How The Terms Of Your Sale Can Impact Your Company’s Profit
Trying to increase market share by strategic and competitive pricing may backfire like a jammed rifle. While pricing is always important, an excessive focus on dollars and cents may be limiting and can ultimately lead you down a one-way road.
TERMS: Consider, for example, the routine use of 30-day terms. For most organizations, 30-day terms are “standard.” In one case, the owner of a small manufacturing firm competing with a major manufacturing organization set the same terms as his competitor, net 30 days. Since the price for the small company’s product was 20 percent cheaper than the competitor’s, term suggestions include changing to net 10 days; net cash; or net 15 days.
There is no reason why the owner of the small firm shouldn’t recover some of his initial price loss through a better cash flow created by different sales terms.
DISCOUNTS: Discounts can be effective in establishing overall price. The discounts your company gives must take into consideration effective money management. Many customers are content to pay in 45 instead of 30 days, and will evaluate discounts from that point of view.
Since many companies take advantage of discounts, the payment incentive can be an effective price condition only if the percent of the discount is in proportion to the overall interest rate applicable at the time of the sale. Few organizations change discount rates to reflect shifts in the prime interest rate.
Customers can also abuse discounts. Many companies take unauthorized discounts through methods that become very inventive. One tactic involves taking a discount, dating the payment within the discount terms (for example, net 10 days), holding the check, and then paying in 30-plus days. Although these actions sometimes just involve honest mistakes, to avoid setting any precedent, review and clarify these situations .
Here are some questions to ask whenever a price change is under consideration:
Have you looked at your terms and conditions lately?
Do you really have to maintain the same terms as your competition?
Can you lower your price if you change your terms from net 30 days to net 10 days or COD/cash in advance?
Should you give discounts? If so, what kind?
Should you charge interest on past due accounts and make that interest part of your terms and conditions?
Should you develop a minimum order requirement before credit is extended?
As a marketing executive, you know that many marketing and sales considerations are part of all major price changes. Remember that in terms of cash flow, “time is money.”