Pricing custom work well is a strategic advantage

How good is your business at pricing custom work?

If you don’t have a way of pricing custom work that consistently accounts for your costs and labor, how do you know if you’re making any profit on these deals? How would it feel to find that you’re losing money on half your custom work?

Do you have a spreadsheet or software program to help? If not, do you have some other formulaic means of pricing work?

If you read the May 12 New York Times “You’re The Boss” piece by the owner of Paul Downs Cabinetmakers, you’ll learn that these guys are fortunate enough to have a formulaic method to determine the price of a custom item.

That they have this formula puts them ahead of most businesses that do custom work. However, the trouble starts when they discuss what’s going on behind the scenes as there are a number of things going on that conspire to cause problems when reality and the pricing formula meet on the shop floor.

The failure points

Downs mentions that the spreadsheet’s material prices haven’t been updated in over 6 years, that material use and overages are not tracked, that tool use and labor methods have changed and that the info in the spreadsheet is sometimes entered wrong and fails to match the reality of the work actually being done.

As you read about all the possible failure points of this spreadsheet and how they’ve allowed it to become outdated and stale compared to their business reality, you can’t help but wonder how they got to that point.

Here’s the thing… this type of situation is pretty common.

Our tendency to think we’re too busy to address these critical, but tiny (at the time) maintenance issues has a way of giving us permission to postpone giving them attention. We think we’ll take care of them someday since some other thing seems more important right now.

It doesn’t seem to work that way, despite the best of intentions.

What usually happens is that the business lets these little things get out of sync an hour at a time, a day at a time, a week at a time and so on until we find that our internal systems look like they were designed to run some other business (or none at all).

At some point, things will have crept so far out of line that you’ll have no choice (like Downs) but to address them. Not only has the job you face become massive, your strategic advantage of having accurate, formula-driven custom pricing will have become the exact opposite.

Why does it matter?

The trouble with getting your business into this situation is that it severely damages your ability to see trends, know if you have enough (or too much) raw material or labor to deliver upon your work commitments.

If you’re already stuck, you have to consider the cost of continuing with a broken pricing model, assuming you have one.

If you aren’t sure you’re turning a profit on custom work – the showpiece work of your business – this merits immediate attention.

This is your best work. It’s the work that generates the reputation that earns your bread and butter work. It’s the work that you use to get your best, most profitable clients.

And yet you aren’t sure exactly how much profit you make on it?

If a close friend was in that situation, you know how you’d react. You’d go out of your way to make the situation clear to them, helping them if possible.

Why not do the same for yourself?

Should this take six months?

No, it shouldn’t. While Downs says his expert worked on this for six months, I suspect what he really means is that it took six months from start to finish – not that his expert worked on it eight hours a day, five days a week for six months.

The important thing to remember is that this doesn’t have to be perfect the first time.

Start with the highest impact item you can wrap your head around. and implement it. Tweak and add pricing components one at a time to improve accuracy.

This allows you to see results and adjust for accuracy and additional information without allowing any single change to be so complex that you have no way to assess its worth, much less its accuracy.

Get to work!

Starting A New Business : Part 4 – Profit is not Salary

Treating profit as salary is a common error for new businesses.

It’s unusual for new owners to start by thinking their business through to the “end game” or to its ideal place.

While some plan with an exit strategy in mind, there’s more to business than “do something, grow fast, get bought by Google”.

What happens if you don’t get bought by Google, WalMart or whoever? You’re stuck with the business you designed. Or worse, the one you didn’t.

Design the ideal

It’s far more desirable and strategic to figure out what your ideal business should look like before you start than it is to randomly arrive in your business’ future and realize that it isn’t at all what you planned to build. Much less that it’s not what you really wanted to do.

Hopefully it’s obvious that it’ll be hard to redesign your business two, five or ten years down the road. While it can be done, it won’t be as easy or inexpensive as designing it upfront.

If you design the ideal business, you have a lot better chance of getting there faster (or at least more efficiently) because your decisions have a built-in filter: “Does this decision move us closer to our ideal or not?”

Yes, almost every business owner has turned away from their ideal temporarily because of a job, contract or customer that was low-hanging fruit: A deal they accepted because the revenue was enticing enough to pull them in the wrong direction and distract them from their ideal – even though they knew better.

You’ll be far less tempted by these things when that built-in filter is there from day one.

