by MHolland | Jun 18, 2020 | Business Tips
I just read a Blog from the Business Development Bank of Canada called 7 Steps to Setting the Right Price for Your Products or Services.
The Blog makes some good points. I have 2 comments on it, though.
Firstly, the Blog has the overall wrong focus. It is inward not outward. This is common.
What do I mean? In this BDC Blog the first two steps are:
- Calculate your direct costs;
- Calculate your Cost of Goods Sold.
Those steps are important, but not yet.
Your internal costs should not dictate your prices.
Yes, you read that right.
Why? No one cares.
Think about it. When you shop, do you care if that store is either:
- Losing money on that thing you just bought? or,
- Making a killer profit on the sale?
No difference, right? You are looking at one thing only – value for money.
And, that is subjective. It varies from person to person. Place to place. Time to time.
This leads me to the first thing you must look at in pricing….
What Do People Value in Looking at Your Products?
Why do they shop with you? Is it unique? What makes it unique?
Let us look at two simple examples –
First, things have subjective value. There are a group of consumers who value the 3-point star on a Mercedes-Benz. It is a symbol of quality. General Motors could replicate the exact same car as a Mercedes. Those same people would value it less. In this case, it is the prestige of that 3 Point Star on the hood. It may be a sense that the inherent quality means the car will last longer. Ergo, it is worth more.
Secondly, bundling can create a perceived value. You have never skied before. You go into a ski shop to buy a pair of skis.
The astute salesclerk guides you to a “Beginner Ski” package. It includes pants, jacket, boots, poles, toque, gloves, and goggles. You went into the store to spend $xx and ended up spending 3 times that!
There was a perceived value. The single price of each item likely added up to more than the bundle price. Yet, the store owner made a much higher sale.
OK, so we know value is a perception. It is not objective. If it were, everyone would have the exact same reaction to the sticker price of an item. We know that is not true.
This leads to the second thing…
No One Cares About Your Costs
You enter the store, and the owner sits you down. He pulls out his Profit and Loss Statement, showing you all his costs. He explains how expensive it is to be in business these days. Yawn.
He shows you a modest and fair markup for his products.
Feeling good yet? No?
Why not? His markup is fair. It is even lower than you would expect.
You just do not care. Why not?
Because for one thing, he could be a poor manager. His staffing costs could be way too high. Material wastage is out-of-control.
I repeat. The store owner’s costs have no bearing on your buying decision.
With one exception! Buyers are acutely aware of abusive labour practices. Unfair labour practices can bring a decline in that perceived value.
This leads to my last point…
Lower Costs Does Not Equal Lower Price
You figure out a way to make your products for less. Lowering your prices is the ethical thing to do, right?
Deciding to lower prices could increase volumes. Or, invite more competition.
People value the end result of what you offer them. Your lower costs does not change their perceived value.
One of the points in the BDC Blog was to determine your markup from your actual costs. The problem here is obvious. Why should your customers pay for excess fat in your production?
Or, you may be leaving profit on the table they would be happy to pay for.
In Summary
There is nothing wrong with low prices, low costs, high volume. The challenge is that you are competing with Costco, Amazon, and Walmart. And, you will not win.
I just read about a hardware business in the USA. The owner sent his team members to Lowe’s and Ace Hardware to check prices. He would then lower his. A better strategy would be to stock unique hammers and charge more, not less.
Here are the steps in the correct order:
- Determine the value you offer through the eyes of your customer;
- Set your price;
- Look at your costs. Too high? Sharpen your pencil. Consider outsourcing your production.
Thanks for reading…
by MHolland | Jun 5, 2020 | Business Tips
Being in business is just about creating and selling stuff. Delivering services. Right?
Wrong. It is about creating advocates for your business. There is a pathway to creating advocates. It is narrow and uncrowded.
Would you like to know what it is?
The best way to show you is with a Chart, a grid.
It looks like this:
The vertical axis is what you do – your outcomes. A law firm provides legal services. A restaurant? Meals. Clothing store? Clothes. You get the idea.
The question going up the chart is – did I ‘not meet’, ‘meet’, or exceed my customers’ expectations?
You go to a restaurant. Your meal was either crappy (not met), good (met), or just like mom’s cooking (exceeded).
Now look at the horizontal axis. It is called “Process”.
It is not how you do what you do (that is operations). It is how you deliver what you do.
Everyone knows you can get a great meal, and lousy service. It can be lousy in any number of ways.
A grumpy, rude, indifferent, or distracted server for example.
The “process” part is the people part. Did the business show they cared for you?
