What Makes a Bad Business?

Have you ever walked into a business and immediately thoughtthis is a good business”, or “there’s something wrong with this business”?  Many years ago when I worked in manufacturing industries I found I could do that.

I’ve been out of manufacturing for a long time, but over the last twenty-eight years I’ve used that instinct across myriads of small businesses. Of course, it doesn’t always happen; maybe I missed something, maybe it was just an average business, doing enough the hang together.

All of which led me to think about what makes a bad business, a bad egg, with the suggestion that the reversal of these things makes a good business.

You know your product or service ticks all the boxes, but you haven’t actually surveyed your customers to get their views.  Are you relying on verbal asides, but haven’t captured them?  Now I’m not looking for statistical certainty here, but rather collecting sufficient views to give a picture, or suggest a trend. 

When doing business plans, I always do a customer/client survey to find out how they perceive the business, and its offering.  Your opinion may not be the best one, and the response often surprises my client, and provides a valuable input into the planning workshop. 

In “Ready, Fire, Aim” Michael Masterson advocates getting your product into the market place as early as possible, and then continually tweaking it in response to customer feedback – “release your product early, and release it often!”  Then it will start to tick the boxes.

You are Chief Cook, and Bottlewasher!  In other words, are you trying to do everything yourself; manager, marketer, operator, bookkeeper.  If you are, have you the time to do it all properly?  That leads to late nights and working weekends; not good for the family, or yourself.  It leads to stress.  And are your skills appropriate for all these roles?

The other side of this coin I have discussed several times (You may have been caught in this trap?), (How do you get your business working for you?), (Are you really in Business?) – not having the time to work ON the business.

The point is you can’t do everything yourself.  You need a good team, one that can keep the business running well if you have to take a business trip, or even that well-earned holiday.  That doesn’t mean employing a lot of people.  Yes, you will need more employees as you grow, but are there tasks which can be sub-contracted, outsourced, or even off-shored (More Disruption, but more helpful).

You don’t stand out in the market - How often have I been told that “that’s not the way we do things in this industry?”  If you are not different, how will you stand out from the crowd?  You can always stand out by being very bad at what you do, but there is little value for the customer in that, and even less for you.  Do one thing really well – become the GO-TO business in your market. 

Part of that positioning is your pricing.  Undercharging is not sustainable.  There is always a market for a product or service that provides higher value to the customer, and a higher margin for you.  Constant testing and tweaking as I suggest above will help you find that value point.  Compete on quality, expertise and what you do really well, instead of price. 

Is customer service an afterthought – I’m sure you’ve been in a situation where you have said “I’ll never go back there again”.  I know good customer service is a cliché, but businesses that really look after their customers do well.  Appreciate loyal customers who show you there is a demand for what you do. There is no dollar amount you can put on brand advocates. Good will translates to loyal customers.

People don’t leave companies — they leave management.  This lesson goes for both employees and customers. A manager will lose staff if the employees think they’re not being listened to or valued. Customers will stop using your products or services if they are dissatisfied with them. The quality and reliability of your products and services is a reflection of management.

One of signals I pick up for good and bad businesses is the demeanour of employees.  It doesn’t matter whether they are shop-floor or office.  If they look cheerful and happy then there is a good chance the business is being managed well, and if managed well, it will be a good business.

Presentation of your business matters.  If it is well presented, neat and tidy, then again it is likely is well managed.  This also connects back to the staff.  Happy staff are unlikely to allow their workplace to be a mess.  This applies to the building, to the shop-floor, to the offices, to vehicles, and to how staff are presented.

There’s Nothing Wrong with Asking for Help

When clients approach me for coaching, I find they are almost always a business with a problem, a problem that if not fixed, will see them go out of business. 

They usually have “business”, although frequently not enough, but often it is the wrong business, less than profitable business.

Often they lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand the information they need to have control over their business, how to manage and analyse it, and how to answer that critical question – WHY IS IT SO?

If you would like to discuss with me how you might do that, book a Strategy Consult here.  http://www.profitsleakdetective.com/fast-track-to-cash-consult

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

You go out of!

It’s an old saying, and maybe even a little trite, but it is worth thinking about. 

First of all, not having business starts with not having sales.  Without sales, you don’t have business.  No customers, no business.  It’s like standing on a street with your cap held out, hoping someone will drop some money into it.   Business starts with a sale.

So that leads to ….. having a product or service that someone wants to buy.  And they will only want to buy your product or service if it solves a problem they have, or meets a need.  Standing on that street with your cap held out doesn’t solve many potential donators problems, or meet many needs, unless it is a need to be generous and give – the charitable nerve.

It is a good idea to do some research and test the market, before you fully commit to “business”.  As Mark Ford says in “Ready, Fire, Aim”, trial your offering, and keep improving it.  What you have may not meet the mark, so find out what is required before you fully commit.  It doesn’t matter what you think.  You should only be doing what your customers want as they are the ones who are paying you.

