In yesterday’s post “Product Life-Cycle Management: Steal Market Share in the 4th Stage”, I reviewed how proper product life-cycle management can increase a product’s gross profit in a declining market. This is done by grabbing market share in the product’s final end of life stage and then positioning it for another growth spurt in the lesser-known fifth stage; the rebirth stage. However, I didn’t delve into the strategies companies can employ to make this possible. Therefore, today I want to provide you with some simple strategies to maximize your product’s gross profit in a declining market.
First, it’s important to note that the following strategies can be employed whether a product is in the final stage of its life-cycle, or if the product is simply encountering a slowdown in demand. However, while the strategies are the same, the outcomes are different. For instance, when a product enters the final stage of its life-cycle, lowering its price to capture market share is an acceptable strategy if it forces competitors to abandon the market sooner than they normally would.
In this case the company grabs market share by lowering price and essentially steals customers in a declining market. However, what if the company lowers its product's price when the demand for the product is just slow? In this case, once that market rebounds, the company will then have to increase its price, or accept a much lower gross profit per sale. Therefore, be sure to define the conditions for the product’s decline in its market.
- Is the product entering its final stage of product life-cycle management?
- Is the product still healthy, but it’s just the market that has slowed down?
The above video and table are taken from the post: Your Product's Exit Strategy and the Final Stage of Product Life-Cycle Management. It explains why some products go past the fourth decline stage and enter a fifth stage called - rebirth.
Maximizing Gross Profit in a Declining Market
There are essentially two ways to increase a product’s gross profit. One is to keep pricing as is, while lowering costs, and the other is to lower pricing and increase gross profit by increasing market share. In our example, we’ll use the following strategies to increase gross profit by increasing market share. Two of these suggestions below have links to additional articles that provide further insight into maximizing gross profit.
1. Back-End Rebate Program
What are back-end rebate programs and why are they such a vital tool in grabbing market share and improving customer retention? Simply put, back-end rebates programs are customer reward programs. With each additional customer purchase, the customer accrues a rebate, or discount, towards future purchases and retains these rebates in their "Bank".
The customer must achieve a certain volume before claiming the rebate. As time goes by, the customer won’t want to lose their rebate amount within their bank, and will always contact your company when they receive competitive bids. You’ll maximize gross profit, increase customer retention and gain insight into market pricing.
Here's the link on how to run the program - it has an excel sheet and summary of the steps: Sample Back-End Rebate Excel Sheet for Customer Retention
2. Prompt Payment Incentives & Discounts
Every company wants to save money, especially in an economy such as this. However, as bad as the economy is, it doesn’t mean you should assume your customers can’t prepay their orders. Give them the option to do just that. Use invoice discounts and incentives for prompt payment and prepayment of orders. In a number of cases, cash flow is a cyclical business concern. As such, your customers may have more money at certain times of the year than others. Be sure to take advantage of these periods.
3. Manage the Customer’s Savings for Them
Ever notice how some customers just don’t seem to be able to see the savings your company is offering them? It happens all the time. Sometimes it’s because the individual reviewing the offer doesn’t care. Other times it’s political, and yet sometimes it’s because the customer doesn’t have the time to do the analysis themselves. When confronted with these situations, show the customer the savings.
Help your customer help themselves. The following post includes an excel sheet where your customer simply has to input their current pricing relative to your new quoted price. The excel sheet will then show it as either a savings - BLUE or a loss - RED. Here is the link Customer Management & B2B Sales: Show Me More Savings!
Maximizing a product’s gross profit in a declining market means to be proactive in sales, put plans in motion to capture market share and use some simple and straightforward approaches to stealing customers. Whether it’s the product entering its final life cycle management phase, or a product encountering a slowdown in demand, using some simple approaches can produce significant results.
The strategy is not to maximize gross profit by trying to raise pricing – which is not realistic when customer demand declines. Instead, the focus must be on increasing gross profit by increasing market share. Steal customers, increase market share and this will allow your company to maximize your product’s gross profit in a declining market.
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