Good News

Federal Government purchasers are required to give preference to small businesses (normally companies with 500 employees or less) on purchases of $1/2 million or more.  Under a bill passed last week by the Senate, at least 23% of smaller purchases, normally made by credit card, must also go to small businesses.  According to Inc.com, The Purchase Card Waste Elimination Act, will open up an additional $16 billion in purchases which have traditionally gone to large suppliers.

The House has yet to act on the measure.  Read more details here.

Mine Your Own Business will keep an eye on the measure’s progress for you.

White Knuckle Flyers

Southwestcom_plane
Southwest Airlines has an excellent blog called "Nuts About Southwest" where employees post on a variety of topics.  One regular contributor is Captain Ray Stark.  Today he writes about turbulence, you know the stuff that makes the plane shake like a wet dog and makes you think you’re about to become a statistic?

Cap’n Stark gives an interesting explanation of what causes turbulence and why it doesn’t make planes fall out of the sky.  He asks, "When was the last time you heard of an airliner falling apart because of bumps at cruise? I cannot remember such an event."  He’s right.  It just doesn’t happen.

He describes the procedure for breaking the wing off an aircraft during testing.  The wing will bend almost seventeen feet before it breaks off.  Interesting stuff!  If you’re a white knuckle flyer, this article may put your mind a little more at ease the next time the pilot turns on the "fasten seat belts" sign.

10 Financial Yardsticks for your Business

Do you ever get to the end of the day and wonder where the money is?  Business is good.  According to your accountant, you’re making a profit.  But, when you go to pay the bills, there’s not enough money in the bank to go around.

Joseph Anthony writes for Microsoft Office Live on 10 Financial Yardsticks for Your Business.  Cash flow is the name of the game, and sometimes we just don’t take the time to analyze this all-important measure.  The article is geared toward manufacturing, but the lessons apply to any type of business.  Anthony suggests that you get the answers to the following 10 questions:

1. What are your assets?  It’s especially important to keep track of changes in the value of your assets.  Most things will decline in value, but some things, like real estate, may increase.

2.  What are your liabilities?  It’s not yours if you owe it to someone else.

3.  What’s it costing you to produce (or acquire) what you sell?

4.  What’s it costing you to sell what you sell?  This one may be a little more difficult, but you’d better know the answer.

5.  What’s your gross profit.  We discussed this in an earlier post on pricing.

6.  What’s your debt-to-asset ratio?  How much of what you "own" is actually owned by someone else?

7.  What’s the value of your accounts receivable?  Like total assets, it’s important to know if this is going up or down.

8.  What’s your average collection time on accounts receivable?  Are you acting as a banker for your customers?  If so, how long is it taking you to get your money?

9.  What are your accounts payable?  Are you taking longer to pay because you want to or because you have to?

10.  What’s happening with your inventory?  Again, is it going up?  If so, is it because you’re making an intentional investment in more goods, or are there other reasons?

It’s important that you be able to answer these ten questions.  Big companies always have this information available to them.  You should too.  If you don’t, your accountant should be able to help you, or there’s software available that will make the calculations for you.  (Remember, the article is from Microsoft.)

Thought for the Day

“Never confuse movement with action”

Ernest Hemingway

Too Good to be True?

From Forbes.com, via Wired News, comes this article on resumes.  It seems that as many as 40% of all resumes include some enhancement of the facts.  Employment dates are often fudged to hide periods of unemployment.  Grade point averages and even degrees earned may be the result of creative resume writing, rather than actual accomplishments.  Previous salaries may also be suspect.

The article reports that potential employers are spending more time than ever checking references, which is a good policy.  A little time on the phone could save a lot of headaches later.

Here’s a link to a Forbes slide show on their selection of best resume lies.

Coupons

Coupon_1
Seth Godin has an interesting post on
his blog today that fits nicely into our discussion on pricing.  The
subject is coupons.  He points out three benefits of coupons and two
warnings.  First the benefits.

Number one, a coupon allows you to offer different prices to different
customers. Maybe you’d like to offer a greater discount to customers who travel
a greater distance.  Zip code mailing lists would be one way to do
that.  Zoned advertising would be another. 

Number two is that "they provide the shopper with a totem."
Some customers view a coupon almost like a check.  They have to cash
it.  If they don’t buy, they lose something, the value of the coupon.

Number three, coupons create a feeling of urgency.  If I want to save (or
not lose) the value of the coupon, I have to buy before it expires. 

