Tag: discounting strategy

Retrenchment Strategy: What Is It? | Types of Strategy | Companies That Employed It
Businesses run on the three basics, Men, Money, and Machinery. If you are in a situation, facing loss. You will want to keep your head above the water. Devise a good strategy. Take some steps to look for what it is that has got your head into deep waters.

What is it that has made you stand in this position of loss?

You can analyze a lot of factors and make certain important decisions now.
- What is it that you can let go of?
- Is this important to you right now?
- Can this help you improve?
- Cutting this off will help you get out of this position?
- Is it effective?
How does an organization cut down costs and increase their revenue?

Cutting down costs on activities that do not profit businesses means also cutting down the number of men in that sector. For example, if there is no longer a need for you as an organization to focus on the clerical department. You will have to eliminate the people working there, which will efficiently reduce the cost. It includes shrinking of a business or a part of it to enhance the overall performance.

The decisions you make have to be realistic and achievable. So, Lets look at What is retrenchment strategy and the companies that employed the retrenchment strategy.

Retrenchment Strategy – What is it, When is it employed and Why is it employed?
Types of Retrenchment Strategy
Pros and Cons of Retrenchment Startegy
Companies That Employed the Retrenchment Strategy

Retrenchment Business Strategy

Retrenchment Strategy – What is it, When is it employed and Why is it employed?

As it is a matter of finance, capital and investments are basic that let your organization keep going. Revising the basics: money, machinery, and men.

So, What is a retrenchment strategy?

The strategy includes the desertion of products and services that are no longer needed by the business.

When is the retrenchment strategy employed?

It is implemented when a company is facing financial issues. It is a corporate strategy, which is done by reducing an organization’s expenditure.

Why is the retrenchment strategy employed?
- To shift focus on activities from where revenue is generated and hence increase profits or simply because the operation, project, the service, product or the product line going on in the organization may not align with the core of the business.
- To eliminate unnecessary costs that incur.
- To ensure financial stability in the organization.
Who employs the retrenchment strategy, and where is it used?

The organizations use it on a linear or a collective basis. It is used in
- Corporations
- Startups
- Companies
- Businesses
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Unable to cope with loss due to COVID-19, some major companies have filed bankruptcy. They include big players like Virgin Australia, Gold’s Gym and Whiting Petroleum.

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Types of Retrenchment Strategy

Retrenchment Strategy Types

This is also applicable to line extensions, operations, and projects that are being carried out in your business. First, let’s take a look at the three main types of retrenchment strategies:

1. Turnaround strategy

It is also called management measurement. The turnaround strategy is used when a business wants to improve its performance and decrease negative trends.

This strategy is used when the business might be facing:
- A decline in the market shares.
- Decrease in profits.
- The issue of spending more money as an organization during a specified period.
- Worsening debt-equity ratio.
- Negative cash flow.
- Decline in sales.
2. Divestiture Strategy

The divestiture strategy is adapted for when the turnaround strategy fails to yield results for a business. The divestment strategy analysis mainly the profit and profile factor. In an organization, the departments, products, services, or divisions are analyzed. Keeping in mind one question: Does this profit us? If not, then the company will let go of it.

This strategy is used when the company might be facing problems like:
- Not being able to keep up with the competition in the market.
- Facing negative cash flows.
- The business started or acquired does not match the core values of the company.
- When a tech upgrade is needed and the company is unable to do so.
- It is struggling to survive.
- The company might be running a business that is not profitable to the company.
3. Liquidation Strategy

This is the arrival of a business at its last stage. When no other options are available, the company sells all of its assets. As ugly as it might be, it involves total shutdown of a firm and will attract negative reactions as it also leads to consequences majorly including unemployment, of the people who worked there. Which also creates a bad reputation for the company.

To understand this more clearly, let’s take the Tata group as an example. It is a highly diversified entity with a range of businesses under its umbrella. A lot of which did not align with the identity of their core business.

