Categories
Management Pricing Product management

Is it time to raise prices?

I recently received a question from someone who was curious about how to raise prices. They have service customers paying a monthly fee going back almost 20 years. All their customers are on the same price plan – and they’ve had always been at that price. They were concerned that they could not raise prices without losing a bunch of customers – a legitimate concern since they hadn’t changed their pricing in close to 20 years.

There’s a couple things to look at here. First off, if you’ve had customers for 20 years, you’re probably not going to raise prices by such an egregious amount that you’re going to lose a bunch of them.

One possible exception to that – you’re seriously under charging now, losing money and what some might consider an egregious increase is actually what you need to get your margins right. However, this seems extremely unlikely after 20 years unless losing money on this product is a recent development. What I usually find when I see someone’s books is that they’re doing OK, but could be doing a lot better if their pricing made more sense.

While this conversation could have a lot of variables, the raise prices question comes up fairly often. Many times “How do I raise prices for existing clients” ends with “… who have been paying ‘nothing’ forever?”

Customers going back almost 20 years who were all on the same price plan, so the company didn’t know what to do. They were concerned that they could not raise prices, without losing a bunch of customers.

There’s a couple things to look at here. First off, if you’ve had customers for 20 years, you’re probably not going to raise prices by such an egregious amount that you’re going to lose a bunch of them unless you’re seriously under charging now and actually losing money.

If you’re still losing money after 20 years. it’s hard not to wonder what’s wrong with you, or whoever is funding you. I’m guessing that’s unlikely. I didn’t look at this company’s books, but if I had, I suspect that they’re doing okay. And could be doing a lot better if the pricing and their price structure, made more sense.

It’s a bad time to raise prices

The first reaction to get out of the way is that now is a universally bad time to raise prices. It’s COVID time. It’s October. It’s 2020. Winter is coming. My competitors haven’t raised prices recently. Sales are down. We can find many reasons why the time is bad to raise prices. Some of them may be true, but that doesn’t mean it’s a bad time.

Of course, raising prices for existing customers isn’t the same as raising them for new customers. While you’re focused primarily on pricing, keep in mind that “the price” is but a single component of “pricing”. Pricing includes volume, service delivery, packaging, price tiers, timeliness, value proposition, and other things.

How you sell this new pricing needs to be carefully thought out, particularly if it involves a restructuring of delivery, service structure, etc. Sometimes customers you’ve had for 20 years commonly have different needs and bought for different reasons than those who bought recently. Sometimes not. You should know.

A common thought is “What features can I add to the existing product so that I can raise the price for existing customers?” While that’s useful – do your existing customers want the new features you’re dreaming up to add to the product?

Negative margins? Nope.

The company with the question sells software as a service, but the conversation applies to almost any service that has a recurring service model. Sure, there are some exceptions to the “any service” thing, but there are an awful lot of parallels across industries.

First off… these customers don’t expect you to lose your shirt just so they can do whatever they do with your product / service. If they expect that, they’ll disappear when you make these changes and frankly – that’s a good thing. No one needs customers who buy a product with a negative profit margin. Sure, you might say “Well you know with the whole COVID thing, I can’t afford to get rid of customers.” Tell me, how many customers do you want if you’re losing money on each one? Do most businesses really want even one more customer that costs them more than they charge that customer? In almost every case – no. The exceptions are by design.

If I raise prices, I’ll lose customers

Almost everyone I talk to about these things feels this way when they prepare to raise prices. We know we might lose a few, but sometimes people get this wild idea that they’re going to lose 80% of their customers because of a price increase. Are you really providing that little value to your customers? I doubt it. I suspect you know your customers better than that. In my experience, it simply doesn’t work out that way. You’ll probably lose some but the math will probably work out with you doing less work and making more – even if the increase is small.

So how do prices get like this?

There are many reasons, including an addiction to coupons, not paying attention to margins, missing the impact of step costs as volume increases – among others. The two reasons I see most often are “we can’t do it now” and inattention. When I say inattention, I don’t mean anything specific. It’s as simple as not taking a regularly scheduled look at prices, costs, margins, etc – and then doing something about it when you find something wrong.

Back to the person who asked the question. They indicated that their customers had been paying $29 a month for between 15 and 20 years with zero price increases during that time. I don’t know how many customers they have – I didn’t ask because it doesn’t matter. I assume they are at least marginally profitable at that price level – or were until recently.

