Posts Tagged ‘price’

Ask 5 Questions To Find Out What Customers Want To Pay

Tuesday, September 18th, 2012

I’m a Scotsman and happy to admit that I fit the “cost-conscious” stereotype that sticks to people from the country of my birth. In fact my friends call me “the canny Scotsman”.

While I’d hardly say that pricing strategy is my favourite part of what we do, I keep an eye open for anything that will give us – and our clients – an edge in that area.

That’s why a blog post about how to find out what customers will pay caught my eye.

The author, Rafi Mohammed, is a pricing consultant and he says that it’s as simple as asking your customers. My first reaction was that they won’t tell the truth. Human nature being what it is, it would be only natural for them to give a “low ball” answer.

But, as with so many things in life, it turns out that it’s not so much what you ask, it’s how you ask it.

Rafi suggests that, rather than ask the question directly, say that you’re carrying out a customer satisfaction survey. Tell your customers that you’re trying to understand what they like about your product or service so that you can serve them better in the future.

Then include these 5 questions in a series that probes general customer satisfaction.

1. “What competitive products did you consider buying?” If the answer is “none” then the customer is not price sensitive and you may have room to increase price. I think that, at worst, the answer will tell you who else your customers are looking at – a valuable piece of intelligence in itself. But, in this economic climate, I don’t think there are many companies that don’t consider alternatives.

2. “What do you think of our prices – are they too high or too low?” The logic is that some customers will clam up when asked this question – but that others will give a lengthy answer. Listen to the second group carefully, without probing any further, and then move on.

3. “What other features would you like added to the product/service?” I really like this question. The information you gather can be used to offer different versions of your service e.g. Silver, Gold and Platinum. It will also tell you what your customers would be willing to pay a premium for – fuel for the development of your next version of the product or service.

4. “What do you like and what don’t you like about our pricing strategy?” I like open ended questions like this. Everyone can find something to say, so the question gets people talking. And lays the groundwork for more probing.

5. “Are there other ways you would like – or even prefer – to buy our products?” This is the kind of question that – 9 times out of 10 – will produce an unsurprising answer. But that lone surprising answer, when it does come, could shake your current assumptions to their core.

If you want to read more, the blog post is called How to Find Out What Customers Will Pay.

By the way I’m not at all bothered being lumped into the Scottish stereotype. In fact I think being called “canny” – a term we Scotsman invented – is a compliment. The Pocket Oxford Dictionary defines it as “shrewd and cautious; worldly-wise; thrifty.” How can that be bad?

If you enjoyed this post you’ll also enjoy Prices – 6 Reasons To Keep Them Up.

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Should I Sell Or Succeed?

Tuesday, April 26th, 2011

Suspend your first reaction – i.e. has Jim finally lost his mind – just for a moment. This is a question we are asked more often than you would think. It may not be posed in those exact words, but it’s always the fundamental, real question.

Let me tell you why it’s asked and then give you our answer.

Frustration and Unexpected Curve Balls.

Business owners like to think they’re superheroes, capable of absorbing unending stress and working mind numbing hours day after day after day. But they’re not, they’re human beings and so – occasionally and less frequently than most – even they get frustrated, tired or worn out.

It often happens when a new initiative or project takes longer, runs significantly over cost, or generally creates more headaches than anyone imagined – even in their wildest dreams.

Another trigger is a completely unexpected event. A competitor dramatically drops prices, a long term supplier goes out of business or a partner walks in and says they’ve decided to retire.

It could be a tough, slow market because of a recession. Or the owner could have reached an age where he/she is ready focus on other aspects of life.

It could be a combination of the above.

But the result is the same – the business owners say the equivalent of “You know what, I don’t have the desire/motivation to do this again. It would be easier just to sell.”

That’s when we hear the question.

You Can’t Do One Without Having Done The Other.

Consultants (it is said) always answer a question with a question. In this case we ask something like:

• “Can you be sure that a company – in the middle of a major project or facing major price competition or about to lose a key player/founder/owner or some combination of the above – will continue to be successful?” and
• “Would you pay top dollar for a company in any of those situations?”

Buyers want to minimize risk when purchasing a company. So the likely answer to both questions would be “No”.