Working for, Working on

If you seriously ask yourself “What would my business look like, act like, do, sell, etc when it’s exactly how want it to be?”, you’ll find yourself thinking about important things that go way beyond that widget you just have to sell.

One of the really important questions that should come out of that is “When my business is in its ideal state, how much time do I personally want to work there, either as an employee or owner?” The difference is simple: most employees work for a business, but owners should work mostly on their business.

Few think about that when doing budget projections at startup. What often ends up happening is that you create a job for yourself because your business can’t survive without you.

If you started this business to get away from a job, replace the income from a job that you’ve lost or to earn your freedom – do you really want to design and take on another one?

Job or business?

It’s a job if it’d fall apart, fail to generate revenue and/or tick off customers because you stepped away for an afternoon, day, week or month.

A business shouldn’t need you working every minute of every work day to generate revenue. That’s what brings us back to talking about your business model and why I insisted that profit is not salary.

Profit is what an owner/investor receives. Salary is what an employee receives. Today that might seem like a meaningless difference.

As your business grows, you’ll reach a point where you have to hire someone because you can’t get it all done. That may seem like a fantasy today, but if you do enough things right – it could end up more like a nightmare. Planning now is what makes the difference.

Be an investor

If both profit and salary are built into your business model, you’ll be prepared to hire someone to take on the work you can’t get done or no longer want to do.

While you’ll have to give up your “worker salary” when that happens, the “management” salary should still be there. When you delegate the work to someone else, you don’t want your business to be designed (much less required) to stop paying you – and that includes the day you decide to hire a manager to replace you.

Look at it from a buyer’s perspective. They want to invest in a profit producing business, not a job.

To that end, YOU are the first investor in that business. Design with that in mind.

Starting a New Business: Part 2 – Are you ready?

selliner_see
Creative Commons License photo credit: elbfoto

Last time we talked briefly about things to consider in the early going of the business you just started.

We talked a little about the product/service, but focused mostly on some basics about licenses/permits and getting supplies with a little taste of business model talk.

The reality is that we shouldn’t have talked about most of that stuff, but we had to start with that conversation because it’s the type of thing new business owners expect to hear.

You might be thinking “I’ve already got a product, I’ve already got a business (even if it’s only a few days old) and I need to know what to do to start. NOW. RIGHT NOW. So help, already…”

Problem is, that’s not the best place to start if you want to build something lasting.

Fake left, go right

Sorry for rushing ahead last time, but I wanted to get you into analysis mode just a little bit before we moved ahead (or back) to this step.

We did talk briefly about the business model and I hope that provoked you a little. Ideally, it made you think that you might not have all the info you need to work out the details of your model. Those of you who thought hard about it probably wondered if you didn’t have a lot more work to do.

You do.

Before you order those business cards, buy those supplies, determine your costs and set your prices…you need to research your market.

This means far more than doing a keyword check to see how many Google searches there are for “gold plated harmonica” (if that’s your business), much less finding out if GoldPlatedHarmonica.com is available and at what level the competition is already delivering these items. Those things are just part of the process.

Questions, questions

How much do you really know about the market you’re entering? Assuming the market isn’t brand new, have you researched industry product, service, supply and performance trends? What do they indicate as areas of opportunity? Areas to avoid? What are the emerging product/service trends in this market?

Are you familiar enough with your prospective ideal customer to enter their market? Or will you stand out in the wrong way and alienate your business from them?

Who buys gold plated harmonicas? Where do they live? What kind of stores do they purchase music supplies in? What else do they buy at the same time? How many are sold per year? Where are they purchased – online, in stores or both? How many are purchased annually? Are their peaks and valleys in purchasing habits? Are there peaks and valleys in supply? Are there legislative, import or similar issues that you must deal with at startup or on a one-time basis? Are there any liability concerns for the product and its use?

How many do they buy over their lifetime as a purchaser of gold-plated harmonicas? Is there a progression of better and better purchases? Is there the possibility of referrals by your existing customers to others who favor gold-plated harmonicas? Are there opportunities to render service, deliver purchases or offer training classes?

At what age do people start upgrading to gold-plated harmonicas? At what age do they stop purchasing? How do people decide to be in the market for gold-plated harmonicas? What do they buy in the year or two prior to moving up to a gold-plated one? Where can you buy replacement parts? Is there a repair market or do people replace them? Is there a scrap market? (they are gold-plated, after all)

Who dominates the market today? Why do they dominate the market? What will you do to set yourself apart from them? Is it possible to partner with them?

