Cut and thrust

One consequence of the low inflation in Britain's economy over the past five years is that prices have come under intense pressure. In markets such as personal computers and white goods, prices have fallen. In others, rises have barely kept pace with inflation.

What ought to be worrying more companies is the fact that this has been happening at a time when the economy has enjoyed nine consecutive years of above 2 per cent growth. Both business-to-business and business-toconsumer sales have been buoyant. What happens if economic growth slows, as a growing number of economists predict it will do?

If the number of customers falls, and those that remain spend less, prices will come under even more pressure. The price wars we've seen in the past five years will begin to look like mere skirmishes. So in this"pre-recessionary" climate, just what should companies be doing to arm themselves forthe battle ahead?

In a price war, accountants are among the front-line troops. Their input is vital and they should promote a series of remedial actions. There are 10 of these which could prove particularly important.

1. Ensure your firm sells on value -- not price.

When prices are falling, it's easy to get sucked into a discounting war, in which consumers are the only winners. "Too many businesses are giving into the pressure of discount pricing and end up losing the battle when, if they applied some solid pricing strategies, they could retain loyal customers and gain new ones who shop for value and not price alone," according to consultant Thomas Winninger, an expert on price wars (T Winninger, Full Price: Competing on Value in theNew conomy, Dearborn).

He argues that "value" is made up of seven components: service; response; variety; knowledge; quality; guarantee and; yes, price. "Note that price is only one item on this list. Always support value instead of defending or discounting price,"he says.

Winninger suggests a series offive questions that could help to determine where your company delivers its strongest value for customers:

* How do I differ from my competitors?

* If I ceased to exist,why would my customers miss me?

* What do my customers want that I don'thave?

* What need do I fill for my customers that no one else does?

* Who are my best customers and why?

2. Target service -- not product market niches.

This gives you a better chance of building in the six non-price differentiators in Winninger's list. "Although you may pride yourself on having the best selection ofyour particular product or the best service, any of your competitors competes with you at a core level on product; he warns.

And differentiating in areas such as service or quality need not be expensive. Often it involves finding out what your customers want, then providing it in simple ways. Financial managers need to work with marketing experts to work out how to add more value in low-cost ways.

For example, the Marriott hotel chain has chosen to compete in the premium market on service. When guests arrive, instead of queuing at a busy reception, they're met at the front door by a host who gives them their room key.

One way to make certain you're targeting service rather than product, is to treat customer surveys as a way of life rather than an occasional activity. And this is not just a task for the marketing people. A good (and cheap) time to ask customers what they think is when you're sending them an invoice or when they're paying abill.

Winninger suggests that companies should continually survey around a fifth of their customers with specific results-based questions. This will enable them to identify their greatest strengths - as well as the areas where they're not providing what customers want. A firm that does this will be in a good position to take on discount competitors and beat them with the next action.

3. Use "package pricing" to attract customers. Use the same "lead price" for your core product as the discounter. But, unlike the discounter, offer a package with more value at a higher cost alongside.

"This doesn't mean selling accessories to add on to the price, but showing customers the way to have the other items theywill need right away at one price; Winninger explains. The technique has been refined by computer retailers, such as Time and PC World, which have beaten discounters by offering peripherals, discounted software and extended warranties as part of their more expensive packages.

Of course, the technique can be applied in a wide range of other industries. The package holiday industry, for example, gets customers through the door with an attractive lead price, but then sells a host of supplements and extra services, such as car hire, to boost the value ofthe package.

4. Make price comparisons difficult.

When it is impossible to put together a package price deal, consider the alternative of muddying the pricing waters. If customers find it hard to compare like with like from different suppliers, it's possible to protect prices with a range of tariff structures and special offers.

The telecommunications industry has developed this into an art form. Terrestrial and mobile phone companies offer a bewildering variety of rates and discount offers, which disguise the core price and make comparisons almost impossible.

Some electrical and white goods manufacturers assign product numbers not just according to the product, but also according to where it's sold -whether this is ahigh-street store or a catalogue. This makes it harder for customers to compare like with like.

