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How To Manage Price Wars

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DQC Bureau
New Update

There are very few things in business that change as quickly as prices and technology. The newer the technology, the higher the price. And as technology becomes obsolete, prices keep declining directly in proportion to the volumes. Thus, technology that used to be the domain of high-end users has become accessible to the common man.

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A strong example of this phenomenon is the computer hardware business. Rapid technological changes and newer manufacturing techniques have meant that hard disk capacities and CPU speeds have approximately doubled every 18 months or so.

The trend of increase in hard disk capacities is set to continue at least in the foreseeable future. In this scenario of availability of improved technology at low prices and decreasing margins, a dealer would be able to survive only by providing a very comprehensive service.

And this becomes all the more necessary as home users become big buyers. There is a distinct shift in the business from big corporates to the individual home PC users. And this trend is borne out by the IDC Directions 2000 survey wherein home PCs account for almost 39 percent of the market share in 1999-2000 as against just 24.2 percent in 1998-99.

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With this development even the market has seen an increasing growth. In 1998, India spent around $ 2,500 million on IT. But taking in account the current pace of purchasing, the country is expected to spend three times this amount (almost over $ 7,000 million) by 2003, making it the third largest market in the Asia-Pacific during that year.

Complete solution provider

This is exciting news for the channel partners. But what cannot be denied is that there is a bleaker side to the picture. As the volume of sales increases, prices of products decline and margins shrink further. And e-commerce has only added to the problem. So does this mean that channels are slowly dying out?

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The answer is YES. But only if you are a box-pusher who merely buys from the vendor and then sells it to the customer. But if you go beyond this to provide a well rounded, complete solution to your customer, then there is an entirely new business scenario unfurling before you.

In a bid to get more and more customers, dealers often under-cut their prices. This kind of under-cutting might help to get more customers. But getting customers is not the only thing that will keep you in the business. What will determine your success or failure eventually will be your business practices.

Tackling price drops

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The first and foremost step to secure your place in the market would be to develop a working relationship with your customers. This would involve maintaining a database, creating a mailing list and sending them regular updates regarding newer products, and price changes that are imminent in the near future.

The "Just in Time" principle is a great tool used by the manufacturing industries worldwide which could be applied by a smaller vendor as well. A minimum-balance inventory control if practiced properly, can free up cash flow to a great extent. This is especially crucial for a small business as big inventories can unnecessarily tie up scarce cash resources.

Know your brand

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As the market changes, so does the customer's perception of a particular company change over a period of time. A great example would be the rise of Compaq as a brand in the past few years. A well aware customer wouldn't mind paying a premium for such a brand name. Thus, the profit margins can be a bit more generous. Frequent brand/product repositioning can work to the advantage of a dealer.

As discussed earlier, a newer technology has a premium attached to it. But the older the technology, the cheaper it becomes. What is also true, is that the need for the latest technology is most often felt in urban centers.

So, a dealer could try and tap into the semi-urban and rural areas to further try and expand his market with a product providing a reasonable performance at a very competitive price.

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Inventory management

In the current scenario of decreasing margins, for a given volume of sales, the number of transactions increases drastically. This is where inventory control becomes very important. Regular stock taking helps keep tabs on slow moving items and determines the rate of stock turnover. This in turn can be used to determine adequate re-ordering levels for goods sold on a regular basis. This prevents build up of slow moving goods in the inventory, freeing up resources for other requirements.

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Reordering in sufficient quantities (either by oneself or as a group) can help you avail of bulk buying discounts. This is called an 'Economic Order Quantity'.

Following FIFO or First In First Out method can rotate the stock effectively and prevent damage and obsolescence due to excessive storage times. Forecasting based on past trends can also help boost business. For example, there is invariably a spurt in business during Diwali festive season or just before the financial year ending as buyers scramble to claim depreciation. Thus a well-heeled vendor could make the most of these opportunities.

Last but not the least, a good sales promotion campaign can also be of great value to you. It could be something as simple as an advertisement in the local cable TV network or some thing more elaborate depending on what percentage of the business you want to invest in promotions.

Assuming roles

In the fast changing world of the IT hardware industry, it is no longer viable for a business to be a single service outlet. The old mode of doing business, that is, acting as a conduit between the vendor and the user, is no longer an acceptable model.

As customers become more informed about the product they want to purchase, low prices by itself will not guarantee a successful business. Besides offering a competitive price, value addition in the form of an annual maintenance contract as well as tutorials on product integration are also becoming industry norms. The dealer has to assume the role of a counselor who helps the user to understand and use his machine efficiently.

For a customer, the MNCs that manufacture the hardware are faceless entities and he relates to the products solely through his interface with the dealer. So, in case of any problems with a product, the dealer can be of invaluable help to the customer. He can listen to the problem and offer assistance in the best manner possible, especially if it has to do with a warranty claim or a product replacement. Prompt action can engender great goodwill and trust.

Bottom line

It is increasingly apparent that an after-sales service package is of utmost importance, not only for the customer but also for the dealer. It ensures renewed contracts with a paying client and can assure a very loyal customer base.

Thus, when the next shakeout takes place in the ever so turbulent world of IT, you - the dealer, will be firmly entrenched in the minds of your happy customers.

Remember - all businesses in the world - be it a multimillion-dollar passenger aircraft or satellite company or even the pizza sold in your neighborhood joint - depends on repeat business. And as long as the customers keep coming back, your cash box will keep on ringing.

Milind Kamat is Country Manager, Accton India.

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