Wednesday, December 18, 2013

Twisted Thinking - #3 Focus on the Lowest Price versus Channel Profitability

This is the third in a five part series on Twisted Thinking.  The reason for this series is to help organizations see the madness in their current thinking and how short term thinking doesn't produce long term, sustainable growth.

Today's twisted thinking - always offering the lowest price as a path to profitability, undercutting every other channel partner that you have engaged to sell your product.

 
The first in the laws of stratospheric success as espoused by my heroes and friends, Bob Burg and John David Mann in their book The Go Giver, is the Law of Value.  That law states that "Your true worth is determined by how much more you give in value than you take in payment.".

We talked about that a little on Day 1 of this series when we talked about the insanity of airline pricing. But what I want to talk about today is the issue of focusing on offering the lowest price versus looking for the best channel in which to sell your product(s) profitably.

I have written about Direct Distribution (aka Channel Bypass by suppliers) extensively in the past, so I won't go into great detail, but the essence is this.

If you only look at the cost of distribution (i.e. commissions, segment fees, booking fees, transaction fees) and not at the revenue being garnered from a particular channel, you will not make an informed decision based on the profit that you can make from each sale.

This is simple math.  The amount that is charged for the product, less the cost of sales is your gross profit.  Direct Distribution is NOT free.

It is twisted to think that you can charge the lowest price, get everyone to come to you directly and actually win (e.g. have sustainable growth and profits).    You are likely leaving significant money on the table and that my friend, is Twisted Thinking.

Disintermediation is not something to aspire to if you haven't done your homework on your unit profitability by channel.

Stop following the crowd.

My mother used to encourage me not to "bite off my nose to spite my face".  While at the time, I likely didn't really understand what she was talking about, I get it now.  Over the past decade, I have watched travel suppliers do this repeatedly.  Not only do they undercut their distributors, but they withdraw product and send cease and desist letters regarding their marketing efforts and in extreme cases, they take them to court.  Now that is twisted.

My mother was anything but twisted.  So if you don't want to listen to me, I encourage you to listen to her.  She was a wise woman.

Tomorrow, Twisted Thinking will look at CRM and personalization.

Stay tuned.






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