These questions come into play when writing a marketing plan but many of them also have bearing on your business model / business plan.

Are you asking enough of the right questions? Are you doing the research necessary to assure that your business plan / model make sense given the market of available buyers?

These questions are not intended to scare you out of a market. Quite the contrary, they are intended to make your entry strong enough to keep you there.

Lucy and the Aluminum Football

World's Favorite Sport
Creative Commons License photo credit: vramak

Lately, there has been a lot of talk in the news and around the Flathead Valley about the Bonneville Power Administration (BPA) offering a four year power supply deal to Columbia Falls Aluminum Company (CFAC).

The deal is subject to environmental review and other what-ifs, so it isn’t a done deal quite yet.

Given the economic struggles facing Columbia Falls, any news of new jobs is good news. Really good news, in fact.

The topic of CFAC concerns me – it always has. Folks who have lived in Columbia Falls far longer than I know the history of CFAC first hand. To summarize for everyone else: It opens. It lays off / closes. It changes hands. It opens. It lays off / closes. And so on.

Again, Lucy pulls it away
CFAC has at times been our employment Lucy (from the “Peanuts” comic strip). Just as Charlie Brown approaches to kick the football, Lucy pulls it away and Charlie goes flying through the air, screaming and lands flat on his back. Imagine having that done to your career and family -  several times.

No matter how good things are when CFAC is rocking, a shutdown ripples through the financial well-being of our fair town’s families and the businesses that serve them. The impact of the historical ups-and-downs of CFAC on those families is unimaginable.

To their credit, CFAC’s troubles haven’t always been bad news for the valley.

In at least one case, their troubles have generated substantial benefits. Several years back, CFAC paid their people to do what amounted to volunteer work for a number of groups that couldn’t have otherwise afforded the labor. Many organizations benefited big time from the hard work their employees provided back then – and continue to benefit from the work done back then.

Don’t be a commodity
It isn’t as if these troubles were created on purpose (feel free to argue about that in the comments).

While it may not have started that way in the 1950s, the CFAC of modern times is incredibly sensitive to the whims of commodity prices. Many businesses deal with commodity prices somehow affecting some part of their business. CFAC’s business has it as part of their raw materials supply, energy supply and their finished product. As things sit today, it’s a tough, tough business they’re in.

Imagine having someone else setting the prices of every major component of your business. Now imagine that the ingots you ship are not substantially different (speaking very generally here) from those shipped by a Chinese firm using labor that works for $10 a day, ore that’s mined locally by workers paid similarly, and so on.

Advice to everyone else – do whatever you can to avoid getting yourself into a commodity market. If you’re in one, work on your business model to get out of it.

In fact, that’s my advice to CFAC, though they didn’t ask. Let’s call it a wish for the betterment of Columbia Falls and the entire valley.

The Whole Valley
Wait a minute…the whole valley? Absolutely. It’s about airline seats, hotel rooms and rental cars. It’s about cafes and catering. It’s about grocery and clothing stores. It’s about car dealers and construction work. It’s about the schools that get property taxes from an active thriving business instead of the waiver-level taxes of a dead one.

My wish is that in four years no one cares what electricity costs CFAC. Not because they are gone, but because whatever they sell has so much value that people will pay whatever it takes to get it. It worries me deeply that in four years we’ll be right back where we are now.

What I’d like to see is for CFAC to add a ton of value to the aluminum they produce, *before* it hits the rails. I’m told CFAC had some of the best millwrights anywhere who could create “anything”.

I wonder
I wonder what CFAC could make that would allow them to sell a product that doesn’t get sold on commodity markets based on someone else’s price control. I wonder what they can manufacture with the skills and backgrounds of the people who worked there for the last 20-30-40 years.

I wonder what would happen to a community manufacturing valuable products for today’s economy, rather than commodities from my grandfather’s economy.

I wonder what would happen if Charlie got to kick the ball.

Make an offer that makes sense

zipper
Creative Commons License photo credit: gagilas

Yesterday, an email from WinZip arrived in my inbox.

I’ve used and liked WinZip for at least a decade. Not many pieces of software can make that claim.

Lately, they’ve been emailing me pretty frequently. This particular email offered a free copy of the latest WinZip if I used their affiliate link to sign up for a free trial with Netflix’s online movie service.

Whaaaa?