Sellers want to maximize the selling price so the business owners pretty quickly figure out the answer to the “Should I Sell Or Should I Succeed” question for themselves.

A fresh mind can often quickly see a solution to the types of challenges that cause business owners to consider selling in the first place. And this is one situation where we – and other consultants like us – add value.

The Bottom Line.

As a rule, you can’t sell unless/until you succeed.

But, as with many rules, there’s an exception to this one. Want to guess what it is?

5 Tips To Improve Margins and the Bottom Line……

Wednesday, May 5th, 2010

Sometimes the old truths are the most important ones. A conversation with a client the other day got me thinking about these simple tips that can pay major dividends.

There are really only 4 ways to increase profits – sell more, improve margins, cut costs or do all three. Costs always have a habit of creeping upwards over time. So, particularly in these economic times, it pays to take a hard look at them and then eliminate the things we can live without. But there’s a limit to the extent to which we can cut costs before we hurt the company’s long term growth potential. To get steady, incremental increases in profit we have to sell more and improve margins.

There are only 2 ways to sell more – add new customers or increase sales to existing customers. In my experience, when we talk about selling more we tend to put the focus on adding new customers. But we know that it costs at least 6 times more to sell to a new customer than to an existing client. That’s not hard to understand when we consider the “acquisition” costs – e.g. advertising, telemarketing, etc.

Tip # 1. Don’t lose your least expensive prospects – existing customers. They must be convinced that we do a great job; otherwise they wouldn’t buy from us. Every business loses some customers over time, but when customers leak away, replacing them with new ones cuts into profits. The key is to focus on our “retention rate”. We need to have a process that alerts us when a customer stops purchasing from us. And we must find out why exactly they’re leaving – not simply make assumptions. Keeping customers satisfied is better for your bottom line than replacing them.

Tip # 2. Remember not all customers are created equal when it comes to profitability. Pareto’s rule tells us that 80% of our profits will come from 20% of our customers. But, how many of us slip into the situation, over time, of treating all customers as equally important? That actually hurts our profits because we waste money using the same marketing and selling techniques on everyone and treat them the same way when they contact us.

So, how do we recognize the 20% of customers who give us 80% of our profits? They are the companies who buy from us regularly and understand the value of what we do for their business. They focus on quality and reliability rather than price and they pay on time. Because they are successful in their field, they have the potential to grow, allowing us to grow with them. They may even refer potential clients to us. These are our “A” customers. Can you identify yours?

Tip # 3. It makes good business sense to treat “A” customers differently than the others. Everyone in the organization should know who they are. So, when they talk to them on the phone or face-to-face, answer their email, make product for them or pick their orders, these “A” clients get the most prompt, attentive, efficient service we can give. We should market differently to them too. Stay closely in touch personally and via email, e.g. send them our newsletters, and develop the relationship by figuring out how we can help them respond to the changes in their industry.

Tip #4. Watch the customers who offer some, but not all, of the benefits of our “A’s” very closely. They still focus on quality and reliability but may not have been around as long as “A’s” and so may not buy as regularly and/or as much. These are our “B” customers, and apart from what they do for our bottom line today, they have the potential to be the “A’s” of the future. Identify them and build a strong relationship with them. They may get fewer face-to-face visits than the “A’s” but they do get regular calls from our internal sales staff – a very effective but much less costly method of maintaining contact. They are also on our email database.

Then there are customers who buy smaller amounts consistently but who have very little potential for further development. These customers – our “C’s” – are solid contributors to the remaining 20% of our profits but the ones who may be most likely to drift away. Our sales and marketing strategies are designed to maintain these relationships in a cost effective way. Primary contact is via regular (but less frequent than for “B” clients) calls from internal sales and email contact about the products or services they buy.

The final group is easy to recognize – they complain most and buy small quantities of our products irregularly. That’s because they are focused on price and discounts. They buy from us only when we’re cheaper than our competitors – they have no loyalty. When they do buy from us, they are abrupt, demanding, they always need delivery immediately and people hate dealing with them. Processing their orders requires our staff to drop everything else and get them to the front of the line. They are our “D” accounts. Dealing with “D’s” can be so disruptive that occasionally they even cause us to make mistakes with the orders for the profitable customers.