And there must be sufficient numbers of such people to sustain your business.  In others words, is the market big enough?   Sigh, more research.  It is certainly not enough to rely on “Streakers Defence”, i.e. it seemed like a good idea at the time.

But of course, there is yet more to the business you need to have, to avoid going out of it. 

It must be profitable business. Inevitably there are a number of strands to this, and they relate to the price you are able to charge, and your costs. 

Now the bloke standing on the street doesn’t have many costs to operate his “business”, he doesn’t have a minimum price either.  He’s not able to say “nothing less than $5”.  He’s a price taker, not a price maker.

There have been many words written about pricing, both from a marketing and from a financial point of view.  For some reason, those writing from one viewpoint rarely take into consideration the other’s view.  You certainly will go out of business if you don’t get it right.

To my mind there are two key issues when determining your price;

Positioning is the first.  The price you set determines your position in the market.  It can make you just a commodity, seemingly no different from the competition.  Or it can set you apart, suggesting that your offering is not just different, but better.  Mind you, it had better be both, or you will be quickly found out.

Gross profit margin is the second.  It must recover all the direct (i.e. variable) costs incurred by that offering, then through the volume you sell, cover all your overhead/administrative costs, and leave sufficient over as your profit.  In the end, it is not the volume of sales you make that is critical to the sustainability of your business, but the volume of Gross Profits those sales provide. 

Small business is just that – small.  You don’t have the reach of big business, the ability to generate a large volume of sales at low margins.  You must generate the profits you need from the volume of sales you are able to generate.

Now to your costs.  You need to know your true Cost of Sales; all the costs directly incurred by the offering you make.  Now you might buy it in to resell, you might manufacture the product, you might repair something, or it might be a straight service.  Whichever, there will be costs which you wouldn’t incur if you weren’t selling that offering.

And this is where I have a beef with our accounting friends; they prepare your books for statutory purposes, to determine the amount of tax you need to pay.  And naturally they set out your Chart of Accounts to make that as easy as possible – for them.

They don’t set out you Chart of Accounts to make it as easy as possible – for you.  You want management information, figures that will help you make informed decisions.  So often when working with clients I find variable/direct costs allocated to Overheads/Fixed Costs. 

So the business does not know their true Cost of Sales, or what is their real Gross Profit.  It doesn’t matter from a tax viewpoint, but it does from a management viewpoint.

Whether they be Direct Costs, or Fixed Costs, you certainly need to ensure that you that you don’t incur Unnecessary Costs.  If you do, you might have business, but still go out of it.

There’s Nothing Wrong with Asking for Help

When clients approach me for coaching, I find they are almost always a business with a problem, a problem that if not fixed, will see them go out of business.  They usually have “business”, although frequently not enough, but often it is the wrong business, less than profitable business.

Often they lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand the information they need to have control over their business, how to manage and analyse it, and how to answer that critical question – WHY IS IT SO?

If you would like to discuss with me how you might do that, book a Strategy Consult here

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

Or are you fog-bound?

Are you in this situation?  All’s well in the world; you have plenty of work coming in, and money in the bank to pay the bills you have.  So many of us travel like that; we operate on a day to day basis, the sun is out, the sky is blue.  We assume that the work coming in will meet our cash flow requirements.

But what if there are problems ahead, around the next corner on the road we are travelling?  We can’t see ahead, there’s a thick fog blanketing the road, we can’t see where we are going.  We look at the dashboard; we know how fast we’re travelling, and how much fuel is left in the tank (bank), but not much more.

One problem with focusing on the job in hand is that we lose focus on promoting our business, and the ongoing sales we need, particularly if Murphy strikes, and the job in hand requires extra attention and effort.

But there is more to that fog around the corner than that.  Have you ever been in a very thick fog; “like a giant eraser moving indiscriminately to eradicate what was once there into something that's not”, it blankets you, you lose your sense of direction, you have no clues on where you are no matter which way you turn, even sound is deadened, “swallowed by the greedy beast”

Is your business like that, you don’t know where you are, how you are travelling, or even whether you are heading in the right direction?

The road to success is paved with good information.  Good information disperses the fog, and gives you a clear view of your world. 

And that is the problem we have in our business. We don’t necessarily have a clear view of what is happening.  Sometimes the problem is pretty obvious, like a leaking tap.  A particular line or activity is obviously costing you money.  If we can see it, we can do something about it.  But what about the times when you don't know profits are leaking.  You don't know until you get the quarterly, or half yearly or, even worse, the annual figures.  Because by then, it is too late.   The profits have leaked.

Sure, you might then plug the leak, but what is gone is gone.

Are there aspects of your business which are not doing as well as they should?  Hidden leaks.  Are you in markets which don't perform as well as others you could be in?  Is your level of enquiry slowly declining, and what about the success rate of quotes to sales?

Do you know your true Cost of Sales?  If you don't, I’d be willing to bet you are not covering all those costs, and are writing them off against overheads, not recovering them against the sale.

The problem could be anywhere. 

So here are some clues about information which will help disperse the fog, but not in any particular priority.  Hopefully one or two of them will really resonate with you.

