All businesses want to provide their customers with the best possible service. It’s never easy to confront clients about the impact of them not meeting their obligations. It tends to convey an image of not being appreciative of their business. However, there are simply too many customers who use their volume promises as a negotiation tool to lower pricing. It’s extremely difficult to pass on an opportunity, but sometimes you have to take the time to properly asses the offer. It’s best to take a step back, and ask yourself if this customer is really capable of meeting their volume commitment.
It’s never easy to directly confront your customer’s statement. It could appear as though you are questioning their motives. It can also appear as though you are questioning their honesty and integrity. You never want to imply that you don’t believe your customer, but you must establish some boundaries. However, you simply can’t allow them to think they can get the best pricing if they are not willing to purchase the higher volume.
It’s your job to protect your gross profit margins on sales. You can not simply give your customer the best price for volume they may, or may not, attain. Doing this is guaranteed to fail. If your customer has not met the volume requirements they promised, you’ll be left feeling as if they took advantage of you and your company. Going back to the customer to discuss it afterwards is very difficult, and trying to revise the pricing because they missed the volume, is next to impossible. Therefore, if you are going to protect yourself, make sure to do it right away.
Explaining the Volume Scale Strategy
You could explain that customers who have made promises in the past, did not meet their obligations, and left your company holding inventory it could not sell. A company decision was made to only provide the best pricing to those customers who meet their volume commitments. However, there is a way for your customer to attain this volume pricing. This is done through the volume scale pricing tool.
Establish a Volume Scale Pricing Table
You need to develop a pricing table where each price is correlated to a volume along a scale. To give some idea of how this works, consider the following scenario. Your customer promises to purchase 100 units during the year. The customer states that while they can not order 100 all at once, they are willing to take 10 units at a time. Immediately, they position themselves to try and negotiate a 100 unit price while only taking 10 units per shipment.
This is where you explain that the only way you can provide pricing for 100 units, is to provide reduced pricing on each additional 10 unit shipment. If the customer purchases the entire 100 unit volume, they’ll get the 100 unit pricing. However, they only get the pricing once they reach the 100 unit volume. You need to establish some guidelines with your customer and have them understand that there is a give and take in your business relationship
Your customer gives you more orders, and you reward that additional volume with further price reductions. You are essentially protecting your gross profit and pricing within your market. The following table clearly shows how the volume scale pricing tool works.
Average sell price per unit: $17.77
Average cost per unit: $13.00
Average gross profit per-unit: $4.77
Average gross profit percentage: 27%
The above video explains how the back-end rebate program works. While similar to the volume scale strategy, its main difference is in how the customer accrues a rebate. To learn more about this customer retention strategy, please go to: Sample Back-End Rebate Excel Sheet for Customer Retention
The idea behind the approach above is to provide step pricing on each shipment. This approach is similar to the back-end rebate program I've written about on this blog. Both of these approaches ensure the customer has an incentive to take the volume they promise. In addition, both of these approaches protects your company's pricing and volumes.
In the above table, as the customer purchases more units and reaches a higher volume, their price on each subsequent shipment is reduced. While the initial shipments show a much higher gross profit, your goal is give your customer incentives to purchase the entire volume. For instance, let’s assume your customer wanted 100 units and the best pricing you could offer for this volume was $17.77 per unit. You would use the step scale pricing method to ensure that once the customer reached 100 units, their average price would be exactly $17.77. If your customer defaults on the agreement, and only takes 50 or 60 units, then you have benefited from a higher price and higher gross profit. This approach provides price and gross profit protection. It ensures your customer only gets this price provided they meet their volume requirements.
This is All About Managing Customer Expectations
Managing customer expectations is the most important aspect of your business relationship. You can not allow a customer to assume maximum reward for minimal effort. It simply can’t be the customer demanding higher volume pricing without actually purchasing the higher volume. It simply doesn’t work. When you are confronted with a situation like this, ask yourself how your customer would perform the sale. Would they allow someone to ask for a high volume price without taking the high volume?
More often than not, your customer will simply not allow that to happen with their own clients. Your customer must understand your responsibility in protecting your own interests. When explained properly, your customer will understand the importance of the offer. If they are truly sincere in their intentions to purchase this volume, they should have absolutely no problems agreeing to the volume scale pricing tool.
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