Own Your Pricing Strategy: How to Stop Big-Customer Bullying on Price
Developing a workable pricing strategy is one of the most important decisions of every seller/supplier in the middle market. Your price reflects a return on investment, not only covering your costs but indicating your profit margin, too. To describe pricing as sensitive would be an understatement. Middle market companies need to get their prices right to maximize market share and profitability.
When middle market companies supply larger enterprises, another factor impacts pricing strategy: bullying on price. A larger enterprise may not hesitate to demand major changes in the product, packaging and especially the price. If one particular buyer procures a large share of your production, then you are vulnerable to bullying. When you give in to the "bully" because you want to maintain the massive production/sales volume it offers you (and the subsequent economies of scale), the consequences can be negative.
Here's what happens when a large customer squeezes your margins:
- You become obsessed with reducing your costs to maintain profitability. This leads to laying off people, slashing salaries and benefits, squeezing your own suppliers and other means of cutting costs. While all this action might make you more efficient, it also makes it challenging to retain people, invest in innovation, keep production local and have money left over for your investors.
- If you give in, the customer will keep pushing. In reality, you are allowing the bully to develop your pricing strategy. Does the bully care if it puts you out of business? In many cases, the answer is no, as it can quickly find another supplier to replace you.
Here's what you can do to increase your bargaining power and reduce the risk of being bullied by large-enterprise clients:
- Put your eggs into different baskets. If one customer is buying a disproportionately large amount of your production, then you have a potential bully on your hands. You need to have options available in case this customer relationship sours. Consider what you would do if the big customer demanded a margin-killing price reduction. Could you say "no" and still stay in business? If not, then you'll need to reduce your vulnerability by expanding your customer base.
- Research the big customer beforehand. Make sure the big customer has been respecting its business obligations (just as your middle market company is doing). Business is built on mutual benefit and reciprocity, and any customer who has a problem respecting this is a potential bully. Talk to other suppliers about the big customer, and if the reports you hear are bad, strongly consider turning down the business.
- Make it difficult for the client to consider losing your services. If the big customer truly needs you, then it is less likely to risk the relationship with unreasonable demands regarding your pricing strategy. How do you become irreplaceable to the larger customer? Be special in terms of always doing what you say. Build brand/product loyalty with end users, who will be upset if the big customer makes a change in supplier. Innovate and develop new products that your rivals don't offer.
- Demand mutual respect in all business dealings. Don't let a potential bully start paying late, and never accept late payments with a smile. Don't give in to small demands without having a serious discussion about the costs to your midmarket firm. In some cases, it's good to not sweat the small stuff, but this isn't true when managing your relationship with a big customer. Some lines must not be crossed, and the boundaries of those lines must be clear to both sides. The moment you start giving more to the big customer than your other customers is the moment that client relationship has crossed a line.
When is the optimal time to end a debilitating relationship with a large client? Let us know what you think by commenting below.
Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.