1.    Information enables you to make smart decisions about how to grow your business.  Relying on PHOGy thinking (Prophesy, Hearsay, Gut Feelings) is one thing, but studies show informed decision making is more likely to be right.  So is the information you need available; I'm looking at more than just KPIs.

2.    Do your financial statements give you the information you need to lift the fog?  Studies show the less regularly you review and analyse these, the greater the probability of business failure.

3.    How do you know if your current business strategy is working and viable, if you haven’t the right information?  If you are not growing each month or if you have profit leaks, it is important to find out quickly so you can make some changes before it is too late.

4.    Information certainly helps cash flow management; knowing what is coming, and when.

5.    Spending money and effort on activities, products and services that just don’t contribute is a waste; the 80/20 rule always applies – 80% of your sales, and profits, will come from 20% of your products and services.  And the reverse applies.  Wouldn’t it be useful to know which they are?

6.    Excellent businesses have access to excellent information – they make better decisions, more focused decisions, and quicker decisions

So pave the road to success with good information, and you won’t be fog-bound.

Fast Track to Cash

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, it is not just marketing that is holding them back.  They so often lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand the information they need to have control over their business, how to manage and analyse it, and how to answer that critical question – WHY IS IT SO?

If you would like to discuss with me how you might do that, book a Strategy Consult here.  

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

Are you flying by the seat of your pants?

Have you ever watched an aircraft cockpit scene on film with the pilot and co-pilot going through a checklist in preparation for take-off?  The checklist is usually mounted on a board or strapped to something.

The point is that it is a physical checklist and not coming out of their memory.  You might not realise it but those scenes reflect reality.  No matter how many times they have done it commercial pilots are not allowed to process the checklist by rote.  Checking has to be read from a physical checklist. 

Commercial pilots have been using checklists for decades.  Apparently the practice goes right back to a fly-off at Wright Field, Ohio, in 1935, when the US Army Air Force was choosing its new bomber. Boeing's entry, the B-17, would later be built by the thousands, but on that first flight it took off, stalled, crashed and burned. The new airplane was complicated, and the pilot, who was highly experienced, had forgotten a routine step.

Now while you are not flying an aircraft no doubt you have found that managing a small business is far from a simple thing.  So much to do, so much to remember.  Too often missing something routine can bring you undone. 

Veteran marketing expert and author Denny Hatch (www.dennyhatch.com) wrote of the importance of checklists in getting your marketing and promotional campaigns right. A pity to spend all that money and effort only to have the campaign fail because something was overlooked.

So with Denny’s blessing I thought I would pass on to you his checklist.  To quote Denny “I believe the revised and expanded checklist that follows will be useful to the 20- and 30-something newbies entering this business who are handed decision-making authority beyond their experience.  It's also invaluable to us addled seniors, who tend to forget things.”

THE MARKETER'S CHECKLIST

All Media

1. Does your message employ at least one (preferably several) of the seven key copy drivers—the emotional hot buttons that make people act: Fear - Greed - Guilt - Anger - Exclusivity - Salvation - Flattery?  ___Yes ___ No

2. Does your copy contain some or all of the 13 most powerful and evocative words in the English language: You - Save - Money - Guarantee - Love - Results - Proven - Safety - Easy - New - Health - Discovery - Free?  ___Yes ___ No

3. Since “you” is the subject of every sales effort, is your promotion about “you”—as opposed to "we," "us" or "our"?  ___Yes ___ No

4. "The prospect doesn't give a damn about you, your company or your product. All that matters is, 'What's in it for me?'" —Bob Hacker
Are you emphasizing your product and what it will do for the prospect rather than yourself and your company?   ___Yes ___ No

5. “Probably well over half our buying choices are based on emotion.” —Jack Maxson
“When emotion and reason come into conflict, emotion always wins.” —John J. Flieder
Is your sales pitch emotional (rather than analytical and rational)?  ___Yes ___ No

6. "People want quarter-inch holes, not quarter-inch drills." —MBA Magazine
Does your sales pitch highlight benefits (e.g., you get quarter-inch holes)—as opposed to features (e.g., buy a drill)?  ___Yes ___ No

7. "Your job is to sell, not entertain." —Jack Maxson
"Cute and clever simply don't work." —Nigel Rowe
Is your presentation cute, clever and entertaining?   ___Yes ___ No

8. Do you make an offer?   ___Yes ___ No

9. "You cannot sell two things at once." —Dick Benson
Are you giving the prospect too many choices?  ___Yes ___ No

10. “The right offer should be so attractive that only a lunatic would say, 'No.’" —Claude Hopkins
“If you want to dramatically increase your results, dramatically improve your offer.” —Axel Andersson

Is your offer the very strongest one you can field?  ___Yes ___ No

11. Do you include testimonials from happy customers?   ___Yes ___ No

12. Is your offer so simple an idiot can understand it?   ___Yes ___ No

Thanks Denny, there are some very useful, and practical, tips there.  Try running one of your recent promotions against it, and let me know how you went.