Tip # 5. The final tip is to “fire” your “D” accounts. That’s correct, if orders from “D” customers are profitable they’re at the bottom end of the margin scale and the amount of resource required to get them out the door wipes out anything we were going to make. Yet we all have “D” accounts – why don’t we just get rid of them? We don’t have to be rude, simply play them at their own game – quote high prices or long lead times. They’ll make the decision not to deal with us. Do it often enough and they’ll stop calling.

Focus on your “A” and “B” customers and you’ll improve your margins. Match your sales and marketing resources to customer type and get rid of your “D’s” and you’ll improve the bottom line. Make retaining “C’” customers a priority; work hard at turning your “B” accounts into “A’s” and get your sales staff focused on understanding your “A” accounts’ business – then you’ll not only sell more but you’ll make more profitable sales.

Some “oldies” but truly “goldies” in these very difficult times!

Don’t Destroy the Long Term Value of Your Company……

Friday, February 26th, 2010

The economists are still trying to figure out how long and how deep this downturn will be. As a business owner I think they’re missing the point. The point is that this downturn or recession will come to an end as every one before it has done. That, and the fact that this one is different from any other, are the only things we can say with certainty.

There are 2 types of financial reward for being a business owner and, while it is still with us, the recession will almost certainly affect 1 – annual profits. For some companies they (and the bonuses and dividends that result from them) will be smaller than in previous years. But the recession should not affect the second reward – the ability to obtain a premium price for your business when you sell it – unless you allow it to. 

How do you avoid the danger of letting current events erode the value of your company? The first step is to ensure the (strategic) awareness that the recession will end influences every short term (tactical) decision you make. Keep your long term goals firmly in mind as you make the changes that are required in the short term. The second step is to continue positioning the business for its eventual sale.

The value in a company lies in it’s future as a going concern – independent of current ownership. The same things that guarantee that a company has a future – Plan, People, Process and Peformance in my language – make it independent of any specific owner. All potential buyers will look at historical financial results in arriving at a valuation for a company. But there’s more to a going concern than the strength of its past, normalized EBITDA. Informed buyers will look for the things that will continue to produce great financial results in the future.

Consistent, superior Performance is perhaps the most visible way of demonstrating your company’s potential as a going concern. While the performance during next year and perhaps even 2011 may not be what you anticipated only 18 months ago, remember that success is relative. Outperforming your competitors, and growing more quickly than the industry, for example, are tremendous accomplishments in a recession. Successful companies perform well in any market conditions.

If your business Plan for 2010 and the following 2 years has not been modified yet, this is a good time to do it. Modifying your existing strategies to, for example, put more emphasis on customer retention may be an option. Considering how to finance growth opportunities – resulting, for example, from weakness in a competitor – might be wise if cash flow is likely to tighten and external financing remains tight. But these steps are about changing how you will achieve your vision and goals, not about changing the vision/goals themselves.

Having a planning Process involving the management team – large or small – is one way to show the company is independent of the owner. Most companies have financial, operational and human resource processes in place. But some key processes, for example, a disciplined approach to developing and launching new products or selecting and entering new markets are less common and present owners with opportunities to increase the value of the company. There are also fewer companies with a well mapped sales process, which would give them everything from better forecasting to higher close ratios, than you might imagine.

Despite the fact that cutting headcount is a quick way to cut costs, this is not the time to let good People leave your company. My definition of “good” prioritizes those who, because of their experience in other growing companies, know what has to be done to add value to yours. A strong culture will drive a company forward regardless of who is at the top and is based on never losing sight of the values and beliefs on which the company was founded. The current situation is also an opportunity to implant strong change management skills and get every employee engaged by asking them to contribute their ideas for implementing the company’s strategies.

A flexible plan, wide spread use of well thought out, documented processes and people who can implement both of them will drive great performance – which will lead to great Profits. So, make the decisions required to meet today’s challenges in the context of building the company’s value over the long term. In that way you’ll reap both sets of rewards for the long hours, financial risks and strained relationships that come with the title of business owner.

4 Tips for Making your Exit a Graceful One……

Saturday, January 30th, 2010

About 4 years ago CIBC World Markets published a study which said that more than half of the owners of small businesses were expected to retire within 15 years.

