Categories
Competition Entrepreneurs Ethics Leadership Management Marketing Positioning Pricing Public Relations Small Business Strategy The Slight Edge

Would you buy $34MM for $5MM?

One of the industry-specific discussion groups that I belong to was recently discussing a $5 million fee (for three years of effort) paid in exchange for bringing $34 million worth of value to an organization.

Just so there’s no mistaking the result: we’re talking about the receipt of $34 million dollars in funds.

Oddly enough, it was felt by some that this fee was out of line, and several considered this fee patently unethical simply because of the amount, regardless of the circumstances.

If you own a business and have employees, you probably pay them by the hour. If so, I suspect you are aware that “paid by the hour” thinking is not the road to success, though it can get the bills paid.

Most people don’t start a career with a big audacious goal of “I want to get the bills paid”, or “I want to make $17 an hour”.

That kind of thinking will get you nowhere financially in the long term.

Generally speaking:

  • Successful people get paid substantially more than whatever is “normal” for their expertise, training, investment in themselves, experience, ability to deliver and value delivered.

That’s a major reason why we talk about stepping way beyond the value delivered by anyone else in your business by thinking harder and being creative and innovating in how you think about what you do for other people or their businesses.

You want people to believe – in fact, KNOW in their hearts – that you can deliver that $34 million (because you have in the past, repeatedly) and as a result, they’ll gladly line up to pay the $5 million to get it, and they’ll feel like they got a deal in the process because they were confident of your ability to deliver value that (possibly) no one else can.

Likewise, if you know you can deliver that sort of value more often than not, you’ll fully guarantee the fee and charge nothing if you don’t deliver.

That’s positioning you – and your clients – can take to the bank.

If I told you I could deliver $34 million in sales to your business, what’s that worth to you?

$50 or $75 or $125 an hour is the wrong answer.

Categories
Competition Corporate America Customer service Management Marketing Positioning Pricing Small Business Southwest Strategy systems

Southwest: Something simple in the air

Yes, it’s a play on the now-untenable “Something special in the air” that American Airlines used to use – back when they really were special.

Southwest Airlines announced changes in their business model that are easy for any air traveler to understand.

Click the image below to see the entire graphic from Southwest.com:

Now I had to admit that flying Southwest used to make me nuts because there was so much difference between the cattle car experience and what everyone else did.

Since those days year ago, they’ve made boarding changes to make things far more normal, and given that everyone else has cut service to the bone, now the other guys are the cattle cars.

Rather than follow the industry – Southwest has always tended to take a page from Earl Nightingale, that is, watch what the mainstream airlines do, and do just the opposite.

That’s just where this is coming from.

Instead of making their business complicated, they’ve made it simpler.

That’s not exactly news. They’ve done simple all along – such as using the same model of airliner across the entire company.

They do simple for a reason: They understand that eliminating all this complexity makes it easier for their staff and their passengers, but that isn’t the real “secret” to all this simplicity.

The key to this latest simplification move isn’t just making the other airlines look like idiots (as if they need help), but that it allows Southwest to chip one more little piece away from their turnaround process (land, deplane/unload, clean, board/load, takeoff) without slowing things down to check for paid tags, or capture a credit card or make change, and so on.

Plus it’s a heckuva lot less annoying to the passenger.

Result: More on time departures, faster turnaround, more flights, less planes, happier customers who met all their connections, and far lower expenses for feeding/housing travelers stranded by their inability to manage their on-time arrival.

Southwest is the Apple Computer of the airline business – except perhaps in price.

Simple is better.

What can you do to simplify YOUR business?

Categories
Competition Corporate America Creativity Management Pricing Small Business Strategy

Update: Transparent Economics

Here’s some suggested reading in a follow up to my post “Transparent Economics“:

A NY Times article about steps airlines are taking to make planes more efficient. Smart stuff. Kudos to them for looking at everything, but not just cutting for the sake of cutting.

Quoting from the article:

â??Our fleet is over 500 airplanes,â? said Beth Harbin, a Southwest spokeswoman. â??If you can make a difference on one airplane on one flight, and multiply that by 500, in this day and age that is significant.”