Fast Track to Cash

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, it is not just marketing that is holding them back.  They so often lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand:

•    The strengths, weaknesses opportunities and threats of their business

•    Determine where they want to be – clear, achievable goals, and

•    How they are going to get there – their strategies to achieve their goals

This is sometimes known as the NOW – WHERE – HOW model.

If you would like to discuss with me how you might do that, book a Strategy Consult here

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

Just what is your mindset?

So many people who start small businesses do.  It is getting caught in an operational mindset without a management mindset. 

Now that is not to say you don’t need to have an operational mindset in your business; you do, because you have to deliver your product or service.  And you have to do it efficiently (i.e. at a cost less than the price), and effectively (i.e. meet customers’ expectations).

Why is this important?  Let me give you a real life example.  I’ve been working with a client which is in this very trap; they’re hard-working, diligent, and it is only through their commitment to their vision that the business is still afloat.

They shouldn’t be, but after some years, they are still losing money, supported, indeed funded, by their creditors and bank.  They must have concluded, as I did, that this business, and these people, are worth saving.

What is missing is a management mindset that operates over the top of the operations, a mindset which sets the direction, the goals which must be achieved, and the measurement of progress towards meeting those goals.

The road to success is paved with good information.  A management mindset determines what information is needed, and ensure that it is available, reported and analysed.

Imagine you are a pilot, charged with delivering a plane load of passengers, from Sydney to Perth.   What are some of the things you need to know?

•    The size of your load – that affects the height at which you will fly,

•    Your speed, and hence how long it will take to get to your destination

•    How much cash (fuel) you will need

•    The weather conditions ahead (the economy)

•    How you are tracking against these variables.

The pilot measures his progress through the instruments in front of him.  Indeed, that gave rise to the name “dashboard reports” we see in businesses today.

People doing the delivery don’t have time, the opportunity, or the tools, to look at these variables.  Their job is to deliver.

A sustainable business requires three things; these are not mutually incompatible; they have an element of both.  After all, small businesses aren’t, or should not be, run as mutually exclusive hierarchies:

A clearly defined target market or markets backed by a good understanding of the expectations of those markets.  This requires both a management and an operational mindset.

A sustainable income stream, i.e. both consistent sales and consistent profits from those sales.  Management needs to know what is happening; operations need to know how to achieve it.

Documented systems and procedures that enable the processes by which the profits are generated.  The management mindset of a business requires these, the operations mindset produces them. 

The operational mindset pertains to the ongoing activities of the business to produce and deliver its offerings.  You must do so in a timely manner, and meet your customers’ expectations.  Failure to do so, if not corrected, will lead to failure of your business.

Where do people who start their own business come from – from an operational skill.  Unfortunately, many of the skills you learned in being great at your own job do not translate to being a great manager.

As an individual operator, you are judged only on your own work and results you deliver.  As an operational manager, you are judged on the results and success of your team.

From the other side, if you, as a manager, don’t understand your business operations, and what are the links to its performance, then you might have a management mindset, but will not succeed. If you don’t understand the basics of your business, how it runs and what makes it run, the you won’t succeed.

Management has to have a sense of strategy; knowing where to go, and the strategies to get there.  But they must also love the numbers.  They need plenty of common sense and an ability to derive meaning out of the different ways numbers can be combined or dissected to arrive at the right performance metrics for early warning signals for the business.  Knowing your numbers and the different levers that can be applied to them makes you the master of the game.

Having both a management and an operational mindset is extremely critical for all business owners.  No matter how good you are at framing strategy; it also has to get executed successfully for an organisation to succeed.

And this is the challenge for people going into business for themselves; they must develop a management mindset, and learn how to integrate their operational mindset with their new management mindset.

To succeed in small business, you need both mindsets, and know how and when to step from one to the other.

And that is the next step my client must take; develop a management mindset, and use it.

Fast Track to Cash

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, it is not just marketing that is holding them back.  They so often lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand:

•    The strengths, weaknesses opportunities and threats of their business

•    Determine where they want to be – clear, achievable goals, and

•    How they are going to get there – their strategies to achieve their goals

This is sometimes known as the NOW – WHERE – HOW model.

If you would like to discuss with me how you might do that, book a Strategy Consult here.

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

Or Profits?

In the last two blog posts I discussed the first five common mistakes as expounded by Dennis Brown from Atenga Inc. (www.atenga.com), a consultancy which specialises in developing price optimisation strategies for businesses. 

These mistakes come from their article “Ten Common Mistakes Companies Make in Pricing their Products or Services”. 

In my experience their comment “With the right pricing strategy, sales will increase, discount requests can be effectively deflected and lowering your price will no longer be necessary to win the business” is so very true; a formula for increased profit, which after all is why you are in business.

The first five mistakes were:

Mistake #1: Companies base their prices on their costs, not their customers’ perceptions of value.

Mistake #2: Companies base their prices on “the marketplace.”

Mistake #3: Companies attempt to achieve the same profit margin across different product lines.

