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2012 is drawing to a close and it’s probably a good time to reflect on business in the past year.
Depending on who you follow in the business papers, Australia is either looking forward to stronger growth in 2013 with stronger profits being seen by SME’s as only a matter of months away, or the more negative reports that SME’s are failing to be convinced that business will fare better in the next 12 months. It probably depends on which forecasts you choose to believe by which side of the political divide you support. It is the half full / half empty scenario I guess.
From my perspective, as a small business at the lower end of the food chain, I have experienced good growth with new clients and positive reactions to my sales pitch. On the negative, I’ve also experienced very acute issues with cash flow. I am like many others at my end of the food chain that have found themselves on stop credit with some suppliers from time to time, especially in the latter half of this year.
My Government work has dried up dramatically, in some cases literally overnight with contracts being cancelled less than 24 hours before we were scheduled to start. Talking to others, both in our industry as well as in unrelated industries, I am comforted to know that I’m not alone. If only the banks showed some level of concern.
Its times like that when loyalty is severely tested by both suppliers and sign shops alike. I have some great relationships, and I don’t begrudge them going down the ‘stop credit’ line at all. Business is business. But the ones that I really admire are the suppliers that work with you, rather than work against you in these matters.
What I have found alarming though is the amount of sign shops and sign wholesalers who are starting to discount their products heavily in an obvious attempt to generate sales and cash flow.
Economists will tell you that this discount mentality is often the start of the slippery slope of a business’s decline.
Profit is not the dirty word that consumers will have you believe. If you are not making an honest profit, you are going backward in business, simple as that. That applies to the retail sector as well as the wholesale sector.
In an online article by Cindy Waxer called ‘Discounting’s Downside: The long-term costs of constant price cuts and ‘always-on sale’ mentality’ , Brad Sugars, founder of business coaching firm ActionCOACH was quoted as saying “While price chopping pleases shoppers, it can drastically eat into a small business’ profits. “Companies don’t run on revenue; they run on profit. The moment you start discounting, you lose a lot of your profits.”
Bob Phibbs, a retail consultant and author of ‘Groupon – Why Deep Discounts are Bad for Business’ agrees. “When we give these deep discounts, we kid ourselves and say that it’s because the economy is bad or we need the money. But what we’re essentially doing is giving up on being able to charge full price.”
It seems that when we strike a difficult patch, we think that discounting will ‘fix it’ in the short term.
Some wholesalers in Australia have become consistent in offering heavily discounted weekly and/or monthly specials. That makes many wonder how they are surviving in an increasingly difficult market place. It also raises sceptical questions as to their long term future credibility and liability.
Phibbs is quoted in the same article, addressing a similar thought. “Selling your products and services at a fraction of the cost can drive consumer price sensitivity, affecting shoppers’ buying preferences and encouraging them to pinch pennies rather than part with their hard-earned dollars…With constant discounts, the only way you’re going to keep customers coming back is by giving them equally as big a discount every time.”
Therein lays the problem. If you get a reputation as a discount supplier, you will be forever chasing new clients because people who buy on price are not loyal. Whether you are a retail sign shop, a wholesale sign shop or a wholesale sign supplier, if you constantly chase the cheap end of town you will eventually realise that you are working long hours, have little profit and no job satisfaction. You are on a hiding to nothing.
Keeping big discounts going will usually mean eventually being forced to compromise on products, and this will further entrench the view that you aren’t a serious contender when a client is looking for quality goods for a quality job.
The added disincentive is that your staff is always under the pump and eventually feels the need to move on from what is usually a stressful environment. Staff turnover for those in the heavily discounted sector is huge, and you also find that you have very little room to move financially when it comes to keeping good staff.
This philosophy isn’t unique to our industry. You can use the same argument with just about any other industry you care to name.
Again, Brad Sugars gets straight to the crux of the matter. “The simple reality is there are always going to be people who go towards the best price.” But do you really want those folks to be your key customers?
According to Sugars, small businesses that heavily discount their products and services will “start attracting a type of customer who isn’t there for the service, the loyalty, or the value you add; they’re there for the price. The moment you start targeting these price shoppers, your quality customers will be long gone.”
Claes Fornell, director of the National Quality Research Center is also quoted in the same article. “What’s more, this discount pricing strategy may devalue your brand’s ultimate appeal. American automakers learned this hard lesson during the early part of the last decade, when their heavy reliance on incentives to sell their cars temporarily boosted sales but sent the wrong, long-term message to consumers…… consumers began to perceive non-discounted vehicles from imported brands as having more value than the price-chopped domestic brands. “And once you start discounting it's hard to get out of the habit, and consumers come to expect it,”
Fornell also noted. “Discounts are a two-edge sword and have a negative effect. Low price contributes to a low opinion.”
So, what is the best advice?
Both entrepreneurs offer the same advice.
“….. a trap many small business owners fall into is focusing more on competitors’ prices than on their customers’ needs. Learn how to sell,” advises Sugars, “Whether that entails offering customers special services such as home delivery, or refining your sales pitch. At the end of the day, the best stores are going to curate the best customer experience,” says Phibbs. “And by giving people the experience they want, customers are going to drive past a competitor to get that experience again.”
I couldn’t have said it better myself. Definitely food for thought.
So as we wrap up this year, perhaps we can spend the holiday break not only refreshing our resolve and refocussing on the year ahead, but hopefully we can see the need to be more aware of our need to actually profit from our hard work.
Examine your business, define what is not profitable and either find a way to make it profitable, or promote something else in the industry that is.
Finally, I would like to offer my sincere thanks for all the support I have received this year. I have made wonderful friendships and received emails from a great number of readers both here and in New Zealand.
I’d like to thank everyone from the publisher to the readers who contact me to pass on information, praise a story or even pull me into line with something they don’t agree with.
Please take care over your break if you are having one. I look forward to interacting you again in 2013.