At the time, 3 points paticularly caught my attention. The fact that the sale of their business was expected to generate roughly 30% of retirement income for self-employed people was the first (I am a Scotsman after all). The second was that approximately 40% of business owners were expected to sell their companies to outsiders or non-family interests. And finally, less than 50% of the business owners had a clear plan for exiting their business.

From what I can see not much has changed. You may find this hard to believe but there will come a day when the call of the golf course/boat/cottage/grandchildren etc. can no longer be ignored and even you will either want to sell your company or pass it on to someone in your family. So here are 4 tips based on the experiences of the companies we’ve worked with since the study was published.

Tip # 1. Plan your exit early and carefully. That way you’ll get the biggest financial return for the years of sleepless nights, missed vacations and everything else that you’ve invested.  You don’t ever want to look back and say “I could have got more for the company”. Even if you know who your successor will be, start early, don’t risk waiting until health or other issues pressure you to complete a deal and get out.

Tip # 2. For most of us, selling or passing along our business is a once in a lifetime experience, so talk to people who has already done it – or who have advised those who have done it. Think about things like how long a transition period you want – will you leave immediately after the transfer of ownership or will you stay on for a predetermined period of time? Consider how you would like the purchase price to be paid – are you willing to have some of it come from future profits? Talk to your personal financial advisor. Get him/her to update your calculations about how much you’ll need for retirement.

Tip # 3. Get the help of specialists to value your company and to structure the sale or transfer in order to handle the tax and legal issues effectively. The accountant who does your financial statements and the lawyer who does your contract work may not have a lot of experience buying and selling companies. Find someone who specializes in the valuation of companies (he/she may have the CBV designation).  If the valuation comes in below what you think the company is worth they’ll help you understand why and tell you what you can do about it (Another reason to start early – give yourself time to take a few simple steps that could increase the selling price.) They’ll also make sure you don’t overlook things like the value of any intellectual property you leave in the company. Similarly, find an accountant and/or lawyer and who works daily with the tax and legal aspects of the sale/acquisition and transfer of businesses. If you don’t know anyone we can recommend some specialists we’ve worked with.

Tipo # 4. Many business owners believe that it will only take a few months to dispose of their company, once they’ve decided to get out. That’s an incorrect assumption. Even with a successor waiting in the wings, it takes many months to put everything in place. If your buyer is an outsider rather than an employee or a family member it will take longer to complete the sale. Finding a buyer and then negotiating with someone you don’t know will take even more time.

To build and run a profitable business you have had to do many things well. Don’t let the last thing you do with that business be one of the worst.

Prices – 6 Reasons To Keep Them Up

Monday, November 23rd, 2009

Some of the questions which I get when I finish a seminar, workshop or webinar inevitably involve price strategy. It’s a topic close to my heart (I am a Scotsman after all) and one that provokes strong emotion amongst most business owners. And that’s interesting really, because most buyers typically rank price around 4th in their list of buying criteria.

Price is important only when the product or service being sold is a commodity and very few products actually are true commodities (can you think of one right now)? Large consumer goods companies spend millions on advertising to convince us that some products which are commodities, really aren’t. (Does it really make a difference if you buy gas from PetroCanada or Shell?)

But it probably isn’t necessary for the average business owner to cut prices, offer discounts or to spend a lot of money on advertising to get customers to pay a price which enables them to make an acceptable profit. In fact here are 6 reasons why you shouldn’t be discounting or cutting prices.

Reason # 1. There is no business that doesn’t have the potential to command an acceptable price for its products or services if it is able to market those products or services in such a way that the customer perceives added value. If you don’t believe me just think about the difference in price between a Lexus and a Hyundai – they’re both just a means of transportation. Tip Top tailors and Harry Rosen both sell men’s clothes – but don’t wait for Harry to have a $199 sale before buying your next suit!

Reason # 2. As business owners it’s our job to create the perception that our products and services offer superior value and to back that up with superb service. How do we do that? One way to begin is to figure out who your best customers are (they buy regularly and never complain about price) and ask them why they buy from you rather than from someone else. But don’t ask them to rate the reasons you think they buy from you, ask them to tell you what they consider is important and then ask them to rate your performance on those. Then you can figure out what makes you unique in their eyes.

