DEAL OR NO DEAL AND THE END OF CASH FLOW MISERY!
Do you offer discounted deals just to acquire customers? If so, please stop doing that immediately. The reason
for that is that low priced contracts or offerings many times results in low profits
and in the end negative operational cash flows, even if you succeed in
acquiring the customer.
I would like to call this act of conduct for “the cash
flow misery paradox”. Your purpose is to get profitable customers, so to become
interesting as a partner you lower you prices or offer attractive terms to get
them instead of the competitors, wich in turn results in a stream of low margin
deals and negative cash flow. Results that you didn´t have in mind in the first
place.
Once you have attracted customers by low prices or attractive
terms that are bad for your business in the long run, it is very hard to get
them to buy from you again under regular terms and prices. You´ll probably want
be able to renegotiate the contracts to satisfactory and profitable levels.
That will seldom happen since the customer chose your company as a partner
because of the lower prices in the first place. The customer will sooner or
later switch to a cheaper supplier.
The low pricing strategy is successful only when your
product/services have few or no competitive advantages, or where economies of
scale are achievable with higher production volumes and your company intends to
dominate that segment. Otherwise it is financially a very unprofitable strategy
and can put your positive cash flow and the company on jeopardy, something you
can avoid and be without.
Great post Alexander, thanks!
SvaraRaderaInteresting post, I've tried to make my organization understand the negative impact on cash flow from low priced deals, with mixed results I must admit. Thanks!
SvaraRaderaInsightful post, thanks Alexander!
SvaraRaderaI like the subject, very interesting, thanks!
SvaraRaderaWell put, thanks, looking forward to a new post.
SvaraRaderaMany thanks for your inspiring comments, I'm glad that you found this post interesting. You're welcome back. /Alexander K.
SvaraRaderaGreat blog, thanks.
SvaraRaderaHi! Thanks for this post and an exciting blog. I am not sure If understood you right in this post, do you mean that a company never should offer reduced prices to customers?
SvaraRaderaHi Lena! Thank you for your comment. Good question. What I mean is that if a company would like to offer reduced prices, it should do it under a limited period of time (as a campaign/drive perhaps) and account for it in advance in the cash flow budget, and not use reduced prices every now and then as a strategi to keep/attract customers that would otherwise not buy the company´s Products or services.
SvaraRadera