The fact that the promotional products industry is price-sensitive is a truism. Keeping price structures profitable in the difficult environment of the B2B market is one of the biggest challenges that suppliers and distributors are faced with. But even the buyers actually sometimes show feelings and there is a little leeway in the pricing even in toughly competitive product segments.
When the entrepreneurs talk about war, they are normally referring to prices. And even companies that are always in the winners’ corner as a matter of course when it comes down to other favourite themes of the entrepreneurs such as growth or innovation, take on the role of the victim just as self-evidently when the theme price wars crops up. As is so often the case with wars: It is always the others who started it. The Global Pricing Study 2017 by the strategy and marketing consulting company, Simon-Kucher & Partners, one of the most famous pricing agencies in the world, which advises customers from a wide range of industries on pricing processes, actually empirically proves this phenomenon: Almost 70% of the respondents were of the opinion that there is a price war in their industry – and 77% of them stated that a competitor started it. The answers of 1,925 companies from more than 40 countries worldwide were evaluated. According to 75% of the people interviewed, the most important driver of increased price pressure is the digitalisation.
It is true: eCommerce has radically changed the dynamics of the market. The Internet leads to a tough comparability, the sources of supply are transparent. This – especially – also has a massive impact on the promotional products market. However, the battle was toughly fought out even before the onset of the digitalisation. The B2B market has always worked by its own rules and companies that want to survive in this climate have to understand and abide by these rules. “The target group in B2B industries is significantly smaller than in the consumer industries and the buying processes, i.e. where and how things are purchased are very different to those of the retail sector,” explained Bjoern Dahmen, Partner of the Global Consumer & Retail Practice at Simon-Kucher in Cologne. “The buyers in the B2B segment are professional, the procurement processes more or less defined, there are less spontaneous purchases. There is indeed a certain habituation among the promotional products buyers à la: ‘We have always done it that way’. Furthermore, companies often place follow-up orders. However, people who buy promotional products should ask themselves whether this habituation is viable – because when new objects are imminent, one wants to try out a different product or the prices simply aren’t right, changes are made fast.”
“When I buy things privately, see a product and am in the right mood, I simply buy it and don’t compare prices beforehand,” said Kai Gminder, Managing Director at the textile specialists, Gustav Daiber. “This is fundamentally different in the B2B sector, where comparisons are always made. The customers are wellinformed and know exactly how much something costs where, which is why they haggle for every cent and in case of doubt an alternative product is offered or one goes to a rival company. A distributor in the B2B sector doesn’t directly take decisions for himself, but instead for his customers – very little emotion comes into play here. If a new product doesn’t take off well, it can also be down to the price.” Now purchasing as cost-efficiently as possible is a basic rule of business management – however the importers have very little leeway when sourcing in the promotional products industry. “The Aldi model worked so well for so long, because the pioneer on the discounter market had considerable cost advantages on the procurement side and, above all, absolute efficiency in all upstream and downstream processes,” reported Dahmen. “There is no Aldi principle in the promotional products industry, because all of the companies have the same or at least very similar sources of supply, which makes comparative cost advantages difficult. A chance lies in operational excellence.” Especially in times that are characterised by product safety and ethically responsible supply chains: “The Internet and the online platforms do indeed bring price transparency with them, which significantly influences the price expectations,” stated Marcus Sperber, Managing Director of elasto. “Many factors such as the theme product safety for instance, are however not visible at all here.”
As if that is not enough, on top of that there are tax deduction limits in many European markets, which every promotional products player, whose portfolio falls within the relevant price segments, has to consider in his calculations: “We endeavour to provide our customers with attractive product ranges within the guidelines,” confirmed Yves Dähler, Head of Corporate Business at Victorinox. “However, unfortunately one can’t manufacture products that in some cases have a life-long guarantee at budget cost. What’s more, we support a sustainable and local production. We know no comprises here and won’t have certain prices forced upon ourselves. Tax limits impose a huge bureaucratic stress on the companies, promote cheap imports and pull the rug from under their local manufacturers’ feet.” All of this leads to pressure being put on the margins of all market participants – pressure that is passed on along the value chain. Dähler: “The prices of brand items are often misused by the distributors as a means of underlining their own favourable prices. This is why many partners complain about very low margins. However, these margins are not determined by us the manufacturers, but indeed by the competition within the promotional products trade.”
Astronomical prices vs. RRPs
Unlike the retail market there are no recommended retail prices (RRPs) in the promotional products sector. This gives the distributors a certain amount of leeway, but robs the manufacturers and importers of an important control instrument. “RRPs are frequently the only opportunity for manufacturers to communicate which value they attribute to a product,” stated Dahmen. “They remain to be a good indication of value.” The industry price that many suppliers disclose today is an auxiliary tool which offers a certain orientation. “In the past distributors partly demanded astronomical prices for our products on sales platforms,” commented Gminder. “In order to combat this, we introduced a retail price, that is even well above the industry price. The trade can still decide how much margin he puts on top – whether he wants to achieve maximum profit or whether he wants to bind his customers to him by offering favourable prices that lie under the end customer price.” Dähler added: “We play an open hand and have made the experience that a clear and uniform price policy also gives the distributors security and thus they enjoy selling our products.” Of course, brand manufacturers and their trading partners profit from the image of the brand and specific price expectations that are oriented on the retail price. The value that the recipients attribute to brand items usually lies significantly above its retail and industry price. “If we are successful on the retail market with a product, this success can generally also be multiplied in the B2B business,” confirmed Dähler.
Who decides the prices?
Most of the companies on the market for haptic advertising don’t have the luxury of a retail visibility in the B2C sector, but actually have to structure their pricing based purely on their own market. Within the promotional products industry that is dominated by small to medium-sized companies, determining the prices is normally the task of the top directors: “We exclusively lay down our prices internally,” commented Sperber, “here the executive managers cooperate with the product management.“ Gminder confirmed and added: “Only a small circle of executives and procurement directors are involved in the pricedetermining process – it wouldn’t work any other way.” Regardless of the size of the company, Dahmen advises the management to at least take an active part in the pricing processes: “The executive levels should always have their say in the matter. Of course, the board of directors doesn’t have to fix the prices, but they should definitely approve them. This signalises to the employees: Our pricing strategy is valued highly and the management is not only interested in turnovers and profits. This applies equally for multinationals and companies with a headcount of 20. Price lists are normally updated twice a year. Why should the directors not be involved?”
How much is enough?
The right pricing strategy is even more important than the question as to where one should position the pricing process internally. In simple terms there are different approaches for defining prices. The first is cost-based: A certain amount – the expected profit margin plus leeway for possible discounts – is added on to the purchase price or production costs plus the other running costs that a product brings with it. Approach number 2 – the so-called price matching – orientates itself on the market or the prices of one’s competitors. The third option involves determining the price in a value-based manner, as Dahmen explained: “One should always ask oneself: What is my product worth, i.e. what is the target group prepared to pay? We basically advise companies to implement a value-based pricing system. Purely cost and competition-oriented price strategies bring decisive disadvantages with them and don’t lead to profit maximisation – this fundamental rule applies for all trading sectors.”
This is why most companies implement a mixture between all three price strategies. “The essential thing is that the there is enough cover, we have to be sure that our margin is secured, which is why we always calculate a little higher,” explained Gminder. “Against this background, the price is always calculated from the procurement figures. Orienting it purely on the sales would be the wrong approach.” This certainly doesn’t mean that Daiber orients its pricing purely on the costs – on the contrary: “The question how much a customer is prepared to pay is essential economically speaking and thus the feedback from the sales department also plays an important role,” said Gminder. “It is important that the price/performance ratio is optimal. We receive feedback on our products from our field staff, for instance if a customer states that a certain product should fit into a certain price category. In this case, we save small costs in the design of the product – i.e. do away with a bag.” Dahmen: “There are basically two pricing errors that occur widely, even within huge companies: Either the price is set too high – that isn’t nice, but it has the advantage that this becomes noticeable relatively quickly. A price that is too low is much more dangerous because the companies are delighted with the massive sales without asking themselves if the profit couldn’t have been much higher. We are then the spoilsports, who ask the companies if they are sure that they haven’t priced their product too cheaply. If I determine a price using the pure cost-based method, the probability that I make such a mistake is higher and has the result that I always have to sell more items to secure my profit.”
Companies that orientate themselves exclusively on their rivals, quickly find themselves ranging those price wars that nobody needs and that nobody wants to have started. “Secret price agreements that keep the prices high artificially are illegal and are prosecuted with high fines. Therefore, a fine sense of intuition is demanded. Every market player should watch the market carefully and consider the competitors’ reaction to a price reduction,” noted Dahmen. “If hundreds of companies offer a mass product such as a fidget spinner for instance everyone can knock 5 Cents off the product and the other companies have to follow suit. In the end they all lose out.”
Whereas tight prices simply have to be calculated for certain open products and the pricing has to be strongly oriented on the purchase and production costs and the pricing structures on the market, there is more leeway elsewhere. “We can to a large extent manufacture made-in-Germany productions on an order-related basis, so these can be calculated differently to goods that have to be stocked for longer periods,” explained Sperber. “We have to include diverse factors such as licences, duties, etc. for each item. It is thus indispensable that each product is considered separately and calculated individually.” Experts like Dahmen urgently advise companies to differentiate between portfolios and depending on the product segment implement different pricing strategies. “Of course, in the case of many thousands of items with a number of slow-moving products, I can’t set an individual price for each product. But I can create structures and think about which item stands for what and also vary the margins sometimes. The frequency drivers are very important, because they not only stabilise the business, they also attract the customers. I have to price such top items aggressively. On the other hand, I have totally different options in other sections, such as for bespoke products for instance.” The same applies for products that distinguish themselves from the mass market – for instance due to own designs or innovative functions. “Design is a clear value driver,” remarked Dahmen. “Those who orient themselves on fashionable trends, can trigger off additional buying impulses, whereas these are of course seasonally limited. Here too one has to be careful, also about engaging in too daring design experiments.”
This applies for all features and distinctive characteristics – whether of a design or functional nature: They have to be critically questioned, indeed from the customer’s perspective. “Nobody is prepared to pay for something they don’t need,” continued Dahmen. “There are products in many markets that are ‘over-engineered’. Each feature has to have a value for the customer and trigger off the readiness to pay.” Gminder cited some examples of practical features in the textile market: “T-shirts bearing Swarovski crystals are not expedient for us. Instead we offer a wide range of items, for example we were one of the first on the market to offer ladies’ cuts and a larger selection of colours than the customary five to six shades offered. Unusual colours are not turnover drivers, but they sell well seasonally. The same applies for innovations like the coldblack textiles that don’t heat up in the sun. Such features tell stories and help the items remain a topic of conversation so that the customer says: ‘If they can produce those, they can also produce normal T-shirts.”
The famous added value
Once a company has drawn up a price structure, it mustn’t continue relying on it for years, but instead has to continually take the dynamics of the market into account. It doesn’t suffice to take a look at the prices lists twice a year and merely update them by adding increased cargo or production costs. “We are exposed to constant changes,” confirmed. “It is important to keep the price transparency in mind and continually adjust them to match the current market conditions.” This is why Dahmen recommends a comprehensive monitoring of the sales processes: “One has to draw up a set of rules so that no price is determined by chance and so that errors in the staggering or margins can be identified. Price lists shouldn’t merely be printed in Word and Excel files, but actually integrated into the ERP system and repeatedly compared. In this way, the performance of a product can flow into its value definition. The more transactions I can track, the more I learn and I can deduce from this when I can grant discounts or cash discounts.” The more sophisticated the monitoring, the easier I can also include factors that are indeed difficult to illustrate in figures, but which are decisive for a value-based pricing because they create the much-cited added value for the customer – factors like reliability, service, consulting, delivery times or flexibility. “There are differentiations between the suppliers even on the commodity markets that are strongly standardised,” said Dahmen. “Even if the ton of cement costs the same everywhere the overall packages vary considerably – i.e. regarding the service. In short: Performance has a differentiating impact.”
Unfortunately, services offered can only be considered in the price to a certain degree. “Many of my clients complain that they love their customer service, but aren’t prepared to pay for it,” noted Dahmen. “However, the customer is allowed to be informed that I am not a cheapskate and what I offer them in comparison to other companies. The resulting loyalty pays off somewhere down the line.” The marketing is also one of the items that can’t be easily represented in the product price. As Gminder explained his company invests heavily in high-quality marketing measures, “whether catalogues that we elaborately produce ourselves – among others using professional models and photographers as well as photo shootings at attractive locations – films or social media. These measures make our products and brands experienceable. However, I can’t easily measure how strong the investment affects the sales. In any case it would be a mistake to calculate 100% of the costs for marketing.” A certain amount of upfront payment is necessary and is ideally rewarded with loyalty that is a valuable asset amid the tough climate of the B2B market – not least because it may be decisive when the customer is comparing prices. Long-term success is rarely based on a penetrating cheap offer attitude. “Guarantee claims, good services, fairness, modesty, reliability, honesty… We know that we offer an excellent price/performance ratio without having to attach a ‘20% discount’ label to our items,” reported Dähler. “We have customers that have been implementing our Victorinox products very successfully for almost 100 years as customer loyalty tools. We employees don’t just do the job so we can pay our bills. Our customers sense this passion.”
Then all of a sudden, feelings do come into play on the toughly contested promotional products market and one is no longer talking about the third digit after the comma, but instead about value. Incidentally, companies that do this aren’t normally victims, they are those stood in the winners’ corner.
// Till Barth
Illustration: Jens C. Friedrich, Beke Milas, © WA Media; photos: Shutterstock.com (3)