Given that customers have been paying $29 a month for 15 to 20 years, they either see $29 as a no-brainer value-wise or they are the type of person who never looks at their bank statements. If you have 1000 of them and 10% leave, you’ve lost $2900 a month. If you raise the price to a mere $32, you regain more than the $2900. But we’re not going to do that.

Stop the bleeding

First off, you have to keep things from getting any worse. Start by determining a fair price with a reasonable margin for new customers. If this is your entry level pricing – figure out what can be removed from it and remove it from that lowest tier. Do it now – before lunch. You should know what can be removed after 20 years.

Your entry price still needs to be a no-brainer, but it shouldn’t include every single thing you do. If you aren’t sure, ask whoever deals with customers all day. Sales, support, service – whoever. Ask them specifically. What portion of our services do our new customers rarely use or not need? Of the things that remain, are there any that create a significant hassle? Pull that one too. Your entry level customers should not have high support costs – and you should work on that next if they do.

Change that price and the explanation of accompanying services right now – before you do anything else. Once you do this, you know that whether you get 10, 100 or 1000 customers in the next month – it won’t be making things worse.

It doesn’t matter how the old price compares to the new one. It simply has to make sense to new customers. Maybe the old price was one percent of what the new price is. It doesn’t matter. What matters is that your new customers see value in what you deliver for that price.

The hard work

Before we worry about the old customers and their $29 price, we need to finish setting the new pricing. Get together with your team and see if you can group the customers you’ve gotten in the three years into a few segments. Don’t get complicated here. You can always do this again later – and you might.

Maybe you have customers new to the industry and for them, the entry service level (and price) is ideal for them. What other natural groupings do you have? Your people will know if you don’t. Ask them questions and do not interrupt. Listen. Take notes. Say “tell me more” or “is there anything else” until they’re done. Let them empty their minds on the table. They’re on the front lines. They may not know your costs or margins, but they know your customers.

Discuss what those groups need of the service levels you offer. Don’t make things up. Use data and conversations to drive decisions. Review the decisions with the team to make sure the grouping of services to a particular customer segment makes sense.

Once you’re done with that, look at your numbers, whether they are in some fancy software or on a chalkboard in the shop. Figure out a price that makes sense for each tier. Not a price relative to the 20 year old price, or even a price that tries to “look right” when compared to the entry price. Make the price a good value that preserves your margins.

Update all your prices and service information to reflect all of this work. Ask for feedback as people buy. You’ll want to know why they chose tier A instead of tier B. What’s different about the customers who consistently choose A over B, and vice versa. The value… the economics must make sense – but the mix of services at that level must also make sense. You wouldn’t give a teenager a Tesla X on an icy winter morning. You also wouldn’t send them out without studded snow tires on their 15 year old sedan.

It’s time to raise prices. Finally.

Tell your existing customers the truth about your unsustainable pricing and what you’ve done about it. They’re going to figure it out eventually anyway. Explain your new tiers and tell them what you believe is a good process for identifying where they belong. Don’t get all sales pitchy. Tell them how it is, tell them when the old price disappears and tell them specifically what they need to do and when. Make it as easy as possible – then make it easier. You’re not punishing them for the last 20 years. You’re setting things up so you’ll be around to help them for the next 20.

Some people will not understand. They will leave. Thank them for their time with you and let them go. Don’t argue with them. It’s their decision. A small percentage will be angry. Let them be. You can’t change that about people. It’s their decision. Thank them and move on.

So you raised your prices and the world didn’t end, but you know the problem isn’t completely solved.

With the new pricing, the economics of your business will change. Pay attention. You may have to go through a price exercise like this more often. You may find that assumptions about you customers will change – or maybe they won’t. Either way, you need to stay on top of it.

Don’t do anything that’s not sustainable. It was a lot of work to get out of the mess you were in. Let’s not do it again if we can avoid it.

Explain the economics

Some will wonder why your prices are what they are. It’s their nature. Your costs are usually none of their business. People don’t buy stuff from you because your costs are $x or $y. They buy because they want or need something and the value is acceptable.

If you need to explain your prices – do it as a value proposition. For example “We charge $1200 per month for our service, while allows our customers to save an average of 47 work hours of labor (for example) per week.” Buy or don’t buy becomes simple math at that point.