Mistake #4: Companies fail to segment their customers.

Mistake #5: Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences.

Now onto their next three common mistakes

Mistake #6: Companies often incentivise their salespeople on revenue generated, rather than on profits.

Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume at the lowest possible price. This mistake is especially costly when salespeople have the authority to negotiate discounts. They will almost always leave money on the table by:

(1) selling lower priced products, and

(2) dropping prices to “clinch the deal.”

When their “job” is to get the deal, regardless of profitability, salespeople will do exactly that. And, as a result, your profitability will diminish.

Companies need to redefine the salesperson’s “job” as maximizing profitability, and incentivise profitability, while also providing the salespeople the necessary “tools” to do so. These tools include information on profitability on each of the products your company sells, strict control of the awarding of discounts.

One Atenga client was persuaded by its sales staff to reduce the price of its keynote component from $2400 to $1800. The staff believed – and persuaded management -that lowering the price would drive proportionately higher sales volumes.

The result was catastrophic. Sales volume over the following year declined almost 40%, as customers and channel partners perceived that the lower price signalled a lower quality.

That lower-quality perception prevented the company from reversing the price increase, and it was not until a new product was designed – 18 months later -and released that the company began to recapture its former price point, and sales volume.

Mistake #7: Companies change prices without forecasting competitors’ reactions.

Any change in your prices will cause a reaction by your competitors. Smart companies know enough about their competitors to forecast their reactions, and prepare for them. This avoids costly price wars that can destroy the profitability of an entire industry. Savvy companies understand that any significant lowering of your price – which may drive increases in volume – will provoke a reaction from your competitors.

One Atenga client dominates its marketplace for a specific type of internet web services. As they prepared to move into a new market for the services, smaller competitors were already selling into it with a different form factor.

Atenga research showed that the new form factor would be preferred by the entire market – including the client’s existing customers. The new entrants were financially weak, however and a low price point by the client would put pressure on the competitors that they would not be able to stand.

At the end of the Atenga engagement, the client purchased one of the competitors, and went on to dominate the market in the new form factor, as well.

(Note:  Australian subscribers will be aware of the costly impact the price war between our two major grocery retailers, Coles and Woolworths, are having on their suppliers.  AG)

Mistake #8: Companies spend insufficient resources managing their pricing practices.

There are three basic variables in a company’s profit calculation: cost, sales volume and price.   Most management teams are comfortable working on cost reduction initiatives, and they have some level of confidence in growing their sales volume.

But good price setting practices is seen as a “black art.” Consequently, many companies resort to simplistic price procedures, while the same companies use highly sophisticated procedures and technologies to track and control their costs in minute detail and in real time.

Likewise, companies believe they know what effect marketing campaigns and “the number of feet on the street” have on sales volume. Managers feel comfortable with these two hard data sets. Therefore, they spend nearly all their time on the issues of sales volume growth and cost control, overlooking the vital role of pricing strategy.

They erroneously believe that pricing is not important, or that hard data and rigorous methods are not available to enable them to control pricing. In fact, pricing is of outmost importance, and a key element of the marketing mix.

Good pricing strategies use hard data generated by modern methods such as Value Attribute Positioning, Conjoint Analysis or Van Westendorp’s Price Sensitivity Meter, to generate accurate hard data on the perceived value of a product or service, thereby enabling mangers to maximize their profits by optimizing their prices.

One Atenga client managed prices by reviewing the prices of their competitors and making adjustments to their own accordingly. The primary data input to the pricing decision was the stories customers and salespeople told them about how competitors were offering lower prices.

Atenga research showed that a significant segment of the customers desired a particular set of services along with the product, and that if our client, as opposed to its competition, offered those services, they would be willing to pay significantly higher prices, as their overall costs would decline.

Setting price levels and strategies based on competitive information was missing important profit opportunities.

Here are the takeaways:

  • Your sales team incentives should be based on maximising profits, not sales.
  • Rightly or wrongly, price has a role in shaping people’s perceptions of quality; the lower the price, the lower the quality.
  • Any change in your prices will cause a reaction by your competitors. Forecast their reactions, and prepare for them. This avoids costly price wars that can destroy profitability.
  • Business spend nearly all their time on the issues of sales volume growth and cost control, overlooking the vital role of pricing strategy.  Pricing is a key element of the marketing mix.

I’ll pass on the final three mistakes next week. After all, you can only make so many mistakes bwfore yoy go out of business.

In the meantime, pour yourself a coffee or a cuppa and take 10 minutes to consider whether you are making any of these mistakes.   You could be leaving money on the table, money which is all profit.

What is your pricing strategy?

Do you face that dilemma, trying to reconcile the need to improve profitability with the threat of losing customers if you do raise your prices?  If you would like to discuss how you could generate a continuous stream of profitable customers, keep those customers and minimise customer churn through an improved pricing strategy, contact me.  There’s no cost for a consultation.  It is my gift to you.

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

More Mistakes Businesses Make!