Reason # 3. Two easy ways to add value are to really understand what’s going on in your customers’ business and how your products impact their success; then pass this information on to your staff and train them to provide what your customer will see as great customer service. (Of course maintaining the quality of your products, and doing regular customer satisfaction surveys won’t hurt either.)

Reason # 4. Remember if your gross margin is 30% and you reduce price by 10%, sales volumes must increase by 50% to maintain your initial profit level. For some reason we’ve come to believe that offering price discounts is a good long term strategy. If you still believe that consider the problems that the North American car manufacturers have created for themselves with, for example, “Employee Pricing” campaigns. Or think about how hard it was for the Bay to get away from “Bay Days” or Sears to stop their “Scratch and Win” promotions. You’re right, despite saying they were going to stop them they’re both still doing them. Once you’ve dropped your prices it is very difficult to get them back up to previous levels.

Reason # 5. Price discounting works in only two situations – where you have a definite cost advantage over your competitors and/or your product or service is one where customers are genuinely, truly, price-sensitive. We’ve already dealt with the price sensitive case and if you have a cost advantage why would you pass the entire extra margin on to consumers rather than investing some of it maintaining your technological or other advantage? Let’s face it, you aren’t in business to simply match the price your competitors set, you are here to serve your customers well and make a profit.

Reason # 6. Remember, if your gross margin is 30% and you increase your prices by 10%, you can sustain a 25% reduction in sales volumes before your profit is reduced to the previous level. Research shows that roughly only 15% of customers think in terms of price. They are better left to your competitors because they will never be satisfied and will always be looking for a better ‘deal.’ Their loyalty is impossible to achieve and they’ll never recommend you to anyone else. Focusing resources on servicing this ‘low’ end of the market won’t sustain the future growth of your business through either your turnover or profitability. It’s far better to work with those people who are happy to pay for value.

If you don’t believe my math or that customer surveys don’t have don’t have to be expensive or if you just want to know the date and location of my next seminar drop me an email

4 Tips to Make Sales Forecasting Easier……………

Monday, September 7th, 2009

If we could forecast the future accurately, most of us would spend our lives at a racetrack or casino rather than at work. But forecasting the future is something we all have to do as business owners – either to set internal goals, to obtain additional financing and for other reasons. Forecasting is, however, one of the most difficult and frustrating things that we have to do and few things cause as much anguish and soul searching as sales forecasts.

Tip # 1. Forget trying to predict the future and focus on using “informed judgment”. Many attempts at forecasting fail because those involved, from sales reps. to business owners, don’t have the detailed knowledge of their market, their competitors, their customers and potential customers that is essential for making good estimates. They are less than fully informed when they make their judgment of what will happen – and that’s a failure of work and effort, not of technique.

Tip # 2. Remember that we can only control some of the things that have an impact on our forecasts, for example, the number of dealers we approach, the effectiveness of our promotional tools and our price strategy. There are others factors which directly affect the odds of our success but which are beyond our control. Some are known and can be reflected in the assumptions on which are forecasts are based, for example the price of crude oil, low pay scales for offshore labour. But there are others to which we can only react, for example an unexpected outbreak of SARS.

Tip # 3. The most common mistakes, in my experience, are that we overestimate how much we can sell and how quickly we can sell it. Avoiding those mistakes is hard enough when estimating how much more our existing customers will buy of the products they currently use. Adding any “new” dimension just adds complexity.

Forecasting increased sales to current customers should be easy. We either increase the volume of existing products, start selling them products they don’t currently buy and/or increase prices. But if the account managers don’t have the skill – or don’t make the effort – to get as much information about, for example, what is happening in the customer’s own business and how that affects our offering to them, we will be trying to forecast with less than detailed knowledge. So, we can’t make informed judgments – fertile ground for overestimating what can be sold.

What happens if, for example, we’re going to start selling an existing product in a new geographic market? If our competitors already offer a product in that region/province/country, how much of our sales will come from the market share we’ll take away from them and how much will come from the continuing growth of the market? To begin, we must understand how our product quality, lead times and prices compare with our competitor’s and how much it will cost to get our message heard over their promotional “noise”. We can do some simple, inexpensive research to gain the detailed knowledge required to answer those questions.