Sometimes, this is harder than it sounds, but you may as well do it because they are absolutely going to do it – and they may miss something because they don’t know your service or the follow on benefits as well as you do. There are times when all of the benefits are simply not obvious. Make them obvious.

Even if they choose not to buy your stuff, make it easy for them to assess their decision. If you need 90 minutes on the phone and 13 finance questions to close a sale, find a way to make it easier to understand.

This doesn’t mean assume your customers are dumb or lazy. They are busy. They don’t have time to mess around with spreadsheets and deep research and thought about your service. Make it like the buffet. Lay it out in front of them so all they have to do is choose – even if the choice is “not now”.

Photo by Bertrand Borie on Unsplash

Categories
Business model Montana Positioning Pricing

The premium price lesson taught by craft beer

The craft beer explosion in the US over the last 5 to 10 years is a great lesson in premium price / premium product / premium services and customer ascension.

So what is the big lesson to learn from craft beer? Is it that you could make beer that only a certain percentage of the market will drink? Is it that you can put anything from talcum powder to motor oil in your wort as an ingredient and someone out there will want to drink it? Is it that you can charge for one pint what previously would have been a tolerable price for a six-pack?

But I don’t WANT an $80 diaper!

Those answers are all accurate at some level.

However, the biggest lesson is that in any market (including yours), there is a percentage of the market that’s willing to pay a premium price for a premium product. Products and services have had “Good, Better, Best” for years. Despite that, there are still many businesses out there that only offer a single product line with very little variation or options, premium services, or the opportunity to “ascend” to the next tier of product buyer.

These opportunities are not limited to automobiles, cigars, locally brewed beers, or any other thing. You can buy cheap toilet paper and you can buy fancy toilet paper. Speaking of, there are companies making a living selling diapers that cost $80 each.

While I don’t want to buy an $80 diaper, it’s clear that some portion of the diaper buying public does. That’s the trap that you can’t let yourself get caught in. It doesn’t matter that you and I aren’t interested in an $80 diaper. All that matters is that enough people are buying them. The same goes for a bottle of craft beer that might cost $12, $29, or much more. The challenge is finding a product that fits a market.

Premium price changes everything

In whatever you sell, there is almost certainly a premium price product or service opportunity – or both. You’ll never know where the price ceiling sits until you test it. We’ve all been offered an up-sell (want fries with that?), but this is different. Successful efforts typically result in a new tier of products and/or services. Sometimes, it reveals a completely different type of customer. It also allows ascension for some of the customers you have now.

Testing new product / service / price tiers could result in a new way of doing business for a subset of the people you serve. It may also reveal that there are additional price / product / service tiers between your existing regular and premium-priced options.

A successful “bar” that closes at 8:00 pm?

Montana micro-breweries are a fascinating example of finding an undiscovered tier in a market. They operate under a number of restrictions that impede their growth, including (recently raised) limits on the number of barrels they can brew each year.

Two additional restrictions that would ordinarily seem fatal to a traditional drinking establishment have instead created a new market tier.

First, Montana breweries with a taproom / tasting room may only serve 48 ounces (three pints) per patron per day. This might seem like a rather punitive restriction, but it doesn’t work out that way. First, most craft beers have a higher alcohol content than “regular” beer. As a result, three pints per visit is usually enough. Ever seen a bouncer in a brewery’s taproom? I haven’t. You’re more likely to see families and friends meeting together with their kids. Yes, in a taproom.

Second, Montana brewery tasting rooms cannot serve beer after 8:00 pm – at least not without getting a more costly / complex alcoholic beverage license. The traditional thought process would presume the 8:00 pm close dooms the tasting rooms. Instead, they’ve become gathering places after work, or before/after shopping and/or recreation. You’ll often see groups in a tasting room that you’d rarely see at a bar.

Without the typical late night hours of a bar, employees get home early enough to do some homework, put their kids to bed, or get a decent night’s sleep before their “real job”  (or college).  Likewise, these businesses avoid the occasional negative late night bar behavior that some places have to contend with.

While these limitations are restrictive, they’ve created a consumption tier that all but eliminates the negative behaviors sometimes associated with traditional bars.

The question is – what could be the premium-priced craft beer in your business?

Categories
Business model Improvement planning Pricing Small Business Strategy tracking

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!