Last week I discussed how making mistakes in pricing leaves money on the table - the paradox of pricing; Price strategy is a key resource for companies to increase their competitive advantage, yet most don’t have a strategy or process to set their prices.  Nine times out of ten, business planning on pricing is dominated by the fear of losing customers if prices are raised.

Yet their margins will suffer if they don’t.

And I gave you the first two of ten common mistakes businesses make from an article by Dennis Brown from Atenga Inc. (www.atenga.com )- “Ten Common Mistakes Companies Make in Pricing their Products or Services”.  Atenga specialises in specialises in developing price optimisation strategies for businesses. 

Here are the next three mistakes commonly made:

Mistake #3: Companies attempt to achieve the same profit margin across different product lines.

Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines. The iron law of pricing is that different customers will assign different values to identical products. For any single product, profit is optimized when the price reflects the customer’s willingness to pay. This willingness to pay is a reflection of his or her perception of value of that product, and the profit margin in another product line is completely irrelevant.

The Wall Street Journal reported on March 27 of this year how the industrial behemoth Parker had a uniform 35% gross profit objective across its 800,000 products. They were stuck in a “profit-margin rut.” A new CEO in 2002 determined to change this. The change was championed in the face of determined opposition from the division managers. “There was so much pushback,” according to the Journal, “the CEO eventually assembled a list of the 50 most commonly given reasons why the new pricing scheme would fail.  If a manager came up with an argument not already on the list, then Mr. Washkewicz agreed to hear it out. Otherwise, he told them, get on board.” The company credits the new pricing program with adding $200 million to their bottom line, improving return-on invested capital from 7% to 21% and its shares have gained nearly 88%.

Mistake #4: Companies fail to segment their customers.

Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.

One Atenga client developed an innovative software product. They priced the desktop version at $79.00 per seat, a figure that “felt right” for the executive team. Sales stagnated. Atenga research showed that there were two distinct market segments: consumers and professionals. The $79.00 price was too high for the consumers who were interested in purchasing the product, and too low for the professionals. It communicated “not a serious tool” for the professionals who were interested in its value proposition. As a result of this research, the company decided to focus on the professional marketplace, and raised the price to $129.00. Sales soared.

(After a workshop for a client I received an email from an attendee thanking me for the content.  He also said “Also the cost is too low and therefore appears not to be valuable.”  AG)

Mistake #5: Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences.

While we don’t advocate changing prices every day, the fact is that most companies fear the uproar of a price change and put it off as long as possible. Savvy companies accustom their customers and their sales forces to frequent price changes. The process of keeping customers informed of price changes can, in reality, be a component of good customer service.

Marketplaces change radically in a short period of time. It is important to recognize that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes.

One Atenga customer sells services to the biopharmaceutical marketplace.  Over the past few years, demands for its services have increased dramatically, and the entire industry has run into limitations in the number of trained personnel to do the work, and restricted capacity in terms of the required facilities and equipment.  The company has held prices constant for the past seven years, even in the face of rising costs for capable staff.  Atenga research found that customers believed the company was the best “value for money” in the industry, and they could raise prices about 12% without impacting sales.  The additional 12%, however, more than doubled the company’s profits in the second quarter after it was initiated.

Here are the takeaways:

  • Different customers will assign different values to identical products. For any single product, profit is optimized when the price reflects the customer’s willingness to pay.  Trying to impose uniform margins across your range is a sub-optimal profit policy.
  • The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference.  Tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.
  • Most companies fear the uproar of a price change and put it off as long as possible. Savvy companies accustom their customers and their sales forces to frequent price changes

I’ll pass on another three mistakes next week.

In the meantime, pour yourself a coffee or a cuppa and take 10 minutes to consider whether you are making any of these mistakes.   You could be leaving money on the table, money which is all profit.

What is your pricing strategy?

Do you face that dilemma, trying to reconcile the need to improve profitability with the threat of losing customers if you do raise your prices?  If you would like to discuss how you could generate a continuous stream of profitable customers, keep those customers and minimise customer churn through an improved pricing strategy, contact me.  There’s no cost for a consultation.  It is my gift to you.



© Copyright 2016 Adam Gordon, The Profits Leak Detective 

And leaving money on the table?

Sometimes the most difficult subject to raise with businesses is how they set their prices and whether they could raise them.  Most believe they can’t.  Most don’t have a strategy or a process.

And in not having either, pricing is not carried out systematically to optimise profits on a sustainable basis.  Poor pricing is a classic profit leak, one way or another it leaves your money on the table, money which would go straight through to your bottom line.  I’ve written many times on this subject. 

For that reason, I welcomed a recent opportunity to exchange comments with Dennis Brown who was good enough to offer some kind words about my scribblings.  Dennis is from Atenga Inc. (www.atenga.com), a consultancy which specialises in developing price optimisation strategies for businesses. 

To quote them “With the right pricing strategy, sales will increase, discount requests can be effectively deflected and lowering your price will no longer be necessary to win the business.”