I would add two more benefits.  Coupons level the playing field.  You
don’t have to be a giant retailer to offer a coupon.  If you use email or
the Internet to distribute them, you have virtually no cost until they’re
redeemed.  Even if you use other media, the cost of the discount is only
incurred when the coupon is redeemed.  Occasionally you’ll give a discount
on a sale you would have gotten anyway, but most coupon sales will be
incremental business that you wouldn’t have gotten otherwise.

Finally, when a shopper walks into your store with a coupon you immediately
know two things.  One, she’s serious about buying.  She wouldn’t have
gone to the trouble to bring in the coupon if she wasn’t considering a
purchase.  Two, you know that price is important to her and can tailor you
presentation accordingly.

Godin’s two caveats?  Don’t do a coupon if you can’t execute it
properly.  In particular, don’t use coupons for high-end products.
If you’re selling to the luxury buyer, a coupon sends the entirely wrong
message.  Even the value shopper may be put off if the coupon isn’t
presented properly.  Finally, "if you make the use of the coupon a
hassle, you’ve blown it."  If there are exceptions, state them
clearly.  If there’s an expiration date (which there almost always should
be), make it very clear.  Spending money to bring a customer into your
store and then making them mad is not a good use of advertising/marketing
dollars.

 

The 84th Problem

We’ve all heard the expression "You think you’ve got problems?".  Sometimes it seems like we’re overwhelmed.  Business problems, personal problems, problems at home, Pujols on the 15 day disabled list.  The list goes on.  No one can have as many problems as we do.  Optimists tell us that problems are just opportunities in disguise and, of course, they’re right.  But on those days when "opportunities" seem to be piling up, we can get very frustrated and think that no one could possibly have as many as we do.

Thanks to Seth Godin for pointing us to this post at "Human Being Curious".  You may want to print it out and save it for one of "those days."

Variable Pricing

Last time, we mentioned competing with the “big box” stores. To do that effectively, you have to master the concept of variable pricing. Variable pricing means that you don’t apply the same gross profit percentage to everything you sell. It’s how the big boxes set their prices and if you’re going to compete with them, you’re going to have to use it too.


The average big box store carries thousands, even tens of thousands of items. Out of this huge assortment, there are a few hundred items that are highly price sensitive. They’re the ones that you and I, as consumers, are most familiar with. They’re things we buy often and we have a pretty good idea of their price. For example, we all use 100 watt frosted white light bulbs. As a general rule, they cost around $1.25 to $1.50 each in multiple packs. They may be 2 for $2.99, or 4 for $5.00, but they’re going to be somewhere in that neighborhood.


By comparison, a 150 watt bulb will set you back something closer to $2.75 – $3.00 each. Why? Does it cost twice as much to produce a bulb that gives off 50% more light? No, they cost twice as much because we’re not sure how much they’re supposed to cost. We assume that if the store is competitive on the prices that we know, they must be  competitive on the prices that we don’t know.

It’s all in the customer’s perception. If you happen to sell light bulbs and your price on the 100 watt soft white is $2.50, you’d better believe the knowledgeable customer is going to be sure that your price is twice as high on everything else.


So, how do you use variable pricing to your advantage? First, make a list of the items that you sell that you suspect fall into the price sensitive category. Then take your list to your big box competitors, all of them. What are they charging? If you find a big variation, you know that the item isn’t price sensitive. If they’re all charging about the same, you’ve found what you’re looking for.


Now, you have two choices. Beat the chains at their own game by pricing the items close to their price. Notice I didn’t say lower than their price. You don’t have to be lower. You don’t even have to be the same. You just have to be close. Normally you can get away with a price difference of about 10%. The typical value shopper will pay that much for the convenience of avoiding the big parking lots and long lines at the chain store.


Your second choice is to not carry the item. Offer the customer better alternatives. If you choose door number two, you still need to know what the big guys are charging for the price sensitive item and have a story to tell your customer explaining why your item is better and worth the additional cost.


As we mentioned before, every retailer no matter how big or how small has to cover expenses. Every item can’t be a loss leader. According to their most recent annual report, Home Depot’s overall gross margin for last year was 33.5%. That means that for every dollar of sales at 10%, there had to be another dollar of sales at 57%. It’s important that you understand this principle yourself. Don’t buy into the story that the big guys are always cheaper on every item. It’s just not true.


There’s another important thing about variable pricing. Remember that shopping list? Keep it handy because you need to repeat this process often, at least monthly. Something may change. You have to be aware of what your competition is doing all the time.  They’re checking on you.


Two friends of mine used to be in the retail gift business. They sold figurines and knick knacks and assorted dust catchers. They had a very simple pricing strategy. Whatever they paid for something, they doubled it. It was a simple system.  There was no complicated math.  They knew what they were making every time they sold something.  And, horror of horrors, they didn’t care if their customers knew it.  It worked for them because their competitors all did the same thing.