The Colors Are the Clue
Look carefully at the Chart above. The colors are a clue. There are 3 red boxes, 2 green, 2 purple, 1 brownish, and 1 blue.
Let me unpack it for you.
The Color Brown
The bottom corner – in our restaurant example – means the food is bad, AND the service was horrible. You are gone. And, likely you will tell a lot of people. Way more than when it is great.
The Color Purple
Look at the 2 purple boxes next. In the bottom, middle box the food is bad, but the server was friendly. (Expectations not met, satisfied with the service). In the middle, left box the food is good, and the service is horrid. (Expectations met, dissatisfied with process).
What do you do?
You are searching. You want a better restaurant to go to. Perhaps you are not gone – just yet – but actively looking!
The Color Red
Three boxes are red. Bottom right red box – you are dazzled with service; food is really awful. In top left red box – the food was terrific (better than expected), but the server was rude.
Middle red box – everything is good. Not great. Good. Food is good. Service was good. You are satisfied. Just not running home to share with your friends and family about the place.
As the business owner of this restaurant, are you secure?
No. You are “at risk”. Those customers could leave you. They will leave you when something better comes along.
The Green Boxes
There are two possibilities here. Either the food was amazing, and the service good. Or, the service was dazzling, and the food was good, not great.
You are safer here indeed. Because you have something all businesses long for.
Check it out below.
You have loyal customers.
So, what is wrong with that? Isn’t that enough. Sure. It is good. But is that what you really want? Because there is one piece missing. One secret ingredient.
Remember what I said at the beginning? The road is narrow and the gateway is small.
This leads us to the last box….
The Blue Box
The blue box is where your advocates live.
In this lonely top corner box, you have been blown away with the meal AND the service dazzled you.
And here is the lesson. The one thing advocates do (something even loyal customers do not do) is this:
- They cannot stop talking about your business
They are a walking, talking billboard for your company. They rave about you to friends and family and on social media. Stories are shared about you – good stories. They smile telling their friends about their experience. They gush a bit.
Here is the challenge (for all of us in business). Not how we get there. We may be able to pull that off – occasionally.
It is how do we stay there. How do we embed that dazzling experience with outstanding products/services into the DNA of our systems?
Thanks for reading….
PS – the above distinction applies as much – actually more – during a pandemic
by MHolland | May 27, 2020 | Business Tips
People love to shop. Businesses love to expand. Businesses and people spend what they earn…
The one thing they do not have enough of is what?
Savings.
The pandemic created a global liquidity shock. Customer A owes your business money. They lost 95% of their sales. They cannot pay you.
You, then, cannot pay your suppliers. And so on, and so on, and so on…
It is global. It is a shock. And, it means you have no cash coming in.
What to do?
Downsize, for one. Scale back. Get lean.
The pandemic has showed a lot of people what they did not do. Save money.
Most people and businesses spend what they earn. They feel this pressure to “look the part”.
When you make more, you want to drive a better car. Live in a bigger house. Wear fancier clothes.
The same is true for businesses.
And, here is the raw truth faced by everyone:
Did you save enough money to last 6 months?
I mean, enough to pay all your expenses with not a shilling coming in.
Spending Can Be an Addiction
We buy stuff for many reasons. It can be because we need something.
It may be because there is a hole inside that you are trying to fill up. And, as in all addictions, spending will not, cannot, fill that hole.
Consider it may be a desire to “look good”. You look around, your neighbours, friends, and family drive better cars. You feel “less than”. So, you spend to “keep up with the Joneses”.
Here is a rule of thumb:
Save first
Put money into a vault. Spend what is remaining. I am not suggesting becoming a miser. I am saying – save first, not last.
When you save last, there is usually nothing left. It is all spent.
Here are some focus points to think about before you spend*:
Do not shop.
Live within your means.
Take care of what you have.
Wear it out.
Do it yourself.
Anticipate your needs.
Research value, quality, durability, and multiple use.
Get it for less.
Buy used (especially cars).
*Courtesy of Joe Dominguez, Your Money or Your Life
The Most Impactful Graph, Ever
The following “fulfillment chart” is the most impactful graph, ever. I saw it years ago and it changed me.
What it shows is that fulfillment does indeed go up with each dollar spent.
In the beginning! When you have NO food, clothes, or shelter.
Money spent creates great fulfillment when buying these basics. Remember that first old beater you had when 16 or 17? I do. Loved it. How about your first little studio apartment. The one that was all yours. Fulfilling just to remember, isn’t it?
As you move up the left side of the graph (fulfillment) you reach a crossover point. That point is called “enough”. That is the point where each dollar you spend brings less and less fulfillment.
