Pricing for Problem Customers
When I was running fast-growing Rella Good Cheese Co. (#281 on the Inc. 500 in 1993, known then as “Sharon’s Finest”), I realized some wholesale customers were a delight and some were a total PITA, yet they both were charged the same price. Those who were a hassle took more of our time and energy, since the whole company was just us in the office they cost us more to manage.
So I developed a pricing model that took into account what I called the “Headache Factor.” We would judge them on a “Hassle Scale” of 0 to 5, with 5 = major headache, and the algorithm would give me a Recommended Price. (See the cells in red in the image below.) In the example below, a medium hassle score of 3 resulted in a recommended price $2.49/case higher than the base price.
Those factors included how easy they were to interface with such as order and invoice processing, availability by phone, problem handling, and the like. Also we did due diligence by contacting other friendly vendors to see how promptly they paid, and if they were prone to taking questionable discounts (that’s a popular tactic in the perishable food industry).
Having different prices for the same class of customer is considered illegal if it is not justified in some way. Some customers require a certain number of demos, promotions, and catalog ads every year, so that can be built into the price. Others will take the prompt discount even when paying very late, so build that into your prices as well. But by making this spreadsheet analysis I could legally justify the differing prices (not that it would ever come up, nobody cares except those getting a higher price for a good reason).
For product vendors, not getting paid is the kiss of death so we avoided it at all costs, and would not sell to you if we thought we weren’t going to get paid (oddly, not everyone has that policy). For instance, after a few problems we stopped selling to any company in the metro New York City area. If you get stuck for say $1,000 and have a 30% gross profit margin, you have to sell $2,333 more just to cover the cost of goods of that $1,000 order you didn’t get paid on.
Pricing is a black art anyway, mysteriously counter-intuitive. For instance, one trick we used was to have a high list price, then offer discounts to get it down to where it needed to be. The psychological difference is massive between “no that’s our everyday low price, I can’t go any lower” and “here’s a 10% new customer discount, a 10% intro discount, a 5% family discount, and then when you pay within 10 days take the 2% prompt payment discount.” In one, they grumble whenever your name is mentioned, and in the other you’re their new best friend. Same price in both cases, just a difference in how you arrived at it. The Process, sales is often all about The Process.