How to Hold Price in a Recession

Posted on January 1, 2003 by LCT Staff - Also by this author

At the recent LCT Summit in Florida, one of the most-discussed topics was that of holding price in a recession. Because of the struggling economy and subsequent competition with operators who choose to compete by slashing price, how to hold price and increase market share is on everyone’s mind these days.

Start-up companies sometimes keep prices low in the hope that they’ll gain market share and then can raise prices later. Veteran operators agree that this is a difficult thing to accomplish and often a mistake.

Rule No. 1: Know Your Expenses Before Tampering With Pricing Before you think about cutting your prices to get the business, you need to know what it’s costing you to do the job. “Unfortunately, there are people in our business who will do a job for less just to get the business,” says Dennis Adams, owner of Celebrity Limousine & Transportation Services in Malvern, Pa. “What happens is that when people don’t really know their cost-per-mile, their cost-per-job, or their mix of expenses, it becomes non-profitable.”

Adams advises operators to know what the cost of doing business is for their runs, and then decide what they want their profitability to be. “There’s nothing wrong with being competitive,” he says. “One company may like a 15 percent profit margin, and maybe I’m happy with 10 percent, but that can mean the difference of a couple bucks in a trip. However, when you have people who come in and they’re $20 or $30 under the cost of a trip, whether it’s for an existing corporate client, a meeting planner, whoever – they’re doing the trip and the work at a loss.”

Communicate to the Customer What You Offer “I think it’s imperative that the operator, whether running a small, medium or large operation, understands the value they have for the customer,” says Doug Werdebaugh, senior vice president, U.S. operations for Carey International. “They have to understand what they bring to the table and can’t get themselves caught up in offering the cheapest price in order to get the job. Everybody brings value to his or her customer, and there are different tiers of service. Understand what that is and articulate it to your customer.”

It’s essential that you explain to customers what you are providing for them. The new car, the quality, the trained chauffeur, the proper insurance level, the years in business – all of this is what customers are receiving for the rate they are paying you.

“Security is even more important today,” Werdebaugh says. “It’s a great investment for small companies to get some type of defensive driving training. Not only does it help reduce the cost of insurance, but more important, you’re able to market that certification or qualification with your customer.”

Adams educates his customers by asking them if the competition offers the same services that his company does. “I ask them, ‘If you’re going to shop me, does X company have this particular insurance amount?’ I tell them to make sure they have these items on their request-for-proposal (RFP) - insurance level, year of cars, 24-hour dispatch, how the chauffeurs are dressed, etc. All of these items add up to 100 percent quality.”

Ask your customer if the competitor who is offering a lesser price has all of those qualities. Maybe the customer is willing to sacrifice one or two, but which ones? “What about 24-hour dispatch?” Adams asks. “If a client gets off a plane from London in the middle of the night and can’t get a hold of the operator, where’s the value in that? If a competitor is giving out a rate that’s $20 cheaper than your rate, there is something lacking in service.”

Be visible and try to do more for your customers than simply get them from point A to point B. “I believe that now more than ever there’s a real opportunity for everyone to increase their market by simply communicating to their customers — always being there on time, doing the things they’re supposed to do, keeping the vehicles clean, chauffeurs are spotless – standards that are important,” Werdebaugh says.

After 9/11, when the limousine business started to unravel, Dawson Rutter, owner of Commonwealth Limousine in Boston, took a look at his company’s service levels to see where improvements could be made. “We could then go to our customers and say, ‘This is why it costs $15 or $20 more to use Commonwealth.’ And we’ve been able to hold our customers.”

Renegotiate When Absolutely Necessary Perhaps you’ve been approached by customers wanting to renegotiate their contract and you’re not sure how to handle it. Rutter says that when necessary, he has accommodated those clients. “However, we’re talking five or 10 percent, maximum,” he says. We haven’t slashed 30 or 40 percent off our pricing to try and raise our volume levels. And our customers have been very appreciative of it that we have talked to them, worked with them on price, and thereby have cemented even further loyalty with those customers.”

The negotiation was done with the understanding that when the economy does get better and things start to pick up, Commonwealth will return to original pricing levels. “We understand the need for people to watch their bottom lines, and we need to also,” Rutter says.

“Look at what the volume’s going to be and what they’re proposing, and look at what your rates are,” Adams says. “If you’ve been doing business with them for awhile and you’re doing the best that you can, then maybe you can do something else for them. Adams will offer something, such as extra frequent flier miles for the CEO every quarter.

“Do a little something, but you don’t have to just go left field,” he says. “Negotiation is back and forth a few times. Test the water. But you also have to justify your service with them. You have to sell the sizzle. Get them to like you, trust you, understand your product, and that’s half the battle. Then build the relationship from there.”

Finally, Always Service Your Customers “My recommendation to operators who are new or maybe small and struggling to stay alive is service is what’s going to maintain their account, not a few dollars in their base fee,” Werdebaugh says. “They need to understand what they bring to the table, continue to work on that and modify it, and do more for the customer. I believe that way they can remain competitive. Those are the key things they can do to make sure that a customer isn’t just focused on price. If you’re providing mediocre service, they’re going to expect to get it cheap. But if there’s value there, I believe that the customer will seek that out.”

Operators need to be diligent, control their internal costs as much as possible, and keep service levels as high as possible. “The assumed level of service that customers expect is clean car, on time, chauffeur knows where he’s going, and fairly conversant chauffeur,” Rutter says. “However, very few companies are actually able to do that on a regular basis. The companies that are doing the best job are the ones that have better employment policies and a big difference in service levels.”

Rutter says that the key to succeeding and riding out the price wars is to gain market share. “And you do that by going in with a strong service aspect and a strong sales effort,” he says. “The only way to truly compete against price-cutting is by having a very high service quotient.”

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