In fact, it starts going down! Yup. #truth. It goes down…
How does that work?
The effort required to “get more stuff” means more work, less savings, and higher stress.
Let me illustrate with an exaggerated example. Someone you know has a nice house, good job, wife, and 3 kids.
They want more. They buy a bigger house. House comes with fatter mortgage. But that is ok, because the husband just got promoted and has more income to cover it.
But the promotion comes with higher expectations. This means longer hours at the office. Less time with the family.
The husband – to relieve stress – has a brilliant idea! Buy a motorhome so the family can spend more time together on holidays!
The wife takes a part-time job to pay for the motorhome payments.
The family is spending less time together now. The stress has the husband drinking more and eating poorly. And then a pandemic hits. Unexpectedly.
What to Do Now (If You Did Not save)?
Cut back every discretionary expense you can. Grow your own food in a backyard garden. Start saving now. It is not too late. Get creative. A crisis forces creativity!
Remember principal number one – save first.
And, as we start to come out of this pandemic, please, do not go back to old spending habits. I repeat do not.
Thanks for reading…
by MHolland | May 7, 2020 | Business Tips
Everything is going virtual, right? Zoom meetings. Cloud-based accounting. Online banking. VOIP phones. Website portals.
The pandemic has forced businesses to figure out new ways to work online.
How do you market right now?
Tip #1 – Create an Awesome Service Experience Online
Let us say you own a restaurant. It has been forced to stop due to Covid 19. First question is – can you shift to takeout or catering?
How do you create an awesome service experience online?
First, look at all the points where your customer “engages with your business”.
In a restaurant these touch points are:
- Phone
- Website
- Email
- Waiter/waitress
- The Food
- Parking lot
- Front entrance
- Host/Hostess
- Physical layout
- Bathrooms
Moving the restaurant online, the touch points are:
- Phone
- Website
- Email
- Delivery man/woman
- The Food
- Packaging
- Extras
- Cleanliness of delivery vehicle
See the overlap? Five are the same. Three are new touch points.
Now, walk through each touch-point and re-engineer this business for awesome experience.
This could include:
- A re-designed website, with the daily menu and specials on the front page.
- An online-order-portal. This is where customers order and pay.
- Spiffy branded uniforms for the delivery people.
- Branded, colorful packaging.
- Training for the Team in scripts you want said as you deliver food.
- Scripts for answering the phone.
Systems for phone answering are critical. Answering the phone on the second ring – every time – creates consistency. Consistency at this time wows people. This has them keep coming back.
Tip #2 – What is Old Can Become New Again
Marketing can be offline. You can be bold and try “new” things.
When everyone is marketing online, try something old: direct mail.
Direct mail may surprise prospects. They are not getting much mail. Odds are they may read your letter.
The big challenge is a lot of businesses are working from home. Where to send your mail? Getting the right address will be crucial.
Direct mail must be followed up with a phone call.
My coaching is trying a small number to start (25-50 leads). Then call each one the following week.
Take a problem solving, non-salesy approach. Few businesses want to be sold to in a pandemic. Do you have a service that can fix a problem or save them money? They may be eager to listen to you.
I hope this helps. Thanks for reading…
by MHolland | Dec 11, 2019 | Business Tips
Many people might answer the question above by saying, “to make a profit”.
After all, why else would you be in business, if not to succeed and make a profit?
Fair enough, however, consider in another area of your life – health. Would you ever say, the purpose of my life in the area of health is to lose weight?
Losing weight and earning a profit are simply results of doing the right activities.
I would like to suggest that all businesses could have the same over-arching Strategic Purpose that is composed of 4 parts.
I can hear the groans already! What! The same Strategic Purpose as all other businesses?? How does that work? My business is unique, I can hear you saying…
Hang on, you are right, your business has a very unique strategic focus.
The 4 Purposes of a Business I am about to share with you are the umbrella that you hang all the specific things you will do to achieve your overall purpose.
Purpose #1 – To Create New Customers
If you are not in business to create new customers, then what are you in business for? Certainly, I am sure we can all agree that creating new customers is valid for all businesses.
Now, you will uniquely apply your creativity to figure out specifically how you will create new customers.
There are only two realities here – either you have nothing to sell, or you do, yet cannot convince people to buy it for any number of reasons – price, quality, need, timing, workability, competition and so on.
Ok, I know this is very basic, yet you must have a way to create new customers, or you don’t have a business.
Purpose #2 – To Make Sure They Keep Coming Back
Now, you have created new customers, how do you make sure they keep coming back?
