Saturday, April 5, 2014

SG Sales Guru: Using Pricing to Select Your Customers

Yes! You read the title right. Companies should use pricing to select their customers. Now some of you might think I am crazy. Isn't a business in business to earn money? So what is this nonsense about selecting customers? As a business, we want every customer we can get.

Before we move on, I think it is important that we establish an important fact. While it is true that as a business we want all the business we can get, we however only want business that is profitable. The point that I am making here is that there are un-profitable customers out there. Taking them on as clients only means that you will be losing money.

Allow me to illustrate using an example from a client ...
"My PR consultancy's charge-out rate is $250 an hour. Depending on the client's job specifications we usually discount this. So when we work on retainers, sometimes our rates can come down to as little as $100 an hour for a multi-year contract. I recently had a client that contracted us to do 3 months of PR for their company. The project specifications were discussed and 20 hours of PR work was contracted for at a rate of $200 an hour. However, almost immediately after the contract was signed, the client requested for some urgent pro-bono work. Not wishing to sour a newly formed business relationship, I agreed. As my team began to help out on a goodwill basis, it became evident that the client was beginning to creep the requirement. In the first week alone, the client was very demanding on the pro-bono work such that my team spent close to 20 hours helping on a goodwill basis. With no end in sight, I spoke with the client and mentioned the need to scale back on the pro-bono work or to add on to the original contract. The client went ballistic. I then realized that this was the client's strategy to milk us. I did a quick calculation and, based on my estimates, the likely man-hours required to fulfill the client's requirements would likely double. Hence, the original rate of $200 would not be sufficient to cover my labour costs. And if I added the goodwill work my team did, I would in effect be losing money."

So my point in this. There is always a cost to deliver a product or service. Some clients are easy to serve, while others are not. So unless you have priced your service to match the type of client you are serving, you may end up losing money.

From my experience, it is always good to target the upper middle-class range of clients. Those who are very budget conscious should be avoided as they are likely to milk you for the simple fact that they do not have the budget to pay for more. On the other hand, those that have high budgets and paid a premium for your service can rightly can demand for the best service. In my opinion, these 2 categories of clients are the most expensive to serve and hence the least profitable.

In short, pricing can be used as an effective way for a company to filter for the most profitable clients. Used well, it will keep a business in the black.

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