Please help. Problem with large, long-time customer over prices

Hello, I run a medium sized yard in North Florida. I have a serious problem with a good customer (large, charitable organization) that we have been doing business with for years. This customer brings me an average of about 1/2 million pounds of shred a year. I currently pay .0725/lb. for his shred and after processing it and shipping it to a shredder, I am currently recieving .11/lb. As it is, these margins are barely working for me with my current overhead (baler, insurance, fuel, labor, scales, endless expenses, etc).

I recently received a phone call from the man in charge at this company, who complained about the price dropping "drastically" over the last few months from .09/lb to .0725/lb. I explained that I always pay him as much as I possibly can, and that the shred is a commodity that moves up and down in price with the market. He told me that my main competition in town is offering him .09/lb. for his material and he is demanding that I match that price or he will take his business elsewhere.

I can't really afford to lose this customer, but I also cannot afford to pay him this much money for his material. Also, if I match that price, besides losing money, I think he will think that I have been "getting him" all these years. We've never had problems in the past over pricing. I'm kind of stuck here. Should I match it and hope to widen my margins if the market goes back up, or drop one of my best customers at a time that I really can't afford to be losing customers? Let me know what you think, and what you would do in this situation. Have you been in this position before? What did you do? How did it work out for you? Let me know!

"good customers" don't gripe over a few cents. I would bet this person is bluffing. If he wants 9 cents per pound for steel, why is he spending time trying to get you to match this other offer? He could just take it to the other place and get the price he wants.

I would tie his price directly to the index you are using. I personally use Iron Age, but many are out there. Allow him to view the guide whenever he wants. This way he knows fluctuations are because of the commodity, not your business decisions. You can share with him what the person off the street gets and he should see he is getting a deal.

If the other yard is cutting the margin this thin, they are just trying to get the customer. They will get their money back down the road. If you inform the owner of this and offer pricing based on the index, you are being more than fair. He can either take your deal or he will be price shopping both of the yards for years to come. This is the method I use on big jobs when negotiating with yards. I have only done this on two jobs, but it worked. Just a thought.

That .0375 is gross profit, not net profit. The yearly difference based on their average yearly weight is $8750. The tricky part here is that the other yard doesn't truly want their material at that price. What they have been known to do in the past is manually weigh customers with weights that vary "slightly" from what the scale might read. Maybe it's human error, maybe not. I don't know. But I see it as a win/win for the competitor as we will be forced to match the price and lose any value we had in one of our best customers or they will get them and probably pay about what we are paying anyways. Even though I know this to be true from past experiences, I don't feel right bad mouthing them to the customer. I could be wrong on the competition's intentions and maybe they are getting a much better price when they ship out their shred, but I'm pretty confident my price from the shredders is top notch on what I'm selling.

I really appreciate all of the fast responses. You guys are awesome.

Also, the customer told me that he was giving me the opportunity to match the other guys prices because we have been doing business together for so long.

That's what I'm going to have to do. I can survive without them, but it sure hurts to see them go. My bigger fear is this problem repeating itself with multiple big customers. I can't take that kind of hit on too many bread and butter customers. I do find new customers often, but not of that caliber. The economy is rough and the competition is rougher, lol. Thanks for all of the help and responses. This seems to be a great community.

Originally Posted by FLORIDASALVAGE

I can't really afford to lose this customer, but I also cannot afford to pay him this much money for his material.

Looks like a tuff spot. While I agree with the majority, you can only pay what you can afford to pay and turn a profit (you are not a charity), I think it depends on your situation.

When one door closes, certainly another opens. Maybe this motivates you to find new customers and you end up being in a better situation.

But me personally, I would pay the .09#.

We all know (and its not a surprise) prices are down. Of course, they will rebound, but we never know when and to what extent. I certainly would consider explaining the index you are using but caving on your price. I get that you may break even, but with the tight times its all about market share.

A perfect example is oil prices. OPEC could cut production and raise prices, but they would lose market share. Instead, they are willing to bite the bullet and lose money temporally to retain their market share, so when prices are back up they will make even more.

You may temporally break even or even lose a few hundred dollars because when prices go back up this spring you will make thousands off this customer.

Many different business operate in the red during certain times of the year. I personally would give it a few months (3-4) before I actually went back and said, "Can't do that price". Because of the situation, when prices did rise, I certainly would not pay more than the .09, I would want to recoup as much as I could. Maybe its time to just work out a flat price.....

Its all about keeping your share of the market...

Just an opinion for whatever it's worth .....

When you're in business you need to be looking forward and be able to accurately predict what the landscape is going to look like in a year or two. If you call it correctly and make the right moves today you survive. If you make an error in judgement it can put you under.

Most everything that i'm seeing is telling me that we have entered a deflationary economic phase that may last awhile. It means that commodity prices will drop and continue to drop for awhile. This could go on for years till it hits bottom and a new balance is achieved.

If your competitor can't see that he's going to make mistakes that could cost him his business. He might be able to lure your customer over but he won't be able to keep him without sustaining heavy losses.

What i would do is part company with your customer on the very best of terms.

In a few months or a year he may come back with his tail between his legs.

If not .... you just have to let it go and move on. What once was a profitable arrangement turned sour. That happens sometimes despite your best efforts.

I agree with the majority. You have to make money. I'd have a heart to heart with him, and let the pieces fall as they may.

Now, if you suspect that the other yard is short-scaling, I'd consider sending an unbranded truck and trailer across the yard, that you've weighed accurately on a certified scale.. If what you get doesn't sound right, I'd call the Department of Agriculture.

You can't be held hostage by a customer. If you raise prices, I think you'd be doing just that.

So the saga of the large NoN Profit organizations continues, what a bunch of nonsense the top management makes huge salary and its a non Profit, getting back to your post, customers come and go, you want to keep the good ones. And let the bad ones fall by the wayside, it seems to me your Margins are about as low as you can go, without getting into the numbers it costs a yard around 40.00 a ton to process shred there really is not much left, they are happy with your company's structure and your payment procedures, they may not with the competitions, you can't run a profitable yard on the hope that the market will turn around and you will make it up on the back end, I would hold my ground and if they leave well I don't think they will, you can not work for nothing and that's what you would be doing. Good luck Remember this one door closes and another one opens.

Saw - did not want to post an entire quote and do not know how to select specific statements to quote. Always interested in the saw mill business and you know why. Great insight and very educational. Wish others could see the value of your words and view.

First Patriot I liked your answer at the top >>

Originally Posted by Patriot76

I would tie his price directly to the index you are using. I personally use Iron Age

Seems to be a win win for everyone
Buyer knows they will always be getting the best price

Originally Posted by Patriot76

Saw - did not want to post an entire quote and do not know how to select specific statements to quote. .

Not to hijack the thread
But this is something I know how to do
I reply with quote
remove text I don't want
Be sure to leave the QUOTE= in the front >>> and /QUOTE at the end