Some businesses (no one reading this!) are like revolving doors. A customer comes in the front door and leaves, never to return, out the back door.
They leave, at about the statistically proven rate of 7/10 if they perceive you do not care.
Here, to ensure they keep coming back you must offer great products and services at fair prices, together with great service and incentives to make sure they keep coming back.
Can you see where this is going? It is not enough to create new customers; you must ensure they keep coming back.
Also, you can start thinking of how to ensure they keep coming back! Your own unique creative ways.
Purpose #3 – To Turn Those People into Advocates for You
Now it is getting progressively more challenging. To get customers coming back more often is one thing, to turn them into advocates for your business is something entirely different.
First, what exactly is an advocate?
An advocate is someone who is a walking billboard for your business. They love the service so much that they don’t just come back, they cannot stop talking about you.
Can you think of a business that you use as a supplier, or perhaps are a retail customer of, that you rave about? You literally cannot help talking about that business. It takes more to create advocates than just having great products and services. It takes more than having awesome service.
You have to exceed your customers expectations in both the core product/service of your business and also in how it is delivered – the soft skills in customer service delivery.
Take a look at this Chart below to see the rarity of it (only one box is reserved for it):
Starting at the bottom, if you do not meet your customer’s needs and they are dissatisfied with the service, they are “gone”.
They are searching for an alternative to your business when the service is satisfactory, but their needs are not met, or they are met and the service sucks.
You are “at risk” of losing them when you have added real value in your products or services yet service is bad, or if you have “just met” their expectations and they are “just satisfied” with the service, or lastly if you even dazzled them with awesome service yet the outcome was not met (shoddy product).
You can have loyal customers when you add extra value beyond “needs met” and satisfy them with service, or if you met their outcomes and dazzled them with great service.
The only box in the top right, reserved for your advocates, comes from exceeding their expectations in the outcome of the actual product/service and you coupled that to dazzling service.
Once you have that, you will need to spend very little on marketing because your customers will be raving all over town about your business…
Purpose #4 – To Have Fun Doing What You Do
If you and your Team are actually having fun (and that too is unique to each business) combined with the above three purposes, you will be rocking.
You will be adding value to your Team Member’s lives, your customers will sense the vibe of your business and be attracted to your special flavour of fun.
Having fun does not mean being childish or having a Foosball game in your office. For you it could mean an inner sense of joy bubbling through, with light-hearted humour, care, and love for your Team.
It could be the family atmosphere you created with your Team.
In Summary
Creating new customers, keeping them coming back, turning them into advocates for your business, and having fun doing all that will be a very creative and unique challenge for you to solve for your business.
Can you also see how powerful that is, and that by doing this you would be pretty much assured that the profits are a result of taking actions in these 4 areas?
Thanks kindly for reading…
by MHolland | Dec 10, 2019 | Business Tips
Kindly note the word “conservatism” in accounting has absolutely nothing to do with whether you vote conservative, liberal, or NDP! Ok, now I’ve got that out of the way, let’s define what it means in accounting.
Conservatism in accounting simply means this – that revenue is recognized only when it is assured of being realized (you could say in simple business terms – will I get paid?), and expenses are recognized sooner when there is a reasonable possibility they will be incurred (in other words, you will be liable to pay).
In other words, a cautionary approach is taken which creates more reliable financial statements for users.
Which is why I hate deferred expenses, as I wrote about in a prior Blog. People rationalize deferring expenses (putting on the Balance Sheet as an asset, rather than expensing on the Profit and Loss Statement) by applying (mis-applying?) the matching principle.
As a refresher, let’s talk about what a deferred expense is. A deferred expense (as opposed to a prepaid expense which is different. I will explain later) is an expense that was incurred now, that you think will have a future value in your business. So, you move it off your Income Statement to your Balance Sheet. In other words, you “defer” it to a later date. Sometime in the future, you will expense it.
When you don’t apply the “conservatism” principle in accounting what happens is you end up creating financial statements that cannot be relied upon. They end being full of assumption-based not fact-based.
Let us see how this works by examining a Balance Sheet…
Every Item on Your Balance Sheet Tells a Story
If you were to go through every line item on your Balance Sheet you could tell me a story about it.
Really, you could. The story would either be a true story, based on verifiable facts, or it would be a made-up story, a fairy tale based on assumptions and projections or crystal-ball gazing.
The true stories you could verify. The fairy stories you would have to spin a tall tale.
Let’s go through some examples…looking just at the asset section of your Balance Sheet.
First, what is an asset?
