Business Insight 105 – Product Pricing: Cheap or Expensive? (blog & vlog)


It was suggested that we could compete if our salesmen were prepared to reduce their commission to a flat rate for either matching a price (MATCH PRICE: our contract would have to be accompanied by the quote from the competing company, to prove the ‘match’, i.e. same products, same number and same specification), or for PAR PRICE (where, having discounted to whatever was allowable at the price quoted, they reduced it further by whatever commission they would have been earning).

All contracts were subject to survey anyway and commission calculated against the correct list price; if accepted, the salesmen would get £25 for MATCH and £50 for PAR. The managers would receive a lower ‘override commission’ on these sales.

The sales rolled in. Some of our best salesmen refused to participate, as they thought it was against the culture and ethos of the company (I agreed, but was still in survival mode). Nevertheless, we had a record month.

The contracts were fitted and we waited to see the result in the management accounts (now produced brilliantly, in-house, by our own man, usually by the end of the third week following the month being reported). It was a disaster – we had been busy fools. We had barely broken even.

I didn’t believe the result myself this time. I made the accountant pull every single file for every single job fitted in the month and prove the costs accredited. (The product cost on the P&L had risen significantly, but was always calculated in total thus: opening stock plus purchases minus closing stock = total product costs). Each invoice for each job eventually ended up in a unique customer contract file; in fact all associated costs were put in the same file.

There were 200 files for the month; the exercise was undertaken and the figure was proved – it was still a disaster. The reason also became clear. As previously stated, our target margin allowed for an average 15% discount at the average order value.

With this campaign, our average order value had increased by the amount needed to trigger the 25% discount band much more frequently, and where our margins were already at their slimmest. We had given the business away; we had also ruined quite a number of our salesmen who weren’t able to sell at our ‘proper’ prices anymore, and had gotten used to order taking as a result of being the cheapest. Our best salesmen, who hadn’t participated, were smug indeed and justifiably so.

INSIGHT 105:- If you are going to compete on price alone, you better make sure you are the cheapest, and you better make sure there is a financial i.e. profitable reason for doing it.

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