All too often, small companies operating in a competitive industry will undervalue their goods or services -- pricing them as if they were basic commodities rather than value-added products. The consequences can be life-threatening.
G.J. Payne Co. is a case in point. When a consultant first suggested that Gordon Whitney raise his prices 20%, he was dumbfounded. "I thought it was suicide," recalls Whitney, president of the Santa Ana, Calif., asphalt recycler. But sales at Payne had fallen to $4 million from $6.2 million a year earlier, and the company had registered its first unprofitable year in two decades. Payne's bankers were panicking.
That was two years ago. This year, Payne anticipates sales of about $6.5 million, and its pretax profit margins are a healthy 15%, compared with just 6% in 1983. Harry Dahlberg, a consultant with Durkee, Sharlit Associates in Los Angeles, had reviewed Payne's financials and focused right away on the company's negative cash flow. Payne's scenario was one Dahlberg sees all too often: a mature company in a competitive industry steadily lowering prices to maintain accounts, only to price itself out of business.
Dalhberg prescribed strong medicine. Payne's owner and president took immediate pay cuts of 25%. All other employees saw their salaries fall by 15%. Regional offices in Dallas and Minneapolis/St. Paul were closed as Payne concentrated on business in its own backyard. But the cost-cutting measures still left the company far short of its cash goals. And the only option left was raising prices. Notices were mailed to Payne's primary customers, most of which were city and state agencies spread across Southern California.
To Whitney's surprise, few customers balked as Payne levied first a 15% hike and later a 5% increase. Even more surprising was that the competition, instead of feasting on new business opportunities, quickly brought their prices in line with Payne's higher fees. All in all, raising prices increased Payne's pretax profits last year by $500,000. "I really couldn't believe it would work out to that degree," Whitney says. "Our consultant explained that if we thought we were the quality company in the industry, then we should be the market leader on price. It turned out to be true."