Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Slashing prices may lure customers, but it could prove to be too costly for businesses

- by Alan Duvall 

Published in Dayton Daily News   September 17, 2006 

SALE!  SALE!  SALE!  When was the last time you paid full retail for anything? 

Recently I researched pricing for a round-trip ticket to Charleston, South Carolina.  A Dayton flight was booked since it was less expensive than Cincinnati.  Reviewing the itinerary I discovered both segments of the Dayton flight actually connected through the Cincinnati airport. 

Think about it.  Delta was actually paying me to fly round-trip from Dayton to Cincy.  Wow!  No wonder Delta is in bankruptcy.  

Horrid pricing strategies have demolished foundations of many institutions.  The airline and automobile industries come to mind. The common culprit – pricing against the competition simply to get the business.  Many companies irrationally quote lower prices to close the deal without consideration whether enough profit is built in to guarantee a positive bottom line. 

“I’ve got to keep my people busy, my plant at full capacity.”  Perhaps valid short-term remedies but if these practices continue for the long-term, the business is doomed to fail. 

Business managers should clearly identify internal capabilities and external target markets.  Do you want to be a Saks Fifth Avenue or Wal-Mart?      

Saks is high-end – pricey, stylish, personalized service.  Wal-Mart is low-end – inexpensive, run-of-mill, self-serve.  Some may sneer at the Wal-Mart business mentality, but Wal-Mart is not stupid.  They make more money than Saks. 

Identify your market and price accordingly.  Extra service is expensive and requires a carefully honed internal employee mentality.  Very often the 90/10 rule will come into play.  Ninety percent production will require 10 percent employee time.  The final 10 percent quality-related production requires 90 percent effort.  That final 10 percent perfection effort is particularly expensive and not all customers are willing to pay the value-added price.  

And managers will probably conclude the same employees cannot work on both Wal-Mart and Saks projects since it is difficult to take off a high-service hat and put on a low-end production helmet.

 While in Charleston, I acquired a bedroom set on sale for my daughter.  I really did not need the nightstand, but the quote on the remaining pieces inexplicably was more expensive than the entire ensemble.  Fine – pay me to take the nightstand and fly me back to Dayton.

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.