186-Using Finance to Reduce a Price
Dell is struggling to keep up with HP in the personal computer market. There is one part of the market, though, where Dell remains the clear leader, the small business market. Part of the reason for the company’s success in this market is its financing package. It is more generous with financial support than its competition. It may offer interest-free financing when companies purchase $25,000 or more of new computers. The company offers other creative financing deals. In one of these deals, a customer bought $30,000 of computers on a three-year lease plan that allows the customer to keep the equipment when the lease expires. Overall, Dell says that 22% of its small and medium-size business customers use Dell to finance their purchases. This 22% is up from 17% just two years ago. The company is gaining share by using its financing muscle, despite the chancy economic environment.
Offering financing, whether subsidized or not, is a way of extending the time a customer has to make its cash payment to the supplier. This is a form of discount. In our analysis of several thousand price reductions over the last twenty-five years, we have identified fifteen distinct forms of discount. The offering of financing is one of those forms. Many industries have relied on financing to build their businesses, even in difficult times. The automobile industry has used financing to offer attractive lease rates and payment plans to its customers using captive finance vehicles, like GMAC. GE has used its captive finance arm to finance customers in many of its product categories. In fact, GE has seen its captive finance arm grow into a lender in many markets where GE does not even compete as a supplier.
The home building industry has also used financing creatively. For example, last year Lennar offered special financing with no money down and a 3.625% mortgage rate for the life of its loans on purchases of Lennar’s newly built homes. Subsidized financing helped Lennar win new customers in an abysmal market. (See the Symptom & Implication, “Demand in the industry is falling” on StrategyStreet.com.)
Even small businesses use the extension of financing to build their businesses. Faryl Robin is a New York company that sells high-end women’s shoes. In the expectation that it would build its business with long-time customers in a tough economy, the company offered additional financing. In 2009, it offered retail customers with whom it had a long-term relationship an additional sixty days over its normal thirty day payment period for the customer to make her full payment for shoes she had purchased.
A Leaders Trap occurs when one of the industry leaders allows another competitor to reduce prices against the leader without the leader’s response. A price discounting competitor can attack using any part of the product’s total price. This can occur in any market, whether hostile or not. It is simply untenable in a hostile market, one with overcapacity. It is not as problematic in a nonhostile market, though it will usually mean that the discounting competitor will gain share at the leader’s expense. See HERE and HERE for more explanation and perspective.
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If you face a competitive marketplace, read these blogs. We wrote them to help you make better decisions on segments, products, prices and costs based on the experience of companies in over 85 competitive industries. Much of the world suffered a severe recession from 2008 to 2011. During that time, we wrote more than 270 blogs using publicly available information and our Strategystreet system to project what would happen in various companies and industries who were living in those hostile environments. In 2022, we updated each of these blogs to describe what later took place. You can use these updated blogs to see how the Strategystreet system works and how it can lead you to better decisions.