The businesses that Tata ran for a specified time were soaps, detergents, pharmaceutical companies, and cosmetics. All of which were identified as non-core by the Tata group.
- TOMCO (Tata Oil Mills Company) was divested and sold to Hindustan Lever Limited. The company was sold to Hindustan Lever, as it was non-competitive and would have required substantial investment for them to sustain it.
- Tata’s Merind were divested to Wockhardt.
Adapting a retrenchment strategy might also be a company’s response to a significant reduction in demand for the product, product line, or the service it provides. Which would also include dropping off from the market.

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Pros and Cons of Retrenchment Strategy

Here are the Pros and Cons of Retrenchment Strategy:

Pros
- It can layer, simplify, and flatten the organization’s structure.
- Prove, cost-efficient, and improve performance.
Cons
- It will create a negative image and reputation of a company.
- Criticism and backlash from society.
Companies That Employed the Retrenchment Strategy

A list of 10 organizations that have adopted the retrenchment strategy for various reasons, overall enhancement and to run the organizations in their companies efficiently are:
FAQs

What is a retrenchment Strategy?

A retrenchment strategy is a business strategy that includes the desertion of products and services that are no longer needed by the business.

What is a retrenchment turnaround strategy?

A retrenchment strategy is when an organization feels that the decision made earlier is wrong and needs to be undone.

What are the three retrenchment strategies?

The three types of retrenchment strategies are:
- Turnaround strategy
- Divestiture strategy
- Liquidation strategy
What are retrenchment strategy examples?

Some of the examples of a Retrenchment Strategy are:
- Selling Assets
- Abandoning Markets
- Decreasing Production
- Downsizing
- Outsourcing
March 21, 2022
How IKEA Manages to Keep Its Prices Low? | IKEA Low-Cost Strategy

Thinking about renovating your home? Isn’t IKEA the first name that pops up in your head when you think about shopping for furniture?

In recent times, IKEA has become the go-to option for young and old alike to shop for good quality, durable and affordable home décor pieces. ‘Affordable’ is the keyword here.

Have you ever thought, how has IKEA been able to lower the costs of its products The brand has made a niche for itself in selling high-end beds, sofas, dining sets and wardrobes at half the price of its competitors, but how does it manage the same?. Well, here’s your answer.

There are quite a few methods that IKEA follows to keep its prices low while maintaining the quality of its products. Let’s take a look at these methods.

A Reverse Design Process
IKEA’s Flat Packaging Innovation
Bulk Production
Unique Construction Technique
IKEA’s Self Help Stores
Take it home Policy
A Pioneer In Do it Yourself

A Reverse Design Process

IKEA first decides on the price range for a particular product before starting to design the same. Where almost all competitor brands go by the book and follow the conventional process of choosing a design theme, making a storyboard, procuring the materials, putting together the design and then pricing the item according to the cost incurred, IKEA does the exact opposite.

IKEA’s Flat Packaging Innovation

IKEA’s founder, Ingvar Kamprad, introduced a new selling system in the year 1956, which he termed ‘flat-packaging‘. This flat-packing selling technique has now become IKEA’s identity. So, what exactly is flat-packaging? It is a selling system where IKEA sells parts of furniture instead of selling the whole product together.

This allows the products to be packed in flat pieces, facilitating easier transport to stores. It also gives customers the option of choosing customized pieces for their use according to their convenience. Thus, IKEA manages to maintain the low price of its products.

IKEA Flat Packaging

Bulk Production

IKEA produces all their furniture in bulk. This is something that they have agreed to time and again. Be it dining tables, chairs, sofas, wardrobes, beds, showcase or anything else, they produce a good number of all designs. Therefore, they are offered discounts on the bulk purchase of raw material as well as making costs. This is how the bulk production method allows IKEA to maintain a low price strategy.

Unique Construction Technique

If you ever have the time to go through IKEA’s website, you will come to a part that describes their construction methods. They are always innovating new techniques and methods to maintain their low selling price while making sure that their customers have no complaints about the quality of the products.

On the website, it is explained how IKEA uses the technique of constructing their furniture by layering sheets of wood over a honeycomb base structure. Since the honeycomb core requires less wood, it costs less money for production. Thus, IKEA is able to maintain a low cost of products without compromising on quality.

IKEA’s Self Help Stores

IKEA believes in promoting independent shopping. What is independent shopping? It is nothing but allowing customers to shop on their own. Thus, IKEA does not hire a lot of store staff. This helps them to cut costs towards wages and provide customers with lesser priced products.