Ok, maybe that’s not such a bad deal if I’m not already a Netflix user, but the offer may not make sense depending on what kind of WinZip customer I am.

When I got the email, I wondered “Why Netflix?”

It might make perfect sense if WinZip knows their customer base well. Perhaps they’re sure that a majority of their users are home users, student/teacher users or small business/corporate users. If that were so, it would’ve been best to segment their email list and mail this offer only to their home users. And perhaps I’m somehow on that home list, rather than on their “business customer” list.

Even if all that is true, is this a service that most WinZip users can take advantage of? Does it help their users get more out of their WinZip? Or did they send it because Netflix is a really good affiliate deal for the makers of WinZip?

The offer just doesn’t make sense from a “How can we help you get more out of our software?” perspective – something you should *always* be thinking about, whether you sell software or transmission oil coolers.

In fact, some will see that message – especially at multi-per-week frequencies – as spam.

I’m not convinced that WinZip segmented their email list before sending this out. If they had, it might make sense.

Leverage

In your case, it’s essential to avoid being “one of those people” and eventually ending up on a spam blacklist.

If you’re going to send 3rd party offers to your customers, make absolutely sure they make sense by giving your customer an opportunity to leverage the investment they’ve already made in your products and services.

Whaaaa? Part 2

When you build a commodity (mostly) utility, even one as good as WinZip as been, at some point your business model is going to flatten out. With no recurring revenue, you start doing things like emailing your customers offers to purchase a movie service. Even your business customers.

Think deep and long about that business model. What happens after 100 customers? What happens after 500 or 50,000? What happens 10 years from now?

The more thought you invest in that stuff now, even while building the next-big-thing, the less likely you’ll need to make choices that would never cross your mind otherwise.

How’s your soup?

A few weeks ago, the NY Times’ “You’re the Boss” blog (which discusses small business topics) had a piece from Chicago entrepreneur Jay Goltz about the 10 reasons small businesses fail.

It’s a laundry list of pretty fundamental stuff, much of which we regularly talk about here:

  • a business model whose math doesn’t work,
  • owners who can’t get out of their own way
  • out-of-control growth
  • poor accounting
  • insufficient cash cushion
  • operational mediocrity
  • operational inefficiencies
  • dysfunctional management
  • lack of a succession plan
  • a declining market

Several of the items on this list are things that I encounter not only as a customer, but as someone who helps businesses improve their performance and profitability. Some of them are more frustrating than others. I’ll bet you see them as well.

Jay summed up his comments with this:

In life, you may have forgiving friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people donâ??t like the soup, employees stop working for you, and customers stop doing business with you. And that is why businesses fail.

Unforgiving

We recently talked about the market’s lack of forgiveness. If you missed that piece, I noted that I can be as nice as you like when discussing examples I’ve seen that you can learn from, but the market…well, it just won’t be nice or fair about it. It doesn’t benefit you (or the folks I write about) to whitewash things.

So how can you, the head chef of your business, keep these 10 things out of your soup?

Relentless focus and accountability.

I warned my clients at the first of the year that I would be holding them more accountable for their efforts. Not one has rebelled. Those who have been pressed the hardest have responded with the most results. Accountability works.

First things first

If you have a business model whose math doesn’t work, NONE of the other stuff really matters.

The “If there’s plenty of gross there has to be some net around here somewhere” thing is more prevalent than you’d think. People start businesses for all kinds of reasons, but it’s pretty shocking how few pay attention to the math of the business model.

They start out with a price that they THINK makes sense (it might, it might not) and that initial pricing often drives the rest of the business, their marketing (ie: how many sales they need to make) and their operations (how costs are defrayed).

The other nine items on this list are pretty important, but it doesn’t matter AT ALL how well you’re doing at these things if the basic math of your business doesn’t work.

Cash flow is king

Back in my photo software days, many of our competitors (we had eight at one time) offered “free lifetime support”.

I refused to offer that because I knew it would either kill our business or prevent us from providing the kind of support we felt we had to offer.

Prospective customers would ask me why they should buy our stuff instead of a competitor’s when that competitor didn’t charge annually for software upgrades and support.

All I had to do was ask them: “Whose lifetime are we talking about? How free, unlimited and lifetime is that support when they go out of business because their business model doesn’t work?” Two years later, only two competitors remained.

If the math for your business model doesn’t work, nothing else matters. Once it does, the other nine things are pretty important.

Next time, we’ll get into detail about the math of your business.