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Beware the 10% of your customers who are costing you 125% of your profits

November 8, 2011
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Publisher cash flow - 10% of customers can lose you 125% of your profits

Dr Reed Holden needs no introduction to professionals in the pricing community which is why I found a recent article by him in The Pricing Advisor (published by the Professional Pricing Society) so fascinating. His insights into pricing and value control are spot on and here are some salient thoughts which I think offer real substance for anyone in the throwaway world of publishing profitability:

1. At the end of a quarter, the pressure is on to deliver results and sales people will do almost anything to get the deal even if it means offering discounts to close the sale. Don’t let this happen. Holden argues that once price becomes the issue, competitors also will start to price down: result – all players in the market start to be judged on price and not value. What does this mean for publishers?

For publishers in the book trade, this approach is near suicidal; bookshops are not scientific when it comes to pricing and for years have peddled books like baked beans and salt. Sure, a bookselling chain will be happy to buy at greater discounts but what about returns? What about customer perception if the end price for products is even lower than before? This is bad news for a book trade publisher.

For publishers selling direct  and who have long term key accounts, price reduction merely serves to “train” buyers to wait until the end of each quarter to get the best deal. This should be avoided at all costs – long term erosion of subscription value has a devastating effect on value perception and willingness to pay. High value B2B and professional subscription products cannot afford the perception of being “not worth the money”.

2. Holden argues that when price discounts are requested, management must always ask the question “why”? This is not simply a tactic of denying the request – although it is important to train sales people that such requests can’t simply be granted – but a way of developing strategy. For example, it may be that a key account needs a different product to the one on offer – companies can enjoy more successful relationships with clients by adapting to change rather than offering a “one size fits all” product solution. For publishers, this could mean:

Trade publishers – requests for increased discounts imply that the bookseller is not efficient at selling your books at your pre-determined value point. This is highly likely given that neither the bookseller nor the publisher knows who the end customer is. Many simply don’t care.

In my experience I have seen territorial sales agents demanding ever higher discounts but at the same time delivering fewer sales. The higher discounts in this instance are to preserve the agent’s margins rather than deliver sales to end user at value-based prices. It is important to be certain why the discount is being requested – it may indeed be the case that for trade publishers there are better books/e-books out there than the ones you are publishing; this places increased emphasis on publishers and commissioning staff to model and plan their product marketing. Simply commissioning a one-size fits all book for the sake of output and cashflow is a moribund philosophy today.

Direct publishers – Here the benefits are truly enormous. If price is the issue, it will almost certainly relate to value delivered and not just the price. Key accounts offer huge intelligence about future product development and feature delivery. Lower value products can be developed not just to satisfy the customer but also to act as a “flanking” product to avoid incursions from other publishers. Indeed, in legal publishing for example, history shows us that monolithic products have slowly but surely been eroded by benefit-laden solutions from smaller suppliers.

3. Putting a stake in the ground now is Holden’s solution to discounting. What he means here is that managers need to map how, why and when discounting is occurring, study the results and arrive at a corporate policy and appropriate business development strategies. He argues, rightly, that discounting particularly to small customers (to “win new business”) will be corrosive in the long term: new customers will always expect the lower prices; existing customers will (definitely) find out. Result: disaster. For publishers, this could mean:

Trade publishers – mapping discounts by client, by sales person, by product range. Steps can then be taken to eliminate certain discounts. The problem here, of course, relates to neighbourhood pricing: the trade expects a discount and the publisher relies on the trade like an ivy clinging to an oak. However, there will be opportunity here. In my experience I have been able to analyse complete account sets and then remove the most unprofitable ones from the portfolio. Remember, if accounts are unprofitable, they must either be made profitable or removed.

It is quite possible, for example, that a trade publisher could in time establish a direct relationship with readers, sell fewer books and make more money then by selling in volume to a trade which doesn’t care and which is happy to return unsold stock. This is particularly the case given the huge opportunity offered by social media marketing, brand empathy and branding strategy.

Direct Publishers – again, a process of mapping by client, key account manager, region, industry type. A real problem with companies with large key account teams (and even those with large teams of advertising sales people) is that politics comes into play and senior people (e.g. a sales manager bonused on revenues rather than margins) won’t play ball. Here the onus is on the senior management team to be blunt. In business we have no time for entrenched people: if they won’t change then they have to go.

I’ll conclude with what Holden calls “the value of NO”. He cites a number of scenarios, which are well worth repeating here:

  • Research has shown that 70% of B2B firms and 80% of service firms make the mistake of responding to all customers. Products do not meet the need of all customers – rather than sell the same thing to all people and risk price attrition, produce other items to sell (profitably) to other segments. The key word here is “profitably” (not an excuse to sell lower priced items at further discounts).
  • Don’t force high value items onto customers who want a lower priced product. (A Brand Day Out note: in a trade environment, a price must define value: customers can choose to pay the higher price from a browse situation – it is not up to the trade to reduce the pricing on your value proposition).
  • Identify poorly-performing customers. In desperation, companies load themselves with clients who are too expensive to service. A rough rule of thumb is that 20% of a company’s clients deliver 225% of its profits. This means that all the other customers have a negative effect on profits to bring that number down to 100%. Holden says that  70% of a company’s clients will be at break-even and the remaining 10% will be responsible for losing 125% of a company’s profits. That’s one heck of a hit from so few on so much.
  • Finally, always remember that it’s value and not price that sells a product: whether it’s a Mills and Boon or a multi-site enterprise licence for a digital solution. As Holden says, “the best antidote is to understand, leverage and eventually manage the value of the firm – that’s leadership“.

The question for publishers is when you want to start work.


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