INSIGHTS & JOY

A business newsletter with Pizzazz!

"We help leaders become better marketers
using a holistic business approach!"

September 2007

Today's markets are volatile. Competitors constantly test your customer's loyalty. Some sectors of our economy experiencing a slowdown. Slowing sales tempt suppliers to cut prices in an effort to maintain volume. Often, price cutters do not realize how much extra volume they must capture to make up for their reduced margin. What should you do? You must stay current with competitive initiatives and with your own results. Competitive price cuts or delayed price increase announcements are troublesome to be sure, but you should avoid knee-jerk responses that ultimately damage profitability. The skillful use of temporary measures and nonprice benefits can help you retain both market share and profitability. This month, I offer some specific tactics to consider when your competitor cuts prices.

This year, I launched the NTX Private Business League. Development of the League's structure took more than eighteen months of planning. The League's objective is to link business owners who need professional services from time to time with a select group of experienced professionals who provide those services. Business owners gain impartial outside advice on their most pressing issues and they have access to the full array of professional services when, and if needed. I will update you in future letters as the NTX Private Business League gains traction. Contact me if you would like more information about the League.

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IN THIS ISSUE

Responding to competitor price cuts

Marketing Facets - The Market Focused Guide to Company Analysis

Smiles make the day!

$ Million Marketing Tips

Amazing Facts!

Responding to competitor price cuts

Economic downturns often spawn price cutting by competitors who try to maintain volume by reducing prices across the board, or on selected products and services. Your emotional instinct may be to drop your own prices to match the competitor and protect your business. Often, that is the worst move you can make! Your first step should be to assess the competitor's situation and position in the market. A well-managed rival may be trying to increase market share at your expense. Selective price cuts in your primary offerings by a competitor can hurt, so some immediate response may be needed. Price cutting by a smaller, sloppy competitor may just mean that they are desperate, unloading inventory to raise cash. It probably be a mistake to change your pricing structure to meet a small, temporary dumping situation. Decide if your competitor has the capacity and resources to take a significant bite. Determine whether all of your competitors are reducing prices, or just one firm. It does not pay to lead the way with price cuts.

Does the competitor have a real cost advantage? Compare structures, along with costs of materials, labor, transportation, etc. Build your in-depth knowledge of the market and your competitor, then decide on the best way to counter the competitor's move. In many cases, sellers overestimate the effectiveness of a competitor's price cuts. Customers usually value long-term relationships and familiar products or services over temporary savings from switching suppliers. There is often more customer inertia and apathy than suppliers recognize. Price cuts might mean poor quality or service. Your salespeople can raise the possibility if it may be true.

Consider countering with a temporary price reduction rather than permanently reducing your price list. A thirty-day temporary competitive allowance often will blunt a competitor's new program with a lesser effect on profits. When you are first to announce a price increase, competitors may try to steal business by delaying their own price adjustments. That is another case where a temporary competitive allowance is useful. You do not rescind your increase, but you stay competitive while the others catch up. Soon, competitors recognize that they will not benefit by delaying their own announcements.

The cost of price cutting can be very high. For example, if you have an average gross profit of 30% on a product, and you reduce your price by only 5%, you must increase sales by 20% to earn the same dollars of gross profit at the lower price! It gets even worse if your gross profit margin is less or your price cut is greater. You will find a handy chart, "Sales Increase Needed to Earn Same Gross Profit," in my article library at www.morganmarketingsolutions.com.

Nonprice responses can also be effective in holding off price cutting competitors. Consider communicating your reliable quality and dependable services in more ways. Offer your long-time customers extended credit terms for the next month or so. Back up your quality claims with longer warranties than competitors offer. Provide in-house education to your top customer's staff. Look for other opportunities to add nonprice related factors to your normal offering. For example, some vehicle manufacturers now offer extended 5-year powertrain warranties to help convince buyers that their vehicles are more reliable.

Bracketing your competition may be necessary. Bracketing means leaving your current product at its regular price (or raising the price slightly), then creating a 'fighting' product to meet the competitor's offering. This tactic can be a two-edged sword. If too many current customers switch to your 'fighting' brand from your premium product, you have effectively reduced profits without an offsetting volume gain. It is more likely that most of your customers will stick with your regular product, particularly if your salespeople can point out certain benefits of your regular brand that are not included with the new 'fighting' brand. Later, you may decide to cancel the 'fighting' brand, raise its price, or make it available only on special order, thereby moving customers back up. Be sure to carefully monitor the results of bracketing on your regular product.