5. Build up your company's key accounts.

It is cheaper to get more business from an existing customer than to find a new one. But consultant John Hurcomb has also discovered that, in many companies, business from key customers is often more profitable than the average for the whole customer base. Financial managers should press for more thorough analysis of customer profitability.

Concentrating on customers who provide most good quality business can reduce the cost of selling and, therefore, defends margins when there is pressure on prices. For example, Simon Jersey, a company that sells industrial and business clothing, decided to focus on the accounts with the most potential. It used a series of tough criteria to evaluate potential key customers and, as a result, raised sales to some accounts from 80,000 a year to more than halfa million ayear in fouryears.

And as you build revenue from key accounts, also take the opportunityto:

6. Evaluate the effectiveness ofmarketing&pena

Soap-powder king Lord Leverhulme is famous for commenting: "Half ofmy advertising budget is wasted. The problem is, I don't know which half." At its worst extreme, an unwise marketing spend can destroy a company - as the FDs of many bankrupted dotcoms could verify.

Gung-ho marketing executives always come up with great reasons to increase their budgets and it usually falls to financial managers to keep a grip on reality. Two key figures to look for in any marketing budget are the cost of acquiring a new customer and the projected lifetime value of that customer. It doesn't take a genius to work out that the second figure needs to be substantially above the first, but it's something that many unsuccessful dotcoms failed to ensure. Too often, this essential data is not there and it's particularly vital in aprice war.

7.Explore new pricing models.

E-business encourages businesses to explore new pricing models and provides the means to implement them. For example, websites such as QXL operate on-line auctions for a wide range of products. Other websites have introduced a"community shopping" pricing model, where the price of an item falls as more people buy it. And websites such as lastminute.com have introduced marginal cost pricing to shift "distressed stock" such as unsold theatre tickets or holidays. On-line successes should encourage traditional businesses to experiment with new pricing models.

Budget airlines such as easyJet vary the price of a ticket depending on how early the traveller books. But it's possible to vary prices to meet peaks and troughs of demand in many other areas. Coca Cola is experimenting with a vending machine that varies the cost of a can of coke depending on the temperature. The hotter the weather, the higher the price.

8. Design cost out of your product or service.

Despite new pricing models, a price war makes it even more important to look at costs. Use techniques such as activity-based costing to determine the true unit cost of products. Then explore ways to design cost out of the product (perhaps by dropping features that are expensive to add, but which aren't seen as high value by customers). Look for ways to manufacture goods, such as outsourcing, or find cheaper sources of supply, for example, in the Far East. All types of financial managers could benefit by working closely with research and development and manufacturing managers onthis.

9. Design cost out of the supply chain.

Distribution is often a significant slice of product cost. Explore ways of getting product to customers more cheaply. This could include cutting out intermediaries by creating direct sales, for example through a call centre or the internet.

But also look closely at metrics such as margins in different parts of the supply chain - these will depend on your company's position in the chain. If you're downstream (a dealer or retailer), you may find ways of increasing margins or pushing stock holding up the supply chain. For example, bookstore Waterstones has told publishers it wants discounts of 50 per cent, rather than 30 per cent, on retail price. Small publishers have complained it will put them out of business, so they need to fight back with strategies such as developing direct sales to niche markets.

If, like publishers, your company is upstream, you may want to adopt strategies to defend margins, such as adding value through consultancy, or joint promotions with customers further down the chain.

10. Take the cost out of your invoicing and payment process.

Even the most computerised accounts departments still have significant room to cut costs. Inaccurate invoices, for example, are the bane of many companies. They generate queries, which are costly to sort out, and delay payments. Also, consider whether your firm could collect more payments upfront, perhaps through corporate credit cards. And become more rigorous about credit checking both trade and consumer customers - in an economic downturn, bad debt increases just as price wars become most vicious.

Lastly, review credit control policies. It's too easy for customers to slip from 30 days to 45 and then to 60, especially as cash flow becomes tighter. When you're fighting a price was, the last thing you need is another battle to get your money.