Categories
attitude Business culture Customer relationships Positioning Pricing Small Business

Value and meaning depends on your viewpoint

There are at least two takeaways in this piece about historic Russian space equipment being sold on the open market.

First, know the difference between the value of the least common denominator of your skill (say, swinging a hammer) and the value of knowing exactly where to hit and exactly how hard to swing in any situation – even if your hammer is a keyboard or a dental instrument.

Second, look hard and well beyond the obvious. The metal shard is a great example of looking for meaning beyond the obvious.

What else strikes you about this story?

Categories
Customer relationships customer retention Legal Management Positioning Pricing Small Business strategic planning

Are experts cheap or expensive?

Are experts cheap or expensive?

You may not be old enough to remember the Fram guy, but he’s the perfect example of the expert who can be cheap or expensive.

The cheap expert is the one who gets paid to take care of routine maintenance that prolongs the life of your asset – in this case, your car’s engine. The expensive expert is the one who rebuilds your engine because it wasn’t properly cared for.

While there are several assumptions made there, the point is clear.

The failure to plan

You’ve likely heard the old saying “A failure to plan on your part does not constitute an emergency on my part”, often accompanied by “People don’t plan to fail, they fail to plan.

Both of these sayings describe situations frequently seen by experts in finance, legal, insurance, medical, technology, auto repair and other fields.

For example, as a long time technology guy, I’ve reminded more than my fair share of business owners to backup their files to a safe place.

Why? Because I’ve also been paid by a fair share of business owners to recover and/or reproduce their critical data because they didn’t back it up – ie: they didn’t treat it like the critical asset that it is.

LIFT

One obvious place where this causes problems for business owners is in the critical areas of LIFT – Legal, Insurance, Finance, Taxes. New business owners frequently take shortcuts here because the recommended path costs too much, or at least, appears to.

In those cases, the small business owner might make a decision between C corporation, S corporation and LLC based on a web page’s description or simply because of the cost. If they don’t consult someone who understands the tax and legal implications / limitations / requirements of each type of corporate organization, much less the long term scenarios that each organization tend to bring to the table – do they make the right choice?

Or maybe they buy accounting software and set it up using the default settings rather than having someone who understands their business structure set it up so that it fits the business’ legal and financial organization as well as its goals. And perhaps they just started using it despite a lack of corporate accounting expertise rather than using an experienced, part-time bookkeeper a couple of hours per week.

These are just hypothetical examples, but you may know someone who has taken these shortcuts.

It isn’t that business owners take shortcuts because they are ignorant or apathetic. Usually it’s because they’re under tremendous time and financial pressure.

Can you relate to that? I’ll bet at least some of your customers can.

What about your customers?

Given that, imagine a new prospect needs your expertise but instead of using you, a known expert in the field related to the thing they need help with, they “google around” and do it by the seat of their pants. Why does that happen?

One of the questions I ask new customers is “What do you sell that most of your customers should buy, but don’t?

The answer indicates a number of things, including these three:

  • It tells me one of the things that you feel is critical to the success of your customers.
  • It tells me which of those things you struggle to market, position, price and/or sell.
  • It tells me that your customers may not trust you as much as you think.

Put another way… there’s one product you sell that almost every customer would get good value from, yet you haven’t found a way to show them the value in a way that makes them want to buy it. Or you priced it incorrectly, or you packaged it incorrectly, etc.

If it is truly that important to the majority of your customers, it’s something worth addressing.

Put another way – it’s something the expert recommends, but the customer doesn’t take their advice (or doesn’t take it seriously), so they take a shortcut.

Full Circle

What’s the difference between the choice to take a shortcut that your prospect made and the one you made?

Nothing.

Let’s go back to “What do you sell that most of your customers should buy, but don’t?”

How are you positioning, pricing and selling the things that you KNOW your customers really need?

 

Disclaimer:

I am blogging on behalf of Visa Business and received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa’s. Information and opinions are presented solely for informational purposes, and are not intended, nor should they be construed, as a substitute for legal, accounting or tax advice.  You should consult an attorney or tax advisor for individual advice regarding your own situation. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business. The Page serves as a space where small business owners can access educational resources, read success stories from other business owners, engage with peers, and find tips to help businesses run more efficiently. Every month, the Page will introduce a new theme that will focus on a topic important to a small business owner’s success. For additional tips and advice, and information about Visa’s small business solutions, follow @VisaSmallBiz and visit http://visa.com/business.