In all price cutting situations, carefully monitor competitive moves and your own results. Today's markets are volatile. Competitors constantly test your customer's loyalty. You must stay current with competitive initiatives and with your own results. Competitive price cuts or delayed price increase announcements are troublesome to be sure, but you should avoid knee-jerk responses that ultimately damage profitability. The skillful use of temporary measures and nonprice benefits can help you retain both market share and profitability.

Marketing Facets - The Market-focused Guide to Company Analysis

Marketing Facets is a practical resource for those involved in determining the current health of a company and gauging its future prospects. I designed my 103-page guidebook to be a supplement to other evaluation procedures and information normally gathered during a thorough due diligence or business valuation process. The workbook takes a holistic approach, assembling facts and management assumptions in key areas to help the analyst form and support conclusions.

Marketing Facets is a valuable resource to private investment fund managers, individual investors, venture capital specialists, investment banks, and valuation specialists. Marketing Facets can also serve as a guide for C-level executives who wish to perform their own company analysis as part of normal business planning, or in advance of efforts to refinance, acquire or divest.

Marketing Facets is available in electronic form via the Internet, on CD/ROM, or in print with a ring binder.
> Electronic in MS Word .doc or Adobe .pdf format via the Internet @ $79.95
> CD/ROM format @ $85.95 including U.S. shipping and handling
> Ring binder version and CD/ROM combo @ $99.95 including U.S. shipping and handling

Consulting is also available. Please contact me for additional information.
Telephone: 972.931.7993 Fax 972.931.0542 rpmorgan@morganmarketingsolutions.com.

Smiles make the day!
Speaking of prices and cost...

Today, we are suffering from a new ailment called 'costrophobia.' It is the fear of rising prices!

At today's high price, spilt milk is definitely worth crying over.

The cost of living turns out to be what you make plus 10 percent.

As we progress, the cost of relaxing is soaring out of sight.

Can two live as cheaply as one? At current prices, they'd better!.

Many of us are now experiencing "shell-out" shock!

Now, it is costing Americans twice as much to live beyond their means as it did twenty years ago.

It seems that every time history repeats itself, the price doubles!

My cholesterol problem was mostly solved by the high cost of meat, eggs, and fatty snacks.

$ Million Marketing Tips

TIP: Invest in outside customer research to learn more than your competitors. In most cases, your biggest competitors are customer indifference and your own ignorance of market realities.

TIP: If you cannot see how your product or service is different from competitors, look again...harder. If the differences you find are not meaningful to your customers, aim to create greater differences or additional points of differentiation. Everything can be differentiated, even flour and water...consider Gold Medal and Perrier!

Amazing Facts!

1. A newborn baby's body contains about 26 billion cells; you probably have about 50 trillion!

2. Fast dog. A greyhound can run as fast as 41 miles per hour when in a hurry.

3. Picasso kept warm in his early days by burning some of his paintings.

4. Earth gets as much solar energy in one minute as Pluto gets in 25 years!.

5. A "jiffy" is exactly 1/100th of a second!

6. The world's most visited mountain is Mount Fuji in Japan.

7. About 95% of the population of Egypt live within 12 miles of the Nile River.

8. Alaska has a state flower. It is the forget-me-not!

P.S. Ninety-five percent of our engagements originate as a referral from helpful people like you! If you know someone who:

> Wants to develop a more productive marketing program, or

> Needs help building and implementing an effective operational business plan, or
> Wants to exit a business or acquire another company,

I would appreciate the opportunity to discuss the situation with you.

Our ideal client is a business owner or CEO between 30 and 60+ years old. Usually with a financial, engineering, or production background. Who is often impatient, and interested in improving company performance. Comes alive when you ask, "How's business?" He, or she, is practical but also enjoys the finer things in life. So, you may see my ideal client driving a Lexus, BMW, or SUV to Neiman Marcus...and to Sam's Club. Who do you know that fits this description?

A client speaks: "The implementation guide will be very useful to use as a check-off as your recommendations are acted upon. Some recommendations have been thought about in the past and no action taken for various reasons. With your review, I have been rethinking my positions and will act. The most important issues are those that will 'free up' some of my time to be used in the C store operations and in greater sales efforts." John D., Dumas, TX

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Richard P. Morgan CMC
Morgan Marketing Solutions, Inc.
Two Galleria Tower, Suite 10008
13455 Noel Road, Dallas, TX 75240-6620

Telephone 972.931.7993 fax 972.931.0542
email rpmorgan@morganmarketingsolutions.com
www.morganmarketingsolutions.com

Author, Marketing Facets - The Market-focused Guide to Company Analysis

"We help leaders become better marketers using a holistic business approach!"