These are the same kinds of steps you should be taking as well. Looking at everything strategically, not just going after things with a machete.

Zemanta Pixie
Categories
Competition Corporate America Ethics Pricing Small Business

Transparent economics. Are yours?

Last Friday, we talked about the surging rate of fuel surcharges for ocean-going containerized freight and how it will soon affect the price of imported goods.

As you might expect, fuel surcharges aren’t just going up for seagoing freight customers.

It’s hitting air travel customers as well.

This Times UK article talks about the recent, substantial increase in per-ticket airline fuel surcharges. On the flight they checked, the fuel surcharge was about 218 Pounds Sterling for a London to San Francisco flight. That’s $424 using the exchange rate on June 5, 2008.

$424 per seat? Man, I must have packed on a few pounds lately. Let’s look at a little rough math and see what impact this fuel surcharge has on the airlines.

Assuming that a Boeing 767ER (Extended Range, often used for long international flights) flies this route and uses every drop of fuel that a 767ER can carry, the price for that flight’s fuel is $91603.60. That’s 23980 gallons at $3.82 per gallon for Jet A as of May 30 2008, per IATA.

A 767ER’s range is 12,200 kilometers or 7580 miles, according to Boeing. Assuming that means a full tank, then we get 3.16 gallons per mile (rather efficient, aren’t they?) or a current fuel-only cost of $12.08 per mile to fly 7580 miles. Given that we have a couple of hundred people on the plane, that’s not bad.

The trip from London to San Francisco is 5357 air miles, according to InfoPlease.com.

According to Boeing, a typically configured 767ER holds 224 people in a 2 class configuration, IE: coach and first class. 224 people paying a fuel surcharge of $424 add $94976 to the gross receipts for that flight if it is full (as most planes are these days).

Unfortunately, even that $95k of fuel surcharge isn’t covering the 90% increase in Jet A fuel prices in the last year. Not even close. If that flight is full, you aren’t paying for the difference in fuel prices since 2000 (what the IATA calls their baseline or “100 points” price).

You’re paying the entire fuel bill for the flight.

Presumably there has always been a fuel cost component of the airline ticket. Apparently that is no longer the case.

Only thing is, you only flew about 5400 miles. Remember, a full tank flies the 767ER about 7600 miles. A little more rough math means that we left 883 gallons of $3.82 Jet A in the plane upon arrival at the gate in San Francisco (about $3000).

But I’m a generous guy. We’ll call it even for the $3000, assuming that extra 883 gallons over the average gallons per mile fuel efficiency is burned during taxi and takeoff. And we need to keep in mind the safety margin to have the fuel to steer around storms and/or circle incessantly because of delays caused by weather and Presidential candidates using the same airport.

Finally, you might want to lay off the donuts and pack lighter clothes. The airlines are also allegedly considering a weight-based fee.

If there are any airline pilots reading this that have better numbers on fuel, I’m all ears. I’m sure YOU aren’t seeing any of that extra money.

Are the economics of your business this transparent? What would your clients say if they could do this kind of math on your fees? Are you delivering so much value that they don’t even think about it?

The airlines aren’t. You had better be.

Related articles:

NY Times article about steps airlines are taking to make planes more efficient. Smart stuff. Kudos to them for looking at everything, but not just cutting for the sake of cutting.

Quoting from the article:

â??Our fleet is over 500 airplanes,â? said Beth Harbin, a Southwest spokeswoman. â??If you can make a difference on one airplane on one flight, and multiply that by 500, in this day and age that is significant.â?

Categories
China Corporate America ECommerce Marketing Pricing Small Business Strategy Wal-Mart

Fuel Surcharges: Another reason to buy local

My CFO friend does that sort of financial wizardry for a large international importer.

Last weekend, she told me she had been informed by her shipping vendors that the fuel surcharge on seagoing containers was going up at least 30%, to about $1200 for a large container.

That got me to thinking about a number of issues, so I started digging around.