Then Cracker Barrel came to town. If you aren’t familiar with Cracker Barrel, it’s a chain of restaurants with gift shops. Or maybe it’s a chain of gift shops with restaurants. Either way, they sell a lot of gifts. You almost always have to wait for a table in the restaurant and you spend your waiting time in the store. Brilliant! These two ladies were convinced that Cracker Barrel was going to put them out of business because of their low prices.


Don’t ask me how, but I know for a fact that Cracker Barrel’s margins range from the single digits to well over 50%. Given the difference in product lines and the fact that my friends sold a lot of exclusive lines, they shouldn’t have even considered CB a competitor.

To summarize variable pricing:

You have to know what your competition is charging for a limited number of price sensitive items. If you sell the same items, you must be competitive which means priced no more than 10-15% higher than they are or you shouldn’t carry the item at all. You don’t have to charge the same price.

Price the rest of your merchandise at your normal margins.

Repeat the process often to make sure you remain competitive.

Remember that even the big guys have to make a profit. You may actually beat their price on less price sensitive merchandise.

Value Pricing

OK, we’ve talked about your retail strategy and how it
affects your pricing strategy. Now you’re
probably thinking, “That’s all well and good, but what the heck should I charge
my customers for my products?” That’s an
excellent question. The answer is, “It
depends.” Nobody said this was going to
be easy.

 Let’s try to be a little more specific. For the sake of discussion, we’ll assume that
you’ve decided to go after the “value shopper.” We’ll call the pricing strategy for this customer “value pricing.” The principles that apply to value pricing
apply just as well to bargain pricing and luxury pricing.

 Much of the following information is taken from “Pricing
Your Products”
, a publication of the U.S. Small Business Administration. Here are a few of their suggestions.

 Suggested retail price. Most manufacturers provide “suggested retail prices.” Many retailers use this MSRP as a guideline.
Depending on your industry, this may be a viable price, or it may not. It has the advantage of being easy to use. One of its disadvantages is that the price
is set for all dealers in every market. It doesn’t take local variables into consideration.

 Competitive pricing. This is a strategy where you price your merchandise based on your
competition. If you’re a supermarket
selling two liter bottles of Coke, your price had better be very close to the
competition or you won’t sell much Coke. You may not sell a lot of anything else either if your customers use the
price of Coca Cola as a yardstick to measure your overall pricing. If store A
is at 89 cents and you’re at $1.09, they may presume that you’re 22% higher on
everything.

But if you’re not a supermarket your merchandise may not be
as highly visible as the world’s best selling soft drink and your prices won’t
get the same attention. But, and this is
important, customers do compare prices on everything, especially over the
internet. As we discussed, with a value
pricing strategy you don’t have to match the competition. You do have to be aware of the competition
and have a story to tell that justifies your difference in price.

 Pricing below the competition. You’ve seen the ads, maybe you’ve run them
yourself, saying “We’ll beat any competitor’s price.” This is very hard to do and the net result is
usually that you and the competitor end up making less profit.

 Pricing above the competition. With a value pricing strategy, this is
probably where you’ll want to be most of the time. You execute this strategy by offering more
and better service than your competitors. You may be asking, “Won’t this raise my operating costs?” Possibly, but if you can raise your costs by
5% and charge a 10-15% higher price, isn’t it worth it?

 Some components of better service have a cost attached to
them, some don’t. Keeping up to date on
the latest developments in your industry may require you to spend some time in
reading trade magazines and surfing the web, but they don’t add much to your
cost of doing business. Smiling and
greeting your customer by name when they come into your store (and training
your staff to do the same) doesn’t cost anything.

 Giving your customer a free loaner when their item is in the
shop (when appropriate) has a minimal cost, gives you a huge advantage over
many of your competitors, and might just result in a sale.

 Having a few  toys in an area set aside for your
customer’s kids to play while mom shops costs very little, but may make the
difference between a sale and no sale.

 You know the specifics of your business better than we do. The point is that you have to treat your
customer so many different ways that she has to like one of them. And, every little thing you do to make the
customer’s shopping and buying experience more pleasant, more convenient, more
interesting to talk about gives you permission to add a little bit to your
selling price.

 In a recent post we talked about Starbucks. How is it that they can charge $5.00 for a
frappe/latte/cappuccino/whatever when McDonalds charges about a buck for a cup
of coffee? It’s simple. You can have the comfy chairs, soft music,
free wireless internet, free newspapers and the overall atmosphere of Starbucks
or you can sit in a plastic booth and be surrounded by noisy kids at McDonald’s. It’s your choice. Your business is no different.