IKEA Store

In order to allow customers to shop independently, they also print all the product details, cautions, installation processes, etc. on the price tags. Hence, customers can easily read the guidelines on the price tag and choose the furniture they want to buy without any external help.

Take it home Policy

IKEA has a policy where the customers can carry their buys home by themselves on the same day. Although, it is a tad bit inconvenient this policy does come with its own set of contributions towards the low price strategy.

IKEA Take it Home Today Policy

Since customers can carry their own products, they do not need to pay the delivery charges to IKEA or pay higher product prices that may be used to facilitate free delivery. This reduces a lot of overhead costs on the making charges.

A Pioneer In Do it Yourself

If you have ever shopped at IKEA, you know pretty well that you must be adept at assembling and installing the furniture yourself. The company promotes a DIY environment, where it allows customers to install their own furniture. The DIY model of IKEA stands for Do it yourself.

IKEA Do It Yourself

They provide guidebooks and assembly charts to support customers in installing their own furniture. Thus, the company does not need to pay any extra charges to internal or external teams for installation, thereby, maintaining their low price.

In the recent past IKEA has understood that the DIY method can become a hassle for some customers, so, they acquired TaskRabbit, an external furniture installation support company. Therefore, customers have the option of hiring executives at TaskRabbit for assembling their furniture at lower costs.

IKEA TaskRabbit

Conclusion

With so many unique features and methods, IKEA has become a front-running strategist in keeping its product pricing low and maintaining its position in the market. The innovation applied in every aspect of the business makes sure that IKEA keeps giving a tough challenge to their competitors in the market, holding the top position when it comes to being one of the best furniture-selling businesses in the world. Now you know where to go the next time you want to furnish your home.

FAQ

Why is IKEA so cheap?

IKEA employs flat packaging, DIY model, and self-help stores which help the brand to keep its prices low and competitive while not compromising on the quality.

What does the DIY model of IKEA stand for?

The DIY model of IKEA stands for Do It Yourself, where it ships the product in flat packaging and the customer has to assemble the furniture by themselves which is one of the major reasons how it manages to keep costs low for consumers.

Is IKEA cheap in India?

IKEA to boost affordability in India has priced Out of the 7,500 products that it sells about 1,000 are priced less than Rs 200 and 500 cost under Rs 100.

Does IKEA sell online in India?

Yes, IKEA does sell online in India.

What does the word IKEA stand for?

IKEA stands for Ingvar Kamprad Elmtaryd Agunnaryd.

March 10, 2022
SaaS Discounting Strategy that Works
Software as a Service (SaaS) is the present and the future of the tech industry. According to Transparency Market Research (TMP), the SaaS market will reach $164.29 billion by 2022. The IDC says that SaaS delivery is growing five times faster than the traditional software market, with cloud software accounting for $1 of every $4.59 spent on software.

Discounting SaaS products can greatly impact your revenue and consumer perception. Survey reveals that discounts have a substantial influence on customer acquisition, brand loyalty and brand perception among consumers. But here’s the thing: Discounts work differently from the seller’s perspective. And if businesses aren’t careful with discounts—if they don’t strategize correctly—the whole thing can backfire in a big way.

Long-Term Effects of Discounting

Quality and price coexist. In the consumer’s mind, the higher the quality, the more the product costs. So, when buyers notice your discounted product, they are confused. And their first rational is: something is wrong. Frequent discounting serves to lower the value of the brand because of an almost subconscious reaction by the consumer who believes that quality also has been lowered.

Consequently, your pricing strategy will train customers to buy only when you offer discounts. That’s not helpful for your bottom line. Your team won’t be attracting ideal customers who want your products. Instead, price-sensitive buyers who don’t appreciate your product’s value could become the norm. Data also revealed that SaaS discounting lowers LTV by over 30%.

Also read:
Here are 7 key lessons that companies can use to implement pricing and discount strategies that work. So, without further ado, let’s get started.

