Why Small Customers Are a Goldmine of Margin Opportunity
So you’ve decided to take a look at your pricing strategy, conduct a price analysis and start searching for targets to improve your margins through pricing. Sounds like a great idea, but where do you start? Our pricing experts typically discover that most manufacturing and distribution firms mistakenly start with a pricing analysis of their largest customers. On the surface, this might make sense. However, large customers, defined as buying large quantities of products, are not the best initial targets for price and margin lift.
Here’s why. Large customers have buying power. Their sheer volumes give them a leg up in price negotiating. After all, who wants to risk losing a multi-million dollar customer due to a pricing issue? Large customers also tend to have skilled buyers who use every tactic known in order to reduce prices. And, if your product cost to the customer represents a high percentage of the customer’s cost structure, chances are you are already on their radar screen – not the place you want to start with a higher pricing strategy.
Instead, consider tapping into your smallest customers. Sure, we know that your business probably mirrors the 80/20 rule where only 20% of your business comes from 80% of your customers. But, these small accounts can typically support a pricing increase better than the larger customers and deliver much higher price increases. Especially when your product represents a small portion of the customer’s overall cost structure.
Create a scatter chart for a specific SKU with customer size on the horizontal axis and the price index on the vertical axis. Ninety percent of the time we see small accounts paying a very wide range of prices. Using the higher prices as a reference point, move the lower priced accounts upward to match or at least approach what other small accounts are paying.
Because we tend to focus our pricing efforts on our biggest accounts, small accounts are often treated with less discipline and become our best targets for price improvement.
We typically see a price improvement of 2% in this analysis alone. And, remember, each increase goes straight to the bottom line.
To discuss with a pricing consultant how you can acquire a thorough price analysis or get strategic pricing advice from a price expert, call Price Point Partners at 330.342.0923