Mining is a cost-sensitive industry. This stems from the fact that our sector is a “price-taker” and not a “price-maker.” That is to say that the value of the industry’s output of commodities is set by international markets and not by the producers.
The only way in which producers can improve their bottom line is to reduce costs. Thus, there is always price pressure on suppliers, regardless of where we are in the commodity price cycle. Now that we are in the low part of the cycle, the pressure is high. Suppliers have to ensure that they have practices in place to protect their margins.
All mining suppliers have been in the position of dealing with a potential customer demanding a discount. Even though you know that your product or service is worth every cent you are asking for, there is always a competitor who is prepared to cut their prices, just to get the sale. You also know that if you play the price game, you will reduce your margins and risk commoditizing your product or service, and you may never be able to regain a reasonable price level with a client to whom you have discounted. Your best defence is to have a total solution approach so that the perceived value of your offering is undeniable. Here are some suggestions.
First, you have to understand the full value of your offering, with specific reference to the customer’s requirement. This is the job of your sales force — to know the customer’s situation thoroughly.
Before making a proposal, it is critical to understand the business drivers of all levels of influence and decision. In your analysis phase, ask all of the in-depth questions that your customer and your competitors may not even have thought of raising. Do not be afraid to expose the risks of your solution. If you do not, someone else will do it for you. Mining companies are interested in working with suppliers who truly understand their business.
Second, your sales people have to make the customer understand what it will cost them not to adopt your solution. Often, resistance to change is a major hurdle and sales people have to be able to prove to clients that it may be costly not to change.
You have to then prove to the customer that your approach will have a specific financial result, such as cutting costs or raising revenues. Such a quantitative analysis goes far beyond the simple cost of purchase. It requires knowledge of how the customer will use the product so that the total cost of use can be established.
In today’s complex business world, and at this time in the mining cycle when profits and capital are slim, senior managers are more actively involved in assessing issues and their options. It is therefore important to understand how your solution affects each level of responsibility within your customer’s organization and to ensure that you effectively communicate it to them. For example, financial executives are playing central roles in setting corporate strategies. Do not leave it to your contacts in operations to translate the technical advantages of your product or service into what they mean in terms of financial impacts. Do it yourself.
Lastly, to avoid margin erosion, it is important that sales commissions be linked to profit, not gross revenue. If discounting pays off for a salesperson who is simply interested in landing orders, your margins will suffer.
Perhaps now is the time to sit down with your marketing and sales people and ensure that you have a strategy in place to preserve your margins.
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.