Price Wars - The Losing Game

Too many businesses believe value comes down to being the lowest price producer.

The result is being stuck in a price war with their competitors, each lowering their prices in order to win customer orders. Operating in this environment is a race to the bottom.

When you're stuck in a price war in the manufacturing industry, you're competing against the entire globe. This is a losing game. Foreign manufacturers are able to price their production far lower than domestic producers by using lower labor costs, access to cheaper energy, and being subsidized by their native country directly or indirectly through subsidies and foreign exchange rate manipulation. They're able to reap the benefit of lower costs while selling into the largest consumer group with the highest purchasing power in the world here in the United States.

Thankfully, value doesn't come down to simply charging the least amount possible.

The Value Creation Problem

Value is the ratio between the price you charge with the value you provide the customer.

This is called the value to price ratio. When your business provides the best value to price ratio, your financial performance sky rockets. The higher the value provided by your manufacturing business, the higher your pricing power. The higher your pricing power, the higher the prices you can charge customers and still generate sales volume, which leads to higher profits.

There are a variety of elements to creating value. Many customers are more than willing to pay premium prices for premium value. The goal is to find ways to increase the value your customers receive relative to the price you charge them. This is done by creating the competitive advantage known as the Value Advantage.

The challenge is most people have given zero thought into how to increase the value their business provides.

So this begs the question, how can we escape the price war mindset and instead focus on creating more value for our customers to increase future profits?

Increasing Pricing Power and Escaping Competition

The Value Advantage focuses on 3 critical areas:

1. Market
2. Customer Experience
3. Production

Each of these helps create superior financial performance by increasing your pricing power and makes you stand above the competition.

Value Advantage #1: Market

Market focuses on prioritizing the customer segment you are best able to provide the most amount of value to. This helps maximize pricing power.

It starts by evaluating which existing customers are the most profitable. These customers often share similar characteristics, whether it is their industry and/or why they choose to do business with you instead of competitors. Identifying this group provides key insights into what your current competitive advantages are.

Let's use a CNC shop as an example.

You don't need to worry about acquiring specialized equipment, developing new processes, or training employees for specific production capabilities. You're already producing what your existing customers require. We only need to identify which ones are the most profitable.

In this example, we've identified two distinct customer groups:

1. Aerospace
2. Automotive

Each group will have its own unique characteristics.

Aerospace customers likely have:

• Lower purchase order volume
• 5 axis machining
• Exotic alloys such as titanium, nickel, etc.
• Extremely tight tolerances and superior surface finishes

Automotive customers on the other hand likely have:

• High purchase order volume
• 3-4 axis machining
• Standard materials such as aluminum, steel, and cast iron
• Looser tolerances

The aerospace customer segment will likely have a far higher willingness to pay compared to the automotive customer segment given their production requirements and order volume sizes. Within each of these groups, you will likely have another customer segment. This segment will have different levels of willingness to pay that determines your pricing power. Within the aerospace segment, some will have higher willingness to pay than others. You can identify the differences between customers at the high and low ends of your pricing for each segment to determine what commonalities exist in the high end. Then you can adjust your sales & marketing strategy to focus on acquiring more customers within this high end range. This helps improve your sales mix, which will result in an increased average selling price per unit and lead to higher levels of profit.

Value Advantage #2: Customer Experience

Customer Experience focuses on the customer journey and interaction with your business from first contact through post-sale support and any other touchpoints.

There are two components to improving customer experience:

1. Quality and number of interactions with the business
2. Reduction in time during and between each stage of the customer journey

Let's go back to our CNC machining example.

The customer journey has three primary phases.

It starts with the presales phase. Prospective customers become aware of your manufacturing business and first contact is initiated, whether it's an inquiry via phone, email, or website. The project scope, material and tolerance requirements, purchase order volume, and other specifications required by the prospective customer is identified. After this, we'll generate a formal quote with itemized costs, payment terms, and estimated lead times. Negotiations take place, any final technical or contractual issues are discussed. If all goes well, the official purchase order is approved.

The production phase now takes place. Pre-production planning such as entering the purchase order into the ERP/scheduling system, setting up programming requirements, material procurement, etc. occurs. The manufacturing process kicks off. Quality control, final inspection and documentation is reviewed to ensure the customer's order meets their requirements. We ship out the order, the final invoice is sent, and we follow up with the customer to ensure parts arrived safely and meet expectations.

Post-sale & relationship management is the final phase. We may conduct an internal review for the job's profitability and quality. We make sure to follow up with the customer and manage the relationship. The goal here is to ensure the customer is satisfied with their first purchase order and encourage future sales.

Each phase represents opportunities to improve the customer experience.

We can make improvements to reduce the number of touchpoints required from the presales phase through the post-sale & relationship management phase. We can also provide updates for the customer as they move through each phase to show we are making progress. Both help reduce missed sales opportunities and increases future sales volumes.

We can also reduce the time it takes to move through the entire customer journey. This will help lower costs, increase production capacity, and increased production quality. We're able to produce and deliver the customer's order faster than competitors, which is a substantial competitive advantage. Improvements in each of these areas increases profits and accelerates cash flow.

Value Advantage #3: Production

The Production component of the Value Advantage means providing superior production capabilities, as well as providing additional value added services.

Let's go back to our CNC machining example.

A higher skilled machining team increases manufacturing capabilities. This may include the ability produce difficult to machine materials such as Nickel-Chromium and Titanium alloys, hardened steel or advanced ceramics such as Alumina and Zirconia. Such machining requires specialized knowledge, specific tooling, and time to machine effectively and efficiently. This expertise is not common across the industry, providing a significant barrier to entry that makes it difficult for other CNC shops to compete. When combined with quality assurance, the end product is far superior than that which can be produced by competitors as each production run minimizes defects, ensures strict tolerances are met, and results in a more durable and reliable machined part. All of these factors leads to higher pricing power as there are a limited number of CNC shops capable to producing these parts. Higher pricing power increases profits.

The value added service component is a way to further increase value provided to customers as they will not have to find and manage separate vendors for a variety of functions. Continuing with our CNC shop example, this may include post-machining finishes such as anodizing, powder coating, heat treatments, etc. to increase the final value of the part. You could also add assembly and take the machined components and turn them into fully assembled products. The whole of the assembled product is greater than the sum of its parts, meaning higher pricing power and profits. These value added services help save customers time and effort, streamlines their supply chain, and positions the shop as an all-in-one solution.

Putting the Value Advantage into Practice

Creating a Value Advantage will require an investment. This could be hiring specialized workers, acquiring specialized equipment, improvements in technology for managing the customer journey, or time from existing employees to determine how best to improve value for customers.

Start with focusing on the market component of the Value Advantage.

This component doesn't require additional resources or changes in production processes. Isolate which customers are the most profitable and determine the commonalities between them. Adjust your sales & marketing strategies to focus on this group of highly profitable customers. By identifying the similarities these customers share, you will be better equipped to focus on the specific areas that given customer segment values the most for the customer experience and production components of the Value Advantage. Focusing on market first helps increase profits which can provide the much needed capital required to make investments to improve the customer experience and production areas of the business.