for change is reasonable, i.e., if it satisfied his felt need and will benefit to all customers, we should consider effecting that change and inform him that we have done it. But if his logic for change is cocky, not based on factual problems he faces, and will give minus to other customers, we should put our foot down and say no. But before saying no, we should take time to convince him that what he says is not reasonable enough to convince our other customers who are using the same software or algorithm that has gone into our software or expertise. In such a case the customer who asked for change would come to the conclusion that he is indeed dealing with experts in that field and not just yet another supplier. ………………….contd.

SME

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