He was kind enough to offer an article, “Ten Common Mistakes Companies Make in Pricing their Products or Services”.  In this, and the next two blogs, I’ll cover all ten common mistakes.

You might find a different perspective useful in considering your own pricing policies and processes, and I’m sure you will be nodding in agreement when you read some of these mistakes.

“Ten Common Mistakes Companies Make in Pricing their Products or Services”

By Dennis E. Brown with contributions from Per Sjofors

Introduction:

Price strategy is emerging as the most important resource for companies to increase their competitive advantage. The vast majority of companies have spent years achieving gains through cost cutting, outsourcing, process re-engineering and the adoption of innovative technologies. However, the incremental benefits from these important activities are diminishing, and companies need to look at other areas to improve their business results.

Today, companies are looking to serve well-defined market segments with specialized products, messages, product variants and services, and to earn superior profit margins while doing so.  Savvy companies are implementing price optimization schemes and focusing on building their organization to serve their most profitable customers.  Many are even “firing” customers who are unprofitable.

All too many companies use simplistic pricing processes and cannot even identify their most profitable customers or customer segments. This lack of information means that all too many management teams have their sales staff focusing the bulk of their time servicing the least profitable of their customers. Some companies even embrace policies and pricing strategies that drive away their best customers, and then they wonder why their profits are not growing.

In the course of our engagements, we have seen examples of good and bad pricing policies. The following is a list of ten of the most common mistakes companies make when pricing their products and services.

Mistake #1: Companies base their prices on their costs, not their customers’ perceptions of value.

Prices based on costs invariably lead to one of the following two scenarios:

(1) If the price is higher than the customers’ perceived value, discounting increases, sales cycles are prolonged and profits suffer;

(2) If the price is lower than the customers’ perceived value, sales are brisk, but companies are leaving money on the table, and therefore are not maximizing their profit.

Costs are only relevant in the pricing process because they establish a lower boundary for the price.  In certain circumstances, there are strategic reasons a company may decide to sell a product below its cost for a period of time, or to a certain market segment as a “loss leader.”

However, when a price is set according to the perceived value of the product or service, sales are brisk, and profits are maximized.

One Atenga client manufactures audio components. Across their product line, they set prices according to a multiple of the parts cost. When the market for high-end audio components boomed, the company did well enough. But as competition began to increase, sales stagnated and profits evaporated. Our research showed that particular products were perceived by certain segments of the marketplace as “priced too low.” Repricing of those products created enough additional revenue to pay for the launch and marketing of a new line of products and restored the company’s leadership position in its niche of the industry.

Mistake #2: Companies base their prices on “the marketplace.”

The marketplace is often cited as the “wisdom of the crowds,” the collective judgment of the value of a product. But by resorting to “marketplace pricing,” companies accept the commoditization of their product or service. Marketplace pricing is a resting place for companies that have given up, and where profits end up being razor thin. Instead of giving up, these management teams must find ways to differentiate their products or services so as to create additional value for specific market segments. The marketplace is full of companies that have managed to drag themselves out of commoditization and establish a unique value proposition.

They have then gone on to capture that unique value at prices higher than those of “the marketplace.”

The best-known case of reverse commoditization is Starbucks. By rethinking the entire experience consumers of coffee engage when they consume a cup, the company has produced prodigious growth and outsized profits. A Starbucks cup of coffee delivers a unique value proposition that engages millions of consumers daily (including this author!), and they happily pay $3.00 to $4.95 for what used to be a ninety-nine cent cup of coffee.

Thanks Dennis – more pricing mistakes to avoid next week.

Is your business travelling as well as it could, and should?

Do you face that dilemma, trying to reconcile the need to improve profitability with the threat of losing customers if you do raise your prices?  If you would like to discuss how you could generate a continuous stream of profitable customers, keep those customers and minimise customer churn through an improved pricing strategy, contact me.  There’s no cost for a consultation.  It is my gift to you.

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

You will be, if you run your business the wrong way

You probably know the statistic; something like two-thirds of businesses fail in the first three years, a horrible statistic that rises to around 80% by five years. 

Why is it so?  I’ve touched on this question from a number of angles but there’s always another, useful perspective from which we can learn something to keep improving our businesses, their cash flow, and profitability.

Is there a ‘right way’ to run a business?  One thing is for sure, run a business the wrong way, and you’ll end up as one of those statistics – road-kill on the business road.

But what is “the right way”?  There are so many different elements that have to be juggled, and meshed together so they all run like a well-oiled machine. And you, the owner, have to be both engineer and mechanic, keeping the cogs properly meshed, oiled and spinning.  Get one cog out of gear, do things the wrong way, and the machine just won’t work

So I talked to Martin Sargent from The Business Group to discuss this conundrum.

For those of you who don’t know Martin, he has been a business consultant in the New Zealand scene for the past 15 years. He gets his daily fix of excitement by working alongside business owners to achieve their true potential.

With vast experience both at the corporate level and in the small to medium business environment, Martin and his team have developed their own unique solutions covering planning, marketing (including online and social media) and money management to help business owners achieve their dreams.

