The balance of trade

Neil Pattemore looks at the effect of Brexit on currency

Published:  16 January, 2017

Following the Brexit referendum, we are now seeing some of the (inevitable) affects, one of which is a reduction in the value of Sterling against other important currencies. This may be great news for exporters and will not only give the UK economy a lift, but is helping the Stock Exchange reach new highs, based on the larger companies now being able to beneficially use their foreign earnings when re-valuing back into Sterling. So good news all round, or is it? What will be the impact of the devalued pound if you are one of the UK's independent workshops?

Firstly, as Harold Wilson famously said 50 years ago, it's all about 'the Pound in your pocket', but if the value of the Pound has dropped, imported goods will get more expensive and probably one of the first and most noticeable rises will be to the price of fuel. This will impact Britain's motorists who will have less money to spend on driving, will do less miles and will have less to spend on vehicle service and repair as other day-to-day goods are affected that rely on road transport or are imported - such as food and energy.

Additionally, the price of new vehicles will start to rise, reducing demand that will help the aftermarket retain vehicles for longer, but will create a 'downturn blip' in the longer term.

Considering more

Keeping their cars for longer after the 2007 recession led many vehicle owners to spend a lot more maintaining their cars outside of the main dealer networks, with the subsequent beneficial impact to independent garages. There is no reason to suspect that this will not happen again, but if other daily costs also rise and things begin to get really tough, what are the critical points to consider when looking at your service and repair prices in a downturn?

Firstly, always remember that it is not just your price that is the issue - you must also consider volume and costs. It is great to have a full workshop, but not if this is at the cost of reduced margin that lower prices will bring - it is too easy to be a busy fool. It is important to understand that if you are making a reduction in the price, this comes directly out your margin and the number of new customers needed to maintain the original profit rises disproportionately. For example, if you make a 30% margin and you reduce your prices by 10%, you will need a 50% increase in customer volumes - it gets much worse if you reduce by an even higher percentage - believe me, you do not want to go there!

So in being prepared for rising pressure on pricing, what should you consider? It is important to understand the difference between the three key elements:

cost

price

value

For sure, your customers will start to look for lower prices, your competitors will start to reduce their prices and the danger is for you to follow and reduce your own prices, leading to a downward spiral of a 'race to the bottom'.

The steps

To start with, take away the customer's focus on just the price and provide added value. This avoids the dangerous 'cost-plus' pricing strategy and focuses on the 'value-added' pricing. For example, pick up or drop off the customer's vehicle, add extra services that the customer would not expect - in short exceed their expectations.

However, also consider that it is better to reduce workshop volumes before you reduce prices. The popular misconception is that by reducing prices you maintain volume, but in reality your competitors will also reduce their prices so your volumes do not increase. Avoid price wars - they are very counter productive.

If volumes cannot be maintained, then focus on where you can reduce workshop costs to help balance the loss of revenues.

less expensive 'no frills' alternative.

increase

Look hard at your customer base and consider where you can increase prices to the top 5%. This will help offset any reduction to other customers which may have been necessary to retain their business.

Shared burden

Remember that your competitors will also be suffering if the going gets tough, so take the opportunity to attract new customers, especially from competitors who are already more expensive - you can be price attractive without reducing your prices. This particularly applies to cars coming out of the main dealer networks as customers keep their newer cars for longer.

It is critical to retain price discipline. The key is not to expect an increase in revenue, but to focus on increasing profit from the same level of turnover. Make sure your pricing strategy is clear and known to all your staff. Ensure that bad debts are strictly controlled and focus on ensuring that the efforts you apply deliver better profit returns.

Finally, leadership is even more important in a downturn. Apply your pricing strategy, but also ensure that your staff have their 'storyboard' in place to market added value services, negotiate any price pressure and optimise customer service expectations.

When times get bad for many, they can separate the 'chaff from the wheat' and allow the better run businesses remain successful.

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