Working with investors and senior managers in the animal feed industry over the past decade, I discovered a strange thing: the majority of buyers of premix and feed additives are not particularly price sensitive. It took years to work this out.
Perhaps one of the main reasons it took so long is that just about everyone I ever spoke to in the industry (including sales staff and customers) across over 20 countries would always insist the opposite, and the evidence seemed to prove it. As soon as prices were pushed a few percentage points above the market rate, sales would begin to drop, and so suppliers would be forced to cut prices again to preserve volumes. Now I completely agree that an important part of the customer base truly is price-sensitive (the proportion tends to vary from one country to the next), but it seemed to leave a point so obvious that it is often overlooked: The vast majority of customers do not switch, even when prices are higher than equivalent products. And so it is hard to avoid the conclusion that an awful lot of them are simply willing to tolerate higher prices.
This was demonstrated starkly during a strategic review of a Latin American premix and feed additive supplier. The business had gone through a period of turbulence and eccentric management, which had led to products being priced at around 40% higher than competitor products for a sustained period of time. Unsurprisingly, sales collapsed over a period of several months, and they lost one quarter of their customers. But the real puzzle is why such a large majority continued to purchase. Were they truly immune to high prices? If so, it might imply that animal nutrition businesses are being run to cater for the most sensitive minority while failing to fully monetise the less price-sensitive majority.
Following detailed research, the answer turns out to be quite complex and nuanced.
- There are some groups of customers for whom switching is risky, making them willing to tolerate higher prices up to a point.
- For others, pricing is so opaque and products so difficult to compare they might not even be aware that they are paying above the odds.
- And there is a third, particularly intriguing group that seems to believe that they continue to receive value-for-money, even at what would appear to be wildly uncompetitive prices.
In these cases, it is almost always because they value aspects of the offering that were never explicitly articulated or accurately measured. This can include product performance which might be higher than even the supplier expected or the value placed in relationships with technical sales staff.
By setting prices centrally and pushing monthly increases and decreases in an almost uniform way, it appears that many feed and premix suppliers fail to recognise the existence of these important and potentially very large customer segments with distinct needs and perceptions of value. Doing so offers the promise of higher average price, dramatic gross margin improvement and lower customer churn. This does not mean ignoring all commercial logic and forcing businesses to choose between the most sensitive 20% and the remainder, but it does imply that recognising their existence is a critical first step towards developing a differentiated set of propositions that meet the needs of all customers.