An asset is something you own, something that has value. I could add more distinctions, however, let’s keep it simple for now.
Cash in the Bank
Together as we go through a Balance Sheet we start with “Cash in the Bank”. You unpack the details about this account, in other words, you tell a story.
You inform me that you own that bank account. It is in your company name. You can show me documented proof that you own it.
Is it the correct amount? You could pull out a bank reconciliation showing me your balance in the bank on that date, less cheques that haven’t cleared the bank yet, and deposits of cheques that haven’t been deposited at that time.
All facts, all clear. We can all agree on those facts.
Next, Accounts Receivable
Now you show me a number on your Balance Sheet that says – “this is how much my customers owe my business”.
Again, is this a true story? I don’t know yet. So, to back it up, you show me your accounts receivable list and that includes all the details of each customer and how much they owe you.
You also tell me that you have reviewed each item carefully and determined that they are good payers, and they all will actually pay you.
I may ask some questions – especially about the ones over 90 days.
Why?
Because it is well known that the older the account the less likely it will be of being collected.
Yet all of these are verifiable facts. I could see over the next few weeks how these accounts receivable are converted into cash.
Inventory
What is inventory?
Inventory is stuff on hand that you either bought from a supplier or built yourself that you will re-sell.
You show me how much your inventory is valued at.
Is it a true number or a phony number?
I don’t know. You need to show me your inventory. Show me the details – how many of this item and how many of that item? What did you either pay for it or what did it cost you to manufacture?
Can you sell it for that much I ask?
You tell me that yes, plus a profit, and that you even reduced the cost on some items to the actual sales value you believe you will get.
Do you start to see how this story is a story you can check up on by asking for more documents or even looking on shelves of widgets and count them?
Can you also see, that by writing things down, this becomes a conservative story?
When I say conservative, I mean you have taken the trouble (this is an accounting principle, by the way) to reduce the cost of certain items of inventory that you feel are worth less than what their cost is.
It is kind of like “under-promising” and “over-delivering”.
Fixed or Capital Assets
Next, I look on your Balance Sheet and see you have bought some capital items – things that do have a future value.
Why do they have a future value? Because they are things that will last longer than 1 year.
We can all agree that usually computers, cars, buildings and furniture do last more than 1 year.
You can show me these physical assets. You can pull out legal purchase agreements for what you bought. You can show me invoices.
You will also be depreciating those assets over the next few years based on your estimate of how many years they will last.
Although, the number of years they will last is unverifiable in reality, you, again, have taken a conservative approach. You have reduced their value by your estimate of the wear-and-tear, and reduction in value that occurs over time.
Goodwill and Other Intangibles
The next items in the asset section of your Balance Sheet are intangible items, like goodwill.
Goodwill – what’s that?
Great question! If you made it up, as in, this is the extra value my business has over and above it’s net assets that I can sell it for, then it is a real fairy story you are telling me.
If, on the other hand, you bought that goodwill, you actually paid for it to a third party, that is another matter altogether.
Now, you are able to show me purchase agreements and dollar figures.
Does it mean that it is worth what you paid for it? Sorry to say so, but likely not.
However, it is verifiable in that I can see an actual invoice.
To determine its actual real-life value, I would hire a business valuator to come in and assess the entire business and let him or her place a value on the goodwill.
Deferred Charges
Ok, dear reader, you have been very patient, and now for my rant…
Deferred charges are what exactly? Again, they are things that you would normally expense, however you have decided to defer them to some point in time in the future when you will write them off.
How did you determine this?
By assumptions. Now, the story takes a left turn.
For all the other items above you can show me verifiable documents for what you purchased. You can show me physical stuff even. You can show me bank statements, customer lists, and so on.
Now, you are telling me that these items – these deferred charges, or expenses, have some future value.
How did you determine that value? You tell me that you invested extra labour that will result in higher customer retention and that that cost can be matched to future revenue.
You have no agreements, no proof, no ability to validate the actual time frame involved.
Will it benefit business for 5 years? 10 Years? 1 year? You get to say because it is not based on anything real.
This is the opposite of the conservatism principle.
This is inflation. Inflating your assets to show a value that you cannot prove.
Increasing your income by reducing your expenses.
This is why a non-conservative approach to accounting creates monkey business. And it can defraud lenders and investors.
By the way, there are times you would defer expenses by following the conservatism principle. An example would be start-up development costs when a building is under construction. These would be capital costs in nature, and rightly placed on the Balance Sheet.
So, the moral of the story in this: whichever political party you support, in accounting always be conservative, and know that every number tells a story!
Thanks for reading…