The Westbound Transpacific Stabilization Agreement (WTSA) covers oceangoing freight in the Pacific in and out of the Oakland area. They recently announced a $600 per container increase, which is a brief resting place before Oct 1’s full “floating” charges take effect.

Up in Canada, the news is the same. The Canada Transpacific Stabilization Agreement (doesn’t that sound benign?) recently set their fuel surcharge at $1,260 for a 45 foot container.

There is similar news elsewhere in the industry.

A 45 foot container holds 3000 cubic feet of “stuff” (that’s 86 cubic meters for my overseas readers).

Let’s look at the impact of these fees on imported goods that your store might be selling or consuming.

Let’s say you have a 40″ big screen HDTV. Figure the box to be 2 feet thick, 4 feet tall and 5 feet long (all wild guesses). That’s 40 cubic feet, or about 75 TVs per container.

It might be more or less, but my box size guesstimate will probably be made up for by the space used by pallets and the like. The math isn’t the point.

If 75 televisions have to split that $1,260 fee, then each TV will go up about $20. Or should.

What will the increase be when it gets to you, the retailer? Do the math before you sign that contract.

If you sell imported cars, figure 4 cars per 40 foot container. That adds $315 per car to your cost, if you’re lucky.

It isn’t just ocean-going freight.

You need to be looking at this elsewhere. A simple example: Does a $1 Fedex or UPS fuel surcharge make sense on a 10 ounce overnight envelope? Call your Fedex/UPS sales rep and see what kind of flexibility they offer, if you do the kind of volume that would make this substantial to you.

My CFO friend tells me to expect some things to rise 30%, even though the fee increases don’t appear to reflect that size of increase in the cost of your goods. October’s increase will push you again.

It’s easy to watch this sort of news on CNN or MSNBC and think it doesn’t impact you – but it does. I suggest paying closer attention to it, particularly if you do a lot of international shipping. Maybe that’s another reason why Ian doesn’t buy Chinese.

On Monday, we’ll hit a lot closer to home on these fuel surcharges. And I might even make you mad.

In the meantime, take a long hard look at the kind of value you’re delivering now. Consider whether those increasing international shipping charges might just be better spent elsewhere – like on locally produced goods.

Categories
Competition Corporate America Customer service Leadership Management Marketing Positioning Pricing Small Business

American Airlines tests the law of unintended consequences

American Airlines has had only a few advertising slogans over the last several decades.

  • We know why you fly. We’re American Airlines. (Uh, because it takes too long to drive?)
  • Something special in the air. (It was the dog, really!)
  • Doing What We Do Best (and that is?…)

That isn’t where the PR is coming from for AA these days.

Naturally, it’s coming from that “$15 to check a piece of luggage” thing.

To me, the $15 isn’t that big of a deal, *but* the likely possibility is that the law of unintended consequences will strike American and other airlines who follow suit.

Airline travel is already working hard to become an experience right up there with going to the dentist, getting a visit from your brother in law the insurance salesman (noting that my pretty cool brother in law sells insurance<g>), and having someone at your door asking if you need your carpet cleaned.

Making air travel even more annoying is not the answer.

What American might see when the law of unintended consequences comes to visit.

At check in:

  • Lines will become longer and slower because people behind the counter will have to take credit cards, make change and so on. Just wait till the person in front of you has a “Take the card” marker on their credit card account and the poor airline check-in clerk is forced to repo their card.
  • MORE education will have to take place during check-in because people will not have funds (trust me) to check bags that are too big to carry on. And of course, they will argue with someone that the bag is OK and has been carried on many times before. All of which will take more time, making the line longer and slower.

At security:

  • $15 per checked bag will mean more people will carry on even more crap. Meaning TSA will have more stuff to xray and the line at security will be even slower because people will forget that the 3 ounce rule applies to carryons and that 24 ounce native coconut shampoo bottle you bought in Tahiti will have to be poured out.

