We appear to have bumbled into credit crunch followed by financial meltdown. The left-of-centre governments of Clinton and Blair over a decade ago, to little Opposition, led the encouragement of lenders to allow people to borrow mountainous sums, with little recourse to whether the interest payments could be maintained, let alone the principal ever repayed.
Unchecked, the banks went bananas. We now see that they lent recklessly, sold on those debts to other banks, fattened their income statements through huge commissions and left their balance sheets one sneeze short of starting an influenza pandemic.
According to engaging economist Robert Sidelsky, it’s Farewell to the Neo-classical Revolution. Unfettered Financiers will be a thing of the past. Here’s a flavour:
“The just-collapsed credit bubble, fueled by so-called special investment vehicles, derivatives, collateralized debt obligations, and phony triple-A ratings, was built on the illusions of mathematical modeling.”
The bonanza is now at an end. The immediate reaction from anyone outside the finance sector was succinct; let them fry. Yet on reflection, schadenfreude shifts to fear. Everyone from housewives to chief execs are keeping their purses shut tight, corporate POs confined to locked cabinets.
The problem now is that no-one wants to spend. Thrift is replacing the excitement of gaining credit. This is undoubtedly going to create problems for us solution sellers. How do you prompt people to spend on your wares?
Well, it’s a toughie. I myself am hearing customers already calling to question next year’s contracts. Here’s two strategies that could benefit us:
This must be an opportunity to get on the radar of the chief cheque-signer. Most vendors, when confronted with a demand to reduce prices, will meekly acquiesce. Avoid this trap by asking for a forum with their top bean counter to discuss financial matters. If apt, why not take along one of your finance bods? Ensure first that they are neither eosophobic or phengophobic (just think of a vampire at dawn!). The aim should be to uncover their funding plans. This could be dynamite. Imagine that they’re unaffected. Working capital provides for all their needs, say. Maybe a simple change in payment terms can keep you ‘in’.
Reduce Supply, Not Margin
So there’s no way around it, you’re facing a cull. Again confronted with the unpalletable, when ‘asked’ most vendors will drop their price. If a client states that to keep their business you must cut your price by 10%, you might consider this a small price to pay. But the impact on margin could be horrific. At 40% profit, a 10% price drop reduces your margin by 25%. Work out what each part of your supply costs you, and offer to reduce those costliest bits. A main point is, that whenever you do reduce price, you must get across it’s conditional you’ll reduce supply too. It’s surely preferable to discuss supplying 90% of last period’s product for 90% of the price, as opposed to 100% of previous supply for 90% of cost.