| FFICE FURNITURE industry is extremely competitive. | | | | ___$500________$500_____ |
| Some businesses treat the purchase as non-essential | | | | ____$424________$437_____ |
| to the business, and always try to get the lowest price | | | | ___$76_________$63_______ |
| possible. A lot of people see office furniture as no | | | | ====== |
| more than a commodity – chairs, desks, filing | | | | Table 1: Impact of stagnant price on profit |
| cabinets, etc – so the value proposition is greatly | | | | Activation 1 |
| reduced in the mind of the buyer. | | | | If you normally make 40 per cent margin on a unit sale |
| There is a legend told in the industry, how one office | | | | and you discount your price by 30 per cent, how much |
| furniture supplier went broke trying to win a major | | | | do you have to increase your sales by to maintain the |
| contract at all cost. | | | | same margin? |
| The contract that was up for tender was one of the | | | | A. 125 per cent B. 150 per cent C. 200 per cent D. 300 |
| largest office developments in Australia, and all the | | | | per cent |
| companies that were involved in the pitch knew that it | | | | The answer is D – 300 per cent. So, the reality |
| would give their company great leverage using it as a | | | | is that if you are struggling with the amount of time |
| reference for future pitches. | | | | that you are working in the business at the moment, |
| Ego prevailed over sensibility for one of the office | | | | this price discounting strategy will just accelerate your |
| suppliers. After each company had submitted their | | | | problems. Working more hours for less profit! |
| tender, the purchaser was open to who had the best | | | | “How long has it been since you last increased |
| bid, and at what price that bid was placed at. Most of | | | | your prices?” I asked one of my clients. |
| the field dropped out knowing that they could not | | | | “Ten years ago,” she replies. |
| afford to lose money on the deal. | | | | “TEN YEARS!” I respond in a |
| One of the office suppliers took the bait, and | | | | passionate animated way. “You mean to say |
| sharpened the offer. The fame was too great for the | | | | that you have not increased the prices in your |
| supplier, and they reasoned that the contract could be | | | | business for ten years! No wonder you are losing |
| funded by future bids that they could win. | | | | money. Guess what you should do next.” |
| This office supplier who gave the lowest bid won the | | | | “Increase my prices” the client answers. |
| contract. The rest of the bidders wondered how on | | | | Problem No 1: Continuously discounting
Problem |
| earth this supplier was going to afford such a deal. | | | | No 2: Not reviewing your prices on a regular basis |
| They did not have to wait long for the answer. The | | | | There is a disease that is killing many businesses. This |
| company installed the furniture, and a sea of red | | | | is not an unknown disease, as there are many reports |
| started to appear on their books. The company | | | | in the daily newspapers and the nightly news |
| completed the installation, but then had to reduce their | | | | programs. This disease is inflation, and if you do not |
| workforce by half, and shut down a couple of sites to | | | | review your prices on a regular basis, the increase in |
| reduce costs. Eventually they went broke. | | | | the cost of the goods that you sell and the expenses |
| Why discount? | | | | used to run the business will gradually increase and |
| Discounting is even more prevalent when times are | | | | without you knowing it you will start to lose money on |
| tough, such as when interest rate or petrol price | | | | each transaction that you make. |
| spikes, thereby reducing the amount of spending in the | | | | Table 1 shows an example of selling a $500 item |
| marketplace. Why is it that when times are tough, we | | | | without reviewing the price on a regular basis and how |
| lose faith in what our business is, and take on the | | | | it can hurt your profits. This calculation is based on |
| poverty mindset and start discounting? | | | | inflation increasing by an average of 3 per cent per |
| The reason is very simple: business owners panic | | | | year, which is a general reflection of inflation rate |
| when sales are down, and feel that to compete in the | | | | increases in the Australian economy over the past |
| marketplace, their prices must be below their | | | | decade or so. The costs in this table include cost of |
| competitors. Where do they get this information? | | | | goods sold and operating expenses. |
| “Our customers are always asking for a | | | | In four years the profit on this item sold dropped by 37 |
| discount!” is the common response that I hear. | | | | per cent. When businesses cry about sliding profits, it is |
| ==============Year 1=====Year 2======Year | | | | generally because they have not sat down and |
| 3======Year 4==== | | | | reviewed their prices. |