Categories
Direct Marketing Getting new customers Lead generation Marketing Pricing Restaurants Retail Sales Small Business Strategy

How to fine tune your pricing

What do you focus on when it’s time to improve profitability?

Sometimes barely twisting a knob can make all the difference.

This 8 minute and 30 second running stride analysis video might be a little dry if you’re not a runner, but the focus on small improvements and 300FPS video to break down opportunities to improve performance inspired me not only to re-examine my stride but to consider it in the context of your business.

Even if you don’t run, the method used to break down the runner’s performance and focus on what would make a radical improvement in his running is worth the viewing time.

You might consider the same type of approach with your pricing, particularly before you offer a discount, BOGO or raise a price.

Small price increase, big impact

Let’s say that you charge $8.99 for a meal at your restaurant. Out of that $8.99, you have to pay our food costs (33%, or $2.97) and your overhead (33%, another $2.97). That leaves a gross profit of 33.92%, or $3.05.

What happens if you raise the price by a dollar?

Your food cost and overhead don’t change. They’re still $2.97 + $2.97 = $5.94. Your gross profit obviously increases by only a dollar, to $4.05. The gross profit percentage increases to 40.5%

Not bad.

Coupon coup…for who?

Now let’s look at what happens if you discount that meal by a dollar like you might do with a coupon.

That cuts the meal price to $7.99. Your food and overhead costs are still the same, $5.94. That dollar discount comes right off the top, reducing your profit to $2.05, or 25.6%

Now what happens if instead of a coupon, you offer a “buy-one, get one” (BOGO) free deal? People love those, right?

Your food cost and overhead double to $11.88, since two meals are involved. Thanks to your buy one get one free deal, your revenue is still $8.99. Profit has gone from $3.05 (33.92%) to a loss of $2.89 (32.1%).

If we change that to “buy one, get one at half price”, your food cost and overhead are still $11.88, but your revenue rises to $13.49. In this case, gross profit is $1.61, or 17.9%. Not a lot, but better than a 32% loss.

Is a one-time drop in profit from $3.05 to $1.61 worth getting those two people in the door? You’d better know based on what these customers will do (as a group) over time.

A plan, not a guess

As we talked about last time, coupons/discounts have to be used strategically. Fail to run the numbers and they can sink you.

Losing money on a BOGO isn’t ideal unless you know your numbers very well and know that over time, that offer will bring you a new, loyal customer who has a lifetime customer value that fits your business model.

Categories
Business model Competition Positioning Pricing Small Business

All else is seldom equal

A question came in earlier this month… “How do I compete with businesses that can offer similar products/services at a lower cost?

The question is “Why are you depending on price to close your sales?”

It’s important to examine because *so many* people focus on it. In a weak economy, it’s natural for price pressures to be everywhere. Did you choose to compete on price, or did it sneak up on you?

If price is your edge, it should be an intentional, strategic choice. All else being equal, price will be the natural decision maker since buyer won’t have to sacrifice based on price.

The trouble is, all else is seldom equal.

Wiggling

In product sales, a competitor’s prices are usually lower because they sell more and can get better pricing from their suppliers. If supply costs are the issue, that’s something you can fix as your sales volume increases.

Until you get there, find some wiggle room. You may find that it makes price less important or even takes it off the table.

Wiggle?

There’s almost always some wiggle room in a price-sensitive situation for the underdog who is hungry enough to do more (ie: provide more value) than the “low price leader”. Remember, they’re the one totally focused on price and their entire business is built around it (think “WalMart”). Want to compete with WallyWorld on price? Only if you’re crazy.

Is price *really* the only way you compete with your competition? Not in my experience.

Whether you sell products or services, there are certainly those who shop solely on price, but there are always others who want more and don’t mind paying a little more for it.

Are there no other ways that you can add value to these products and services? Have you asked your customers?

Take some time to listen to your customers. I’m confident that if you listen, you’ll find a way to take the focus off price and put it on things that will matter a week or a month from now, when price is far less important.

Let’s talk about an example, something price sensitive and seemingly generic…like carpet cleaning.