Tips to Implement Correct Discount Strategies

Package Level Discounting

Package level discounting is discounting without actually discounting. In fact, this method encourages customers to pay more than they intended to in the first place.
For example, a customer signing up has the option of taking the $10 per month standard package plan, which will fulfill their needs. However, by signing up today, they can get the premium package with all of its extra features for $20 per month instead of the regular price of $30 per month. And they can have it at this price until they cancel or downgrade, after which they’d have to pay full price.

Or maybe they could enjoy the reduced price for the premium plan for the first 12 months — giving them a lengthy period to reap (and hopefully become attached to) the benefits and extra features. It’s a clever way to use discounts and a great method for sales reps to deploy with new customers.

Understand the Timing of Cash flows

Companies at any stage should consider offering discounts to their customers—but not without knowing their own profit margins. Discounts can kill a company’s cash flow if they are offered in silos, without taking into account sales commissions and data from the finance team. But how do you determine the ideal discount percentage? It’s a tricky question but thankfully one you can do a little math to answer.

In the graph below, there are three discount models:
- 25% off monthly payments
- 25% off upfront annual payment
- First three months free
Both the 25% off monthly and three months free options result in the company facing a cash challenge if the commission is paid within the first 3–6 months, with the 25% off monthly option putting the company at greatest risk. As you can see, the best approach for the business is to offer 25% off up front.

Principle of Reciprocity

If you give the customer a discount, the customer should you give you some other commitment in return. That commitment should be something other than closing the deal. One commitment to consider is increasing the length of the contract. This is a win for both parties. The customer gets an attractive price on your offering. Your company locks in a few years of revenue, eliminating any chance for near-term churn.

Another commitment to consider is changing the payment terms. Pair a discount with paying the entire annual contract right now. Or tie discounts to quarterly payments. Once again, this enables you to lock in more revenue early. Even better, you get money in hand right away.

Relevant read:
To be really effective, discounts require scarcity

Whether that scarcity is the amount of time the discount is available, the number of discount subscriptions available, etc. it needs to be there. If you don’t put some bookends on the offer, it looks like you’re just discounting your product for no reason (or, several reasons like your product sucks, you don’t value it, you’re desperate, you don’t know how to market your product, etc.).

Scarcity also gets people to take action; no scarcity, no sense of urgency to take the offer. It means you’ll have to actually figure out how to attract better customers, raise the value perception of your offering or, ideally both. If you really do have cash flow issues, then figure out how much you need and offer only that many annual subscriptions, then stop offering them.

Don’t broadcast discounts to the world

A lot of people are willing, and happy, to pay full price. A large banner across a website advertising discounts risks lost income from those people. The idea of a discount should be to make it easier to close a sale, but only as a last resort. Sales reps need to identify customers that require a discount to sign-up and offer them sparingly. Instant demos and online sales meetings are a great way to get to know prospects and understand their pain points and motivations in order to know when (and when not) to offer a discounted rate.

Ultimately, products should be priced to reflect true value and command sales without any deviation in price. However, when the moment is right and when prospects need a little nudge in the right direction, discounts used at the right time can be used effectively.

Percentages Are Hard for People to Understand

Let’s say you’re out getting your favorite coffee. There’s a special promotion, and you have a choice: You can either get 33% more coffee for the same price, or take 33% off the price. What would you do? A team of researchers at the University of Minnesota’s Carlson School of Management asked the same question to their students. The vast majority of them viewed both options as equal, even though the discount by far is the better proposition.

In other words, customers prefer getting something extra to getting something cheap. Retail businesses often see bonus deals valued more than discounts of the same value. For SaaS businesses, this is a great tactic to incorporate in sales proposals—offer the first or second month free instead of using percentages.

Also read:
Demographic-specific discounting

Enterprise and student discounting are the most commonly used demographic-specific discounting methods in SaaS and can be used without damaging the perceived value of a product.
Given the factors involved, such as volume and package requirements, enterprise discounts should be issued on a case-by-case basis without prices being plastered across a website. Non-disclosure agreements (NDAs) can also be put in place to ensure deals remain confidential.

Conclusion

Discounting your products is a major business decision. It can attract the wrong customer and even cheapen the perception of your brand. However, in certain circumstances, offering discounts to enterprise customers can produce greater long-term benefits. So, be strategic with your SaaS pricing and discounting strategy and let us know your views in the comment section below.
February 23, 2020