The Race to the Bottom
Inside Dental Technology delivers updates on digital workflows, materials, lab techniques, and innovation in dental technology through expert articles and videos.
August 1, 2013
Volume 4, Issue 8, July/August 2013
Page(s):
With continued pressure from offshore competition, the rise of corporate dentistry, and sluggish economic conditions, many laboratory owners believe that they have no choice but to compete in a price race to the bottom for customers. This, however, is a risky business strategy, as another laboratory could come in, cut prices, and beat them in that market position.
One of the most common justifications for cutting prices is that the lost profit can be regained in production volume. Unless a laboratory has the buying power of a mega business or can streamline production processes and cut the cost of goods sold, being able to make up lost profit in increased volume is rare.
Consider this example: The price of one of your crowns is $150. After factoring in overhead, cost of goods sold, labor, and manufacturing, it costs you $130 to create that crown. This gives you a profit of $20 on each crown sold. If you sell 10 crowns, your net profit will be $200.
If you send a promotional offer to customers advertising, “Buy 10 Crowns and get the 10th Crown for Free,” you are essentially giving customers a 10% discount on 10 crowns. Regardless of the discount, those crowns still cost $130 to manufacture, so your net manufacturing costs have stayed the same. However, your net profit is now reduced to $15 per crown. For 10 crowns, your net profit will be $150 versus $200.
To maintain a profit of $20 per crown, you would have to quadruple the number of crowns sold at the discounted price, giving your sales team a very lofty sales goal. In most cases, discounting your wares is simply not a practical solution when looking to increase profit margin.
Customers who buy based on price are fickle at best, and they are generally willing to jump ship for a better price. As a laboratory, when you compete only on price, you don’t build relationships or inspire repeat business. You become a company that is good for a deal, instead of quality, service, or knowledge.
Think of the big-box stores that send out coupons on a monthly or weekly basis or that have regular sales promotions. Do you shop at that store when there isn’t a sale or you don’t have a coupon? Most likely you don’t. If you went without a coupon, you would feel cheated.
These stores haven’t built brand loyalty on customer service or quality; their business model relies heavily on discounts and their pricing strategy reflects that. They price their goods higher in order to send you the 20% discount each month.
Finally, another risk of competing solely on price is that you turn your products into a commodity—an undifferentiated product that offers little or no perceived difference between it and your competitors’ product.
Laboratory technicians don’t really want to be in the commodity business. They want to be in the valued service business, the business of providing something that is special and different. Something that that the customer buys, and continues to buy, for the experience and not just the price.
Instead of competing on price alone, change the conversation and focus on value. Using a value-pricing strategy is a better proposition because it attracts loyal customers. Why do customers pay more for a luxury car, even though it doesn’t cost much more to make than a mid-priced car? The answer lies in the perceived value. Value is not an inherent attribute of the product, but it commands a higher price.
For example, you may use the same material to fabricate your flexible partials as the laboratory down the street, but your laboratory adds value in other services. For example:
• You have a dedicated account representative who can sit chairside at seating.
• You offer continuing education and webinars on how to use the product.
• Your flexible partials only take six days in laboratory to deliver.
• You pick up and deliver at no charge.
With that said, value is subjective. While value is a benefit, it is not necessarily a benefit of value to all customers. For example, there are customers who value the continuing education because they are located in rural areas and your webinars are an easy way to train staff without having to travel. Other customers see the continuing education as “nice to have,” but for them, the value comes from not paying for pickup and delivery, which is very important in keeping their costs down. Different customers, however, do not assign the same value to the same benefits. Understanding what each of yourcustomers value and building messages around those values are key factors in building loyalty. If you focus on giving your customers a great experience, being different and unique, and standing out in your customers’ and prospects’ minds, price will become one of the last things they think about.
Deborah Curson-Vieira is the marketing and communications manager for Dental Prosthetic Services