During boarding:

  • Bags that are too big will have to be checked, delaying departure, disrupting the boarding process and oh by the way, will the baggage handlers in the jetway have credit card scanners on them?
  • Everyone and their mom will be carrying on more stuff. It’s bad enough as it is, with people bringing everything they own to carry on – it will get worse when every checked bag is now $15.

During deplaning:

  • Slower, for the same reasons that boarding will be slower.

During an emergency:

  • More crap will be available to trip over as people have more stuff in their lap and stuffed under the seat. One more cabin fire is all it will take for a Congressional hearing on carry ons.

All of this is really not the point of the discussion. It’s simply conjecture.

The real point of this discussion is to motivate you not to let yourself get trapped into doing stupid things that will make it harder and less enjoyable to do business with you, all because you were dumb enough to allow your business to become a price-sensitive commodity.

When the only purchase decision point you give your clientèle is price, you leave yourself with little in the way of strategy.

Given today’s levels of airline service – what other decision points are there? Either that airline goes to your city, or it doesn’t. Everything else is schedule and price. Commodities.

Here’s what they won’t do – and their behavior over time proves it.

  • No domestic U.S. airline will raise the price of their tickets so that they can actually provide the level of service that most travelers appreciate.
  • No domestic U.S. airline will provide the level of service that makes them the only choice when it’s time to fly.
  • No domestic U.S. airline will focus on the most profitable travelers, pamper them so they’ll never leave, price their tickets accordingly and let everyone else fight over the price shoppers who will change airlines for $5 round trip savings.

Don’t fall into the cheap trap. It’s easy to do when the press says that the economy has slowed, even though you couldn’t tell based on how packed the Costco parking lot is.

Be better, not cheaper.

Update: Today, this article about US Air making more service changes in the wrong direction.

Related posts elsewhere on the net:

Church of the Customer’s take on the American Airlines situation.

Categories
Marketing Positioning Pricing Retail Small Business

Higher prices bring pleasure to buyers, Cal Tech study shows

Researchers at the California Institute of Technology announced results of a wine pricing study earlier this year. The study was done to analyze the behavior of pleasure centers in the brain.

Still Life 1   

photo credit: helmet13

 
When taste testers tasted a wine that was priced at $45, they reported that it tasted better than the same wine when the price on the bottle was $5 (the actual retail price of the wine). The same thing occurred when a wine priced at $90 was re-tasted with a price tag of $10 – it came back with poorer reviews.

The study showed – through MRI brain images – that the brain reacted differently and at higher levels to the higher pricing, or more likely, the higher perceived value. The same thing occurred when more expensive vintages were tested.

Interestingly, ABC News filed the story under health, rather than business.

Who are you really making happy when you compete solely on price?

Additional viewing on this topic: Penn and Teller’s show about bottled water, which is all about managing perception and value.

Warning to viewers: this video uses the word “BS” frequently (it is the title of the show, after all), but there are some very good marketing lessons to be learned in this 13 minute video.

More on pricing:

Precise Pricing Pays Off
Can Pricing Strategy Affect Your Brand?

Categories
Competition Management Pricing Retail Small Business

Is your business targeting this recession-proof market?

SLR

photo credit: Al- Fassam [ Online! 😀 ]

People with money.

Dips and peaks in the nation’s economy are always less of an issue to “wealthy” people, no matter how you define what “wealthy” means.

Maybe wealthy means they can buy a Mercedes like the one shown here. Maybe it means they can buy a new car of any brand. Maybe it means they can buy ANY car. Or maybe it means they can afford a bus pass. It really depends on your market.

Before you dismiss the wealthy / affluent market because you prefer to work with “regular people” (whatever that is), consider that higher profit, premium products just might keep you in business so that you can continue to serve those so-called regular people.

Cars, financial products, homes, services, restaurants, retailers, you name it. Every business has a market segment that consists of higher-end clientele. Even funerals.

Dollar stores have an affluent marketplace. You might call it Target or Costco.

In the poll I did a few weeks ago (there’s still time to add your feedback), the number two response was “pricing pressure”. Offering premium services and products is a great way to extinguish price pressure.

Adding value to everything you do is obviously another way:)

Related posts outside of this blog: