Tuesday, 12 March 2013
b.Price versus Volume Generation
It is so very interesting!!!
My business partner had a very long discussion with me and we discovered that:
Most businesses derive profits from selling volume. To do that, the business will cut price so that they can have a larger business volume. Multiply that by its selling price, the total sale value or volume leadership is always an envy of most other businesses.
But, operating at such low selling price of razor-thin margin, the business lacks the ability to perform research & product development. Sooner or later, general financial crisis will hit the business. The business being poor in product and quality improvement will soon be driven out.
That explained why 3 key and sizable competitors of ours folded this year.
Volume leaders are never the answer to business building.
Ever since we change our business model to price leadership. Our business has grown from strength to strength.
Part 1: The bigger margin allows us to do research & development of our products. We now achieve better penetration. We are selling much more than before. Instead of producing more per year, we resisted that urge and produced the same amount the following year. We raised price further hoping that the sale volume is just right again instead of increasing year-on-year.
We will continue to increase price until we sell only the amount we have always been selling.
Part 2: As for those products that we sell less than targeted volume, we increase the quality further in terms of packaging and content, but retain the old selling price. Some time later, we will again achieve the target. Further improvement in products will again grow the sale volume. the mechanism from part 1 is again deployed.
Caveat Emptor: Product development must be continuous and budget planned for every year.
Sale Volume: The desired optimal sale volume per product is derived by trial-and-error.
Not many businesses can see through the issue of volume and price leaders effectively. They are always blinded by immediate cash flows and urgent market share issues. Many businesses thought that by selling more and more and the sale volume going higher and higher is the only way to grow. I can emphatically say that they have been mistaken and misled by the market. They will go broke in no time. They will lack funds to build quality products. They will lack funds to weather financial crisis. They will lack business depth to understand market competitors.
This enlightenment is hard to come by. It is derived from years of painful evaluation of many of our competitors.
Business leadership can only be achieved through continuously improving quality, not by lowering price.