Martin was keen to share one of those solutions with you - "How to do Business, the right way…”  He touched on the eight elements he sees as critical in doing business the right way.

I asked him four questions to explore this issue:

1.    Why did you get into business as a business consultant?

2.    What do you see as the major hurdle business owners face?

3.    What are the 8 critical elements of the business jigsaw you refer to?

4.    What is one thing you would like to leave your listeners with?

Some takeaways you will find useful

There are sources of advice beyond the usual that people suggest by rote; accountant, bank manager and so on.  Small and medium enterprises make up a very large part of our economy, and their owners have a lot of issues that don’t slot into the traditional pigeon holes. 

One large hurdle that must be cleared is the trap of treating the business as a job, and not a business.  That is why it is so important to go into your business with a plan – plan your entry into the business, plan how you will operate, and, just as importantly, plan your exit.  You need to be aware of each part of your business, and how it will operate in the plan.

Critical elements that need to be covered:

1.    Getting the right people and put them in the right jobs

2.    Having the right mindset, focusing on the things critical to your business

3.    The right products and services, right for your business, and for your market

4.    Make sure you give your client/customer the right experience

5.    The right governance – making sure the business is being run the way you want it run

6.    Getting the right message out about who you are

7.    Having the right processes and procedures, and that starts with actually documenting them.

8.    If you can’t measure it, you can’t do it.  You need both financial and non-financial measurements

If there is one key issue, it is PLAN.  It doesn’t matter how your plan looks, but write it down, get it down.   Make yourself accountable for what you say you will do.  That is - IMPLEMENT.  Most plans fail because they aren’t actually implemented.

If you would like to get more information or resources from Martin, you can:

•    Get goodies from his website at http://www.the-business-group.co.nz/

•    Subscribe to their newsletter and blogs

Fast Track to Cash

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, it is not just marketing that is holding them back.  It is the lack of control they have over their business, and eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand:

•    The strengths, weaknesses opportunities and threats of their business

•    Determine where they want to be – clear, achievable goals, and

•    How they are going to get there – their strategies to achieve their goals

This is sometimes known as the NOW – WHERE – HOW model.

If you would like to discuss with me how you might do that, book a Strategy Consult here



© Copyright 2016 Adam Gordon, The Profits Leak Detective 

If it does, it could be costing you a lot!

You will recall a survey I recentlly discussed which found that 88% of the businesses surveyed knew they had a profit leak.  Of these, nearly one-third had no idea where the leak was and so were not doing anything about it.  Estimates of the amount being lost ranged from less than 10% to up to 20%

Looking at the results more specifically, lost sales opportunities, poor project profitability, and low staff utilisation were all among the top areas of profit loss, but some 32% of respondents had no idea where the leaks were occurring.

Of those surveyed, 63% believed that the percentage of profits leaking could be anywhere between 0% - 20%.  At the upper end of the scale that is a lot of money.  It would have a deleterious impact on your bank balance.

I say ‘your bank balance’ because I’m sure there is a question in your mind as to whether this applies to you.  After all the companies surveyed were largely not small businesses, and they were UK based.

Based on my experience I think they do.

Some years ago I summarised my findings from all the small businesses I had reviewed, diagnosed, and helped improve their business; helping them find and plug their profit leaks.

Where did those profit leaks occur? There were three main areas:

Sales and marketing – most were very bad at marketing. They had no formal or planned marketing strategy and had no sales training. This is not surprising, as they had usually established their business on their technical or trades skills.

They rarely had information on the sales and, more importantly, profitability of their key market segments, or the products and services sold to those groups. Nor did they have information on their promotional programs – the leads generated, the conversions from those leads, the cost per customer acquisition; what works and what doesn’t.

Operations – despite those technical skills there were often profit leaks on individual jobs or projects, or in specific aspects of their business. The case study on the Profits Leak Detective home page is a typical example of a business that did its jobs well, but lost money on many. There have been many other such examples.

Again, the underlying problem has always been lack of management information on what was happening operationally. Once the information was available the solution was obvious.

Administration – unlike the Access survey, finance has rarely been a problem. Small businesses tend to be run as a fairly right ship. But the administrative systems and procedures to support the business were rarely available.

Equally rare were Management Information Systems (MIS) to provide the week-to-week and end of month information and reporting necessary to run the business. Regular reporting and review was noticeable by its scarcity.

Conclusion

Those Access Group findings are likely to apply to you. There is a pretty good chance that you have a profit leak, and that you may not know where it is coming from, or how significant it is.

The solution is simple, as the Access Group suggests: have the right information available, and the reporting tools to ensure it is not just available, but is utilised. Then you will have no need of excuses, and be much more profitable.

Fast Track to Cash

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, it is not just marketing that is holding them back.  It is the lack of control they have over their business, and eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business, giving them back control of their business, and restoring their cash.

If you would like to discuss with me how you might do that, book a Strategy Consult here



© Copyright 2016 Adam Gordon, The Profits Leak Detective 

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