Being seldom equal

I could call a dozen carpet cleaners who will do two bedrooms and a hall for $79 (or whatever). Maybe one or two of them would do a good enough job to earn a call back, even though I suspect all of them would do a good job when it came to cleaning the carpet.

Maybe your carpet cleaning skills are only 2% better than everyone else’s, or maybe they’re a little worse (yes, you need to work on that). It matters, but it isn’t necessarily what people highly value when they get this work done.

Your job is to be their carpet cleaner. The name that comes to mind when someone mentions a dirty carpet or that they need to get theirs done.

Not because you’re the one who happened to do it yesterday, but because you’re the only one they’d dream of calling after the way you handled it last time (and the time before, and the time before). You’re the one they talk about at church, in the aisle at the grocery store, at lunch the next day, on the golf course.

Your name comes up at all of those places because you did things no one else ever has and you did things in a way that no one else ever has. The next morning, they’re still reeling from the experience.

An experience? It can be. They may live in a tiny bungalow or a 12,000 square foot mansion. Either way, you can design and deliver a consistent end-to-end experience that they just can’t forget and can’t stop telling their friends about. Ask “What else can we do?”

Rethink your pricing

Despite improving what you deliver, it’s still worth putting thought into your pricing.

Companies often price their goods based on cost, the needs of their sales people, their catalog or their e-commerce store rather than in a way that attracts customers.

Your wholesale costs can’t be ignored, but you can restructure your pricing in conjunction with increased value and change the rules of the game.

Categories
Business model Buy Local Competition customer retention Entrepreneurs Management Marketing planning Pricing Restaurants Retail Sales service Small Business strategic planning Strategy tracking

A number you’d care about

Last time, we talked about those 10 things that cause small businesses to fail, and zeroed in on the business model as most important of all.

There’s usually a reason you got into the business you’re in, but whether you love it or just chose it for the money, the math that makes the business work…actually has to work.

It’s more complicated than how much you spend and how much you make.

How’d you come up with the prices for your stuff?

If you’re a retailer, you probably had someone tell you about keystone. Or maybe you’re using manufacturer’s suggested retail pricing (MSRP). Or maybe you’re 3 cents under your competition because that’s what you felt you needed to do to get the sale.

Ever sit down and figure out how much it costs to open the doors every day – even if you don’t have a door?

Ever think about taxes, licenses, shipping, insurance, and yes…some money for you to take home?

35 prospects

How much does it cost to get 35 people to call you? How much does it cost to get 35 people to visit your store? How much does it cost to get 35 people to visit your website and opt-in to your email newsletter, subscribe to your blog, your YouTube feed or “Like” your Facebook page (or whatever)?

In fact, each of those ways of getting a new prospective customer (often called a “lead”) have differing costs because the advertising (or whatever it took) to motivate them to buy has different pricing and each one convinces different numbers of people to become a prospect.

Note that I said nothing about how many people that advertising reaches. It doesn’t matter if it reaches 35 or 35 million. What matters is how many people raise their hand and say “Hmm, I might be interested. Tell me more.” and show that by calling, stopping in, going to your website and so on for every dollar you spend.

Those things have a cost. In fact, it’d better be an investment. If it isn’t, you’re doing something wrong. Divided by the number of people who said “Hmm”, you know what a prospective customer costs. Most people have no idea what the number is.

Seems like a number you’d care about.

10 customers

Now let’s say 35 of those prospects turn into customers. They buy something.

Each one probably has a different “buying profile”. In other words, customers you meet online might buy different things than walk-in/phone customers do, or they might spend more or less, or they might buy more or less often.

If you don’t pay attention to these things, you won’t know how to deal with them.

You also won’t know which source of buyers purchases the most profitable items, which source returns the most items, and so on. Seems kind of important, doesn’t it?

If you know how much it cost to get those 35 prospects to call you, stop in or what not, AND 10 of them bought something, then you can also figure out how much it costs you (per media, per ad campaign and overall) to get a new customer.

Seems like a number you’d care about.

42 orders

If over the course of a year, these customers place 42 orders or make 42 purchases, you have another important number: cost per sale.

Not cost OF sale. Cost PER sale…to get the sale.

What’d you have to do to get those folks to order or purchase? Nothing? I hope not, because you’re depending on random behavior.

What if that random behavior changes?

