Is the Next Big Thing the Best Solution?
In business for over 70 years, the firm’s products are renowned for quality that has set the proverbial “gold standard” in its industry. The firm retains a pool of highly-skilled production staff and has also ensured its competitive advantage by building long-term relationships with superior raw material producers. Thanks to these factors the company has eliminated all product returns due to quality issues. These key advantages could be jeopardized if the manufacturing processes were relocated overseas. Worse, the proposed location specializes in the manufacture of disposable consumer products with a life span of less than 5 years, a striking mismatch with the client’s high quality consumer durables.
Next, GO Partners’ financial analysis of the proposed move revealed that few of the benefits realized by competing firms would apply. As a general rule, if labor costs contribute to 25% or more of the final cost of a product, relocating manufacturing can result in handsome benefits. But for this client, labor contributed only 11% of the final cost, severely reducing the potential cost savings.
By projecting the additional expenditures of setting up equipment overseas, training new personnel, negotiating new procurement agreements, additional shipping costs, and a host of other “hidden” expenses, GO Partners determined that the potential cost savings would disappear.
GO Partners returned to the President with a clear, objective presentation that led to the rejection of the proposal and generated over $1 Million in cost avoidance for the firm.
Strategic Pricing Drives Business
It’s an issue common to many new businesses: in the rush to carve out enough market share to ensure survival, trade-offs are made that can endanger long-term growth and return on investment.
One of these trade-offs is the decision to take prices offered by customers, instead of developing an innovative pricing structure that generates maximum value for customers while providing comfortable margins for the firm. When a startup medical devices manufacturer faced this issue, a valued advisor referred them to GO Partners.
The company was at a crossroads: its two major products delivered enhanced safety and faster healing to patients, and significant cost savings for the healthcare providers who served them. But the firm’s original marketing strategy - catering to a broad range of prospective customers - had resulted in a few higher margin clients and multiple lower margin customers. Each required the same resource investment of time and sales force efforts. More significantly, price-conscious customers put significant pressure on the sales force, leaving the business vulnerable to lower-priced competitors.
GO Partners met with the Chief Operating Officer, Chief Financial Officer, and members of the sales team to explore ways that value-based pricing could reverse the margin loss and strengthen the company’s competitive position. Everyone agreed that the firm’s two major products provided greater benefits to patients and healthcare providers than any competitor’s offerings in the market. But as a “price-taker,” the firm was not able to leverage that competitive strength.
GO Partners developed a two-pronged approach. First, we developed a target market segmentation strategy that capitalized on higher margin clients. Second, we recommended a bundled package that would emphasize the products’ life-saving benefits for patients and cost-reduction advantages for the provider, clearly communicating the products’ greater value relative to competitors’ offerings. Pricing menus were designed and distributed to the firm’s sales team.
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