How Small Firms Can Compete with Big Companies Through Better Pricing

August 14, 2012- 

Ed Farquhar looks at how smaller companies can beat bigger competitors by taking a fresh look at their sales and pricing strategies.

More companies are looking for opportunities to grow their business by moving into new sectors. Large companies in particular are confronting and shaking up established markets in their bid to carve out more sales in an ever-shrinking economy. This can have implications for small and medium-sized enterprises that are already in these markets.

Take Amazon Supply, for example, a new distribution service offering industrial and research supplies as well as equipment and materials to business. Since its launch in April 2012, there have been concerns amongst mid-market distributors that smaller businesses simply won’t be able to compete with a company offering the low prices and sheer scale that Amazon so easily provides.

However, as SME leaders and entrepreneurs know, size doesn’t always matter. Salesforce.com started off as a small company with a radically different approach to selling software. It is now one of IT’s major players in the cloud computing market. Well-established smaller companies with a strong understanding of their markets know that employing clever strategies and tools will help them compete with larger players and continue to grow.

When big companies offering low prices enter the arena, a key strategy for smaller companies must be to pay greater attention to their pricing as an essential lever for profitability. Many businesses believe that pricing is something they already manage effectively. However, research has shown that mid-market managers are not giving this essential element of the sales strategy the level of attention it truly deserves. In so doing, they are leaving valuable profit on the table and opening themselves up to exactly the kinds of competition they wish to avoid.

The University of South Florida completed a study this year revealing that smaller businesses have the most to gain by focusing in on their pricing strategy. The study indicated that the majority of companies did not have a dedicated pricing team, did not formally manage pricing and applied a ‘piecemeal’ approach to dealing with their sales strategy.

The evidence points to smaller businesses needing to take a more scientific approach to their sales to ensure that valuable margins are not overlooked. How do they do this? The introduction of large newcomers, such as Amazon Supply, might cause SMEs to try to compete using low prices. This can result in them reducing margins, lowering cost coverage and focusing on market-based strategies. However, this approach fails to deliver a deal based on hard facts about what the customer is willing to pay and under what circumstances they are willing to pay it.

This approach also often leaves goods and services sub-optimally priced, as the offer is made on a gut feel. In the parts distribution sector, for example, research has proved that 75% of parts are not appropriately priced. Yet a little precision can go a long way. McKinsey & Company reports that taking action to improve accuracy by as little as one per cent can yield up to an eight per cent increase in profitability.

Key to attaining this accuracy is a more analytical approach. A modern pricing strategy has to be dynamic and keep up with the many changes and fluctuations that occur on a day-to-day level. Variability in global economies and market conditions, for example, can affect the cost of manufacturing goods. Fluctuation in production costs can and should be taken into account in the final deal offered.

Real-time data analysis is not only important for accurate pricing, however. It is also essential for understanding and managing more complex orders and sales processes: what does the customer really want and what offerings really close sales? Many factors make up negotiations and go towards making a deal attractive. This might include bulk deals, consulting services, more frequent deliveries, financing options, service and support agreements and in-house training. Offering the best price as part of the overall package does not necessarily mean offering the lowest.

When it comes to companies looking for more complicated, longer-term offerings, while companies like Amazon Supply can offer low prices, smaller and more traditional enterprises can make better business partners. Their ability to negotiate deals on hundreds or even thousands of items and tailor complex, repeat packages means they can concentrate on meeting the needs of the customer and therefore do not have to compete on price alone.

Building the right deal also helps customers spread costs over extended periods of time and helps the seller avoid one-time operational expenses. Right-sizing the deal is also essential for smaller businesses, stripping offerings of unnecessary fixed costs. Most SMEs are sitting on a treasure trove of sales data that can help them understand how to scale and right-size their deals. Using this data is key.

Businesses must focus on gathering and utilising their available sales information and processing it intelligently in order to extract as much significance out of it as possible. When staffing is limited and time is precious, automating data mining saves resources and gives smaller businesses a framework for systematically guiding strategic business decisions. Turning sales and pricing from an art form into a science is essential to profitability.

Real-time, end-to-end pricing strategies give smaller companies business knowledge and power. Pricing optimisation is not a tool for big business only. It enables companies to compete on a more level playing field with much larger competitors. It can offer smaller businesses the same kinds of benefits and opportunities for growth that business intelligence and Enterprise Resource Planning have done for larger enterprises in the past. A clear and accurate understanding of real costs will lead to better profit margins and a more effective way to head off the competition, from wherever it may come.

Ed Farquhar is european marketing director at PROS Pricing.