If you do expend any time, effort and/or money on marketing, you ought to know which efforts/expenses are working and which aren’t. If one is working, you keep using it and try to improve it’s performance. If one isn’t, you either stop doing it or tinker with it a little and see what you can do to make it work.

Either way, those efforts have a price tag.

Seems like a number you’d care about.

Groundhog Day

In the movie Groundhog Day, Bill Murray’s character relives the same day repeatedly. He goes to the same places and buys breakfast (etc) day after day.

What are you doing to encourage that from your customers?

Recurring revenue is a critical part of every (YES EVERY) business model. Maybe not the same person every day, but definitely on a regular basis.

What if you woke up every morning and knew that you’d make 7 sales today, based on some prior effort, history or activity?

What if you knew how much of that effort, history or activity was needed to keep making that happen?

Seems like a number you’d care about.

Categories
Business model Business Resources Competition Entrepreneurs Management Pricing Small Business Software business strategic planning Strategy

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.

Categories
Amazon attitude Competition Marketing Positioning Pricing Small Business Strategy

Paper. Ink. Electrons. Winston Churchill. Charles Manson.

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Creative Commons License photo credit: kekremsi

Recently, the New York Times published a story about changing prices for books in print and how those prices compare to prices for electronic books.

In particular, the story focused on comparison pricing occurring at Amazon.com for books published both in paperback and for the Kindle, a very popular eBook reader manufactured and sold by Amazon.

The story teaches a very valuable lesson. It starts by quoting customers who automatically assume a lower manufacturing cost for an electronic book, since the incremental cost of producing extra copies appears to be (or close to) zero.

Customers, unaccustomed to seeing a digital edition more expensive than the hardcover, howled at the price discrepancy, and promptly voiced their outrage with negative comments and one-star reviews on Amazon. â??Really, James Patterson?â? wrote one reader from Elgin, Ill. â??Why would it possibly cost more for a digital download than printed and bound ink on paper?â?

Nowhere

Nowhere does anyone say anything about the fact that the reader gets the same VALUE from both books.

Nowhere does anyone say anything about the fact that the reader can read the Kindle version on their PC, Jerry’s iPad, Dad’s Blackberry, Joe’s iPhone, Sandy’s iPod Touch or their brother’s Mac.

Nowhere does it talk about the ability to share comments/annotations, read a page on one device and find it in that same place when they start reading the next time on a totally different device.

For that matter, nowhere does anyone note that the value of the book has nothing to do with the cost of ink, paper, binding or electrons.

Neither should the author of a book, regardless of the means used to deliver it.

Oh the cost of it all

Yes, I realize that the printed book seems like it ought to cost more.

After all, someone had to put it in a box, put it on a truck and deliver it to the local bookstore. There’s the cost of the driver, the truck, the fuel, the paper, the ink, the brick and mortar that built the store and so on.

The difference to most is that people typically don’t see the costs invested to deliver the electronic form, all they see is that 1 copy costs no more than 2 copies because it’s just another download.

When people howl about the price of an electronic book, no one considers the amount (much less the cost) of research and development necessary to design the Kindle device and have it manufactured and shipped to the U.S.

They don’t marvel at the costs of the servers and software to support the book’s transport to a wide range of devices and software viewers.

They don’t consider the boardroom and engineering efforts to work out deals with cellular carriers so that the device can download newly purchased books and sync anywhere in the world without so much as a login.

But none of that matters. It’s great evidence. Great talking points.

But it doesn’t matter one bit.

What matters

The value of the content inside the book is what matters.

What if you opened that book and in two hours of reading learned something that changed your life, changed your business or cured a problem you’ve had for years?

Is the allegedly zero incremental cost of that electronic book in any way relative to the value you received from it? No way.

Are professional baseball bats priced like a 2×4? Are a PGA champion’s golf clubs priced like stainless steel and graphite you might find in an auto parts store? Of course not.

So why is it so easy to assume that a printed book is worth more than an electronic version?

Because no one put any effort into convincing you that the electrons (or the paper and ink) don’t even begin to set the value.

98 cents

Your body is worth about 98 cents in “ingredients”.

Going by that measure, Winston Churchill and Einstein are each the equivalent in value of mass murderer Charles Manson.

I don’t think so.

Never let your products/services get to the point where the value you deliver is calculated primarily by the container it’s delivered in and/or the material it’s made of.