When it comes to taking market share away from competitors, we have to make 2 sales. Firstly convince the customer to stop buying from our competitors and then convince them to buy our product – which is untested in this marketplace. But for most business owners, who are natural optimists and driven, type ‘A” personalities, it is not difficult to underestimate how long this will take!

Estimating the sales that will come just from market growth may seem easy by comparison. All we have to do is to convince the remaining distribution channels to sell our widget – make 1 sale instead of two (always assuming our competitors have left some distributors for us). But estimating how long our new distributors will need to ramp up requires information to help us assess how effective the distributors will be. We also want our share of the market to grow at least as quickly as the market itself. The future market growth rate can be forecast using the actual growth rate for the last 2 or 3 years (either as is, or adjusted upwards or downwards). The rate at which we grow depends on how good a Marketing plan we have. Developing an effective Marketing plan requires informed judgment. Anything less, combined with that optimistic approach of the entrepreneur, will, once again, result in overestimates.

Tip # 4. Even if you’ve worked hard and spent time gathering detailed knowledge which you used to make informed judgments, don’t stop when you develop a “final” set of numbers. Unless you’ve been unusually pragmatic in arriving at this first forecast, call it your best case. Now think of the things that are most likely to go wrong, assume that they will, change your spread sheets accordingly – and call that your worst case. Finally, it’s unlikely that everything will go against you but it’s equally unlikely that everything will go your way so take a third approach, which avoids either of the extremes, run the numbers again – and call that your most likely case.

6 Tips for Managing in Recessions

Sunday, July 26th, 2009

Despite what the media suggest, the recession will not lay waste to every company and household in Canada. Some will be seriously affected and my sympathy lies with them. However, for most of us the impact will be bearable. We know from experience that there are things you can do to mitigate, even minimize, the impact of a recession and articles containing tips and suggestions are already becoming quite common. Here are 6 of what I consider to be the most valuable ideas from the articles I’ve read recently.

Tip # 1. The best time to look for money is before you need it, so make contingency plans now. Do a spreadsheet analysis of the impact of a 5 or 10% decline in sales on your cash flow. Go and talk to your Bank, they’re tightening their terms and restrictions already but they will work with you if you’re a good customer. It’s also a good idea to build a relationship with a second Bank, if you haven’t already done so.

Tip # 2. Look inside the company for cash, for example….can you renegotiate payment terms with your suppliers to avoid borrowing money to pay them? Or will they give you a discount for cash payments? Can you trade off extended lead times, less than 100% fill rates, variable (but not unacceptable) product or service quality against price reductions to improve your gross margins? Sell off unproductive assets, aggressively discount and sell slow moving (i.e. almost dead) inventory, don’t let your Accounts Receivable extend their payments.

Tip # 3. Don’t Lower Prices – Add Value. Avoid the temptation – and pressure – to cut your prices. It will be almost impossible to raise them again later. Either launch a de-featured version of your current product or service and attach a lower price point to that. Or talk to your customers and find out what they need to deal with their challenges and find other ways to “add value” to your current offerings without inflating the cost.

Tip # 4. Don’t make deep cuts to headcount. Letting good employees go can have serious long term effects. You immediately lose the investment you made in training and developing them and you lose an employee whose strengths – and weaknesses – you know. It’s also not uncommon to find that an employee you’ve laid off carried far more knowledge about the operation of the company in their memory than you had realized – and didn’t write it down before they left. There are always some employees who are not pulling their weight. If you have to let anyone go, release them.

Tip # 5. Don’t make deep cuts to promotional activities. Resist the temptation to reduce your promotional budget. If you’ve spent money to create awareness you’ll lose the benefits of that investment if you stop or dramatically reduce your expenditures on, for example, Trade Shows, Advertising and Sponsorships. Look critically at the response rates for your promotional activities and freshen the message or switch dollars from one tool to something more effective – but don’t make deep cuts to the total dollars.

Tip # 6. Help your employees cope. Watch for signs that your employees – particularly the key members of your team – are having problems coping with the recession personally. Everyone makes bad decisions occasionally and, given the easy access to credit of the last few years, many people have overextended themselves. Help them find the advice or counselling they need to deal with their temporary problems. Don’t solve their problems for them – but support them while they do it themselves.

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