Listening to the radio the other day, I heard about the issues that Honda are facing, with impending lay offs in the factory as a result of declining demand. One of the analysts mentioned that this was down to the product being positioned in the “squeezed middle” – i acheter cialis sur internet france.e. mid range product for the mass market.
Having had similar conversations with clients in the food sector and other sectors over the last couple of years, it is an interesting conundrum to consider. What do you do when your customers are seeking more value, and choosing luxury goods, or deciding to shop at the lower end of the value scale? The reality of the situation is that more sectors are seeing a polarisation of buying habits. In food, this has been driven by the migration of shoppers to Lidl, Aldi and discounters, driving a response from all the multiples to push their own value range of products. However, at the same time, they are wanting their suppliers to keep quality and service at the same levels as before, meaning that margins are squeezed massively.
In the case of cars, design and innovation means that more features are being included at the lower end of the scale, and therefore more perceived value is being delivered to the purchaser. Additionally, fuel prices and the cost of keeping a car are driving people to explore more economical (often smaller) models.
How can you respond? Here are a few suggestions to consider:
1. Product design and development. Can you redevelop the product (cheaper ingredients in the case of food, for example) so that margins and performance can be maintained?
2. Explore new sectors and customers. Are there alternative sectors out there, where your conventional mid range product will still sell? Export markets, new sectors, alternative sales channels (e.g. vending).
3. Do everything you can to reduce the costs of your product. It staggers me how many SME’s have not picked up the phone and challenged suppliers on cost, delivery, terms and other factors. Working with a business owner recently, we identified £120,000 of savings among overheads and variable costs. To achieve the same impact on net profit, the company would have needed approximately £1-1.5m in sales!!
4. Say no occasionally. Many SME business owners are all too keen to yield to big customers (in turnover terms), so when asked for price reductions and other contributions, will unerringly concur. Unless your costings can absorb a reduction in margin, either negotiate a position (and revised payment terms if that will help) or say no. It may feel impossible to consider, but you can easily end up making high volumes of product at a loss, and wondering where your profit has gone shortly afterwards.
Tread carefully, be aware of your costs, and understand your product, its position and what your customers and/or consumers really expect.
Ian Pilkington is a practising business development consultant, with 15 years of blue chip operational and general management experience, gained over three continents. To contact him, please email ian@i2iconsultants.co.uk
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