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The Most Important Decision Every Company Will Make


Last updated 8/5/2010

When presenting to CEO groups, I ask them to rate, on a scale from 1 to 10, how competitive their markets are in their respective industries.  The average answer now is “15.”  A year ago, the average answer was only “8.”  It’s an unscientific measure, but it’s a personal indicator of everyone’s increasing anxiety about this economy.

I also ask what companies are doing differently in an effort to survive amidst one of the deepest recessions of our time.  I’ve learned companies are doing things they haven’t tried before: from selling in markets in which they previously wouldn’t sell to partnering with related companies, to pursuing new ways of building market awareness (social networking).  In a declining market, it can be difficult to know which efforts are succeeding. However, one thing is clear—you can’t continue to do things the same old way and expect a life-saving result.

Another thing is clear: price is becoming a more important factor in the buying decisions of people and companies.
 
Options Open


As a result, companies are taking one of two approaches: (1) lowering their prices or (2) holding prices and working harder to communicate value.  The companies that are lowering their price risk commoditizing their product/service to the point where it will be difficult to compete on anything other than price.  As margins vanish, so will the company that caves in on price again and again.  Many of the companies that have recently gone out of business, or are teetering on the brink, have gone down the path of competing on lower prices. 

There are plenty of consumers and businesses that buy on the basis of price.  Because of this focus, those purchasers tend to lack brand loyalty.  Companies discover this when they choose to lower their prices.  There is always someone else who is offering a better sale price somewhere.  At the end of the day, companies that choose to compete on price lose brand value, brand recognition, and customer appreciation. 

Only if a company enjoys a cost production advantage, or an equivalent price saving advantage (e.g., supply chain management, technology, wages, etc.) can it survive price wars over the long haul.  But beware: those cost savings are most often temporary and can be duplicated, which makes being the low cost provider a difficult long-term survival strategy.

That’s not a prescription for success for most small- and midsized companies either in the long term or the immediate future.  Regardless of media focus, the reality is that most consumers and businesses don’t buy on the basis of lowest price.  People pay more willingly for value, and they do it in every industry and almost every market.

The companies that can communicate their value will be the strongest ones to survive this economy.  Surprisingly few companies do this well.  That’s because few companies understand how to uncover and communicate their company’s competitive advantages.

Companies that understand and tout their competitive advantages are able to:

• Maintain prices (and even increase them)
• Gain market share
• Maintain (or grow) profit margins


Communicating Value

“Our business is a commodity business.”  I used to hear this only from CEOs of manufacturing companies, but I’m hearing it more and more from CEOs of service, technology, medical, finance, and professional companies.  The implication of being a commodity business is that no one has an advantage over anyone else, and thus everyone is ultimately compelled to buy on the basis of price. 

Granted, there are industries where price is a primary motivator, but even in the commodity business of manufacturing, if price were the sole motivator, there would be no manufacturing in the U.S. anymore because everything would be cost prohibitive.  Many manufacturers still operating in the U.S. have learned that even in commodity businesses, there are ways to communicate value that minimize the focus on price.

The mistake that many service companies make is limiting their efforts at defining value to product/service features.  This is what they understand best, so it makes sense, but product/service features is only a part of the value equation. 

Each transaction contains a multitude of assumptions, expectations, and unwritten communication of value.  It’s in these areas where companies can uncover their “hidden competitive advantages.”  One such example is in financial stability.

In these trying economic times, I get asked a lot by small- and mid-sized firms if it is appropriate to talk about a company’s financial status in the sales process.

ABSOLUTELY!!!!

In today’s market, if you are financially stable, and are positioned to survive for years, not just the next quarter, that’s a big Competitive Advantage, and one you should be touting every chance you get.  If you haven’t already developed sales and marketing messages that differentiates your company’s financial approach, now is the time.  Companies have proven they will pay more for a product if they are convinced the business they are purchasing from will be around in the future (are you thinking twice about buying a new Pontiac or Saturn?).

But, we caution companies from saying things like:

• “We’re financially strong.”
• “We continue to make money.”
• “We’ve been around for 100 years.”
• “We’re still a family-run business.”

These types of statements don’t meaningfully differentiate you and they aren’t convincing reasons why your financial approach is something your prospects need to consider now more than ever.  

To most consumers, the fact that your company has been around 200 years covering 17 generations doesn’t mean much.  Look how quickly a venerable company such as Lehman Brothers seemingly disappeared overnight.  Even if your company is still family owned and you feel that means something, resist focusing on that fact.  By doing so, you will avoid one of the most common mistakes most companies make in developing their message to the marketplace—they tout what they think the market wants to hear based on their perspective, not on what the market actually values.

It’s hard to increase value in the sales transaction when you are selling something the market doesn’t value, and this is a far too common occurrence.  We recommend companies engage in anonymously conducted double-blind market research to determine those attributes purchasers value most when they make a buying decision.

Once you learn what attributes are most important, the next step is to convince your prospects that you can deliver on what they value.  This may entail making operational changes.  It will entail focusing your message to the marketplace to be in alignment with what your customers and prospects value.  When your offerings are in alignment with what the customer values most, then you possess competitive advantages that can command a premium.

When companies communicate what they bring to the table in a factual manner, it builds confidence and removes risk.

Building Confidence/Removing Risk
Compare the statements on financial stability below to the first set above:

• We’ve increased our reserves to service our average customer from 1.7 years to 2.3 years.
• We’re the only company in our industry that increased its investment in R&D.
• We’re the only company in industry to receive a higher financial rating from all three ratings agencies in the last 6 months.

If your company’s financial stability is one of your competitive advantages, then these statements do a much better job of conveying that commitment than the ones above.  Yet, a review of the messages that companies take to the marketplace shows that most companies are more inclined to spout the less effective message.

The result of using a less effective message is that your company will not be able to command a premium for its products/services.  That leaves your prospect back in the same place we all dread—can you lower your price?

Even if you have a competitive advantage, and even if it is something your customers and prospects will pay more for, you still may not command that premium if you don’t communicate it in a way that clearly differentiates you from the competition. 

Objective, quantifiable, true facts are hallmarks of solid competitive advantage statements.  Companies that base their messaging around this are the ones who are most likely to succeed and grow in this economy.