 “Great, but you still haven’t told me how much to charge for
my stuff.” Finally, here’s something you
can use. Start with your competiton, all
of it. Shop the local stores including
the big boxes if they carry what you carry. Don’t just shop your brands. Shop
them all. Check out froogle and other
online shopping sites. You’re looking
for the bottom. What’s the cheapest
price the customer can pay for my products or something similar? Don’t forget to add freight and handling if
you’re looking at a web retailer.

 Next, take an honest look at your own operation. Make a list of all the things you offer that
the competition doesn’t. Is it
impressive? Great! Item by item, assign a dollar value. If you offer free delivery, what’s it
worth? If you offer in-home service,
what’s it worth? If you teach your
customers how to use your product, what’s that worth? No false modesty here. You’re looking to establish a value. Be honest. If you were a customer, would you buy from yourself? How much more would you pay?

Walk outside your store.  Come back in looking through the eyes of a potential customer.  Is this a place where you’d want to shop?  Is it attractive?  Is it clean?  Would some new carpet or a coat of paint make it a nicer place to shop?  If so, it’s money well spent.

 I live two blocks from a True Value hardware store. I live two miles from Home Depot. If the True Value store carries an item, I
buy it from them. Why?  For one thing, I can always find someone to
help me, and I need it. They will walk
me through a project, tell me what I need, and help me find it.  Second, if I forget something, it’s a lot
easier to go back two blocks than to go two miles. Third, the price difference is usually very
small. Sometimes, the hardware store is
actually cheaper.

 The bottom line (and that’s what we’re really talking about,
isn’t it?) is this: When a customer buys
something, they’re buying a total package.
If they want the cheapest possible price and don’t care about service,
speed, or convenience, they’re probably not your customer. They’re going to Wal*Mart or to the
Internet.

 Your ideal, value shopping customer wants more and is
willing to pay for it.

 Next time, we’ll talk about how you can actually beat the
chain stores at their own game.

 

Your Business Strategy

At the outset, there are some basic rules of pricing that we must discuss.  First, remember great-great-grandpa and grandma?  One thing about their business was always the same and it’s still the same today.  To stay in business you must take in more than you spend.  Subtract your cost of goods from your selling price, then subtract your operating expenses.  The money that’s left, if any, is your profit.  The formula applied to the traders who brought spices to Europe from the Orient, it applies to Home Depot and Best Buy, and it applies to your business too.

It’s one of the laws of nature, just like gravity.  It applies to every business.  It never fails.  If your selling price isn’t more than the total of your cost of goods and your expenses, you’re losing money.  Unless you have unlimited funds, you’ll soon go out of business.

However,the good news is that if you have less money at the end of the day than you started with, you have several choices for tomorrow.

1.  Sell more.

2.  Charge more.

3.  Buy at a lower price.

4.  Reduce your expenses.

So simple, yet so difficult.

Let’s go back to the first paragraph for a second.  Remember, this is a law of the universe.  There are no exceptions.  It applies to Wal*Mart, or whoever your particular "big box" competitor happens to be, just as surely as it does to you.

Sure, the chain stores may sell more than you do, but they also have higher, much higher, expenses.  What they don’t have is FLEXIBILITY.  You have a HUGE advantage over the big guys when it comes to responding to change.  We’ll talk more about that later.  For now, just keep in mind that bigger sales and bigger expenses go hand in hand and the grass isn’t always greener on the other side of the fence.

Something else to keep in mind, and this is very important:  Every potential customer is not looking for the lowest price.   "Always the low price" doesn’t move everyone.  Year-to-date through April, 2006, Mercedes Benz sales in the United States are up 15.9%. 

People fall into three categories when it comes to buying durable goods.  The first type likes to brag about their "deal".  Nobody can buy as well as they do and they love to talk about it.  "You’ll never guess what I paid for this (fill in the blank).  These are the bargain hunters.

People in the second group are the exact opposite.  They may not tell you what they spent, but you’d better believe they want everyone to know that they only buy the best, regardless of price.  They buy the Rolex watches and the Coach purses.  They’re willing to pay top dollar for prestige products. These are the luxury buyers.

Finally, the largest group falls in the middle.  They’re the value buyers.  They may not be able to afford the top of the line, but they want quality and service and, like the luxury buyers, they’re willing to pay for it.  They may buy their toothpaste and deodorant at Wal*Mart, but not their big stuff, IF you give them a good reason.

It’s up to you to decide which group of customers you want to go after.  If you go after the bargain hunter, be prepared to do battle every day.  You’