Sometimes a competitor makes an offer so aggressive that even your loyal customers can’t ignore it. Though they may love your product, your people, your brand, and what you stand for, there is just too much money at stake, reports Forbes. How can you win without dropping your price and playing to their strengths?
Our new colleague James Jennings shared a story about just this dilemma. It stems from when he was national sales director at Green Mountain Coffee Roasters, in Vermont.
Before Green Mountain acquired Keurig, a big piece of its business was direct delivery to restaurants, convenience stores, hotels, food service facilities, bagel shops and other small businesses. Green Mountain sold whole bean and ground coffee wholesale at $6 a pound, compared to the competition’s $3. The quality difference was big enough that Green Mountain could defend the higher price.
One year, though, Green Mountain’s chief competitor got smarter and more aggressive. It upgraded its coffee a bit, raised the price to $4, and armed its salespeople with the tough-to-beat argument: “If you can’t taste the difference, why pay the difference?” For every 1,000 pounds of coffee it bought, a retailer could save $2,000 by going with the competition. Some of Green Mountain’s wholesale customers switched—and many who stayed loyal started pressing salespeople for discounts.
Eventually, one of the senior salespeople invited Jennings on a call to a multi-site restaurant that bought 30,000 lbs. of coffee a year. The account was worth roughly $200,000 in revenue to Green Mountain.
Earlier, the competitor had conducted a taste test of its coffee and Green Mountain’s. The judges were the office staff—people who matched the demographics of the company’s customers. Most couldn’t taste the difference. So why shouldn’t the buyer switch? The savings would come to $60,000.
Losing the customer would be big trouble for Green Mountain. The restaurant chain was one of the biggest accounts in the region. Without its business, Green Mountain would miss its budget. Worse, it would give an aggressive competitor a well-known reference account in the market.
But here’s where the story gets interesting. When Jennings and the sales rep met with the GM, they avoided the usual point-by-point objection. Instead, they acknowledged that the competitor did a good job with the presentation, and that there was too much money at stake to ignore. Then Jennings shifted the conversation from the competitor to the restaurant.
“How many cups of coffee do you sell per year, and what do you charge?” he asked. Net of refills and waste, the GM said, they sold about a million cups for $1.25 each. Jennings knew that the cost of coffee per cup can range from 7 to 14 cents. A retailer selling 100 cups of $3/pound for a dollar each might would make $93 in gross profit. At $6/pound it would make $86.
However, if better coffee could increase sales just 10%, the picture changes: 110 cups of $6/pound coffee sold for a dollar would make $94.60 in gross profit. The gross margins in cup coffee are so big that 10% growth is more than enough to overcome a 100% difference in the cost of the coffee.
Jennings explained all this to the GM. “You put a lot of effort into your restaurants, the menu, and delivering a great dining experience,” he said. “Now, I don’t have a particularly good palate, so I might not be able to taste the difference. But what if some diners notice that coffee, the last thing they experience, falls short of the meal? What if just one person in ten did?”
“We could lose $125,000,” the GM said. Then he added, “We don’t just lose the coffee. We could lose the whole dinner check.” After that moment, he never spoke of the competition again.
Jennings wasn’t through. “Let me ask,” he said, “what if you were to upgrade your coffee and raise the price by 25 cents?”
The difference between what the GM was buying and organic Sumatran worked out to 3 cents a cup. If the restaurant company increased the price by a quarter, it could make an incremental 22 cents apiece on a million cups of coffee. Instead of reducing cost by $90,000 and risking a poor customer experience, it could actually improve that experience and make an additional quarter-million dollars of profit.
Jennings and the sales rep invited the restaurant’s executive chef to visit Green Mountain’s coffee lab, taste coffee with experts, and choose a coffee that would become the company’s new house coffee. Then Green Mountain would sponsor tastings with the staff and teach them how to talk with their customers about it.
The moral? Put your business literacy to good use. Before you develop the next generation of brochures for your company, ask these questions
- How do your customers make money?
- Do you offer a profit advantage over your competition?
- Do your salespeople know how to tell the profitability story?
- Do you have sales tools that make profitability calculations easy and transparent for customers?
If not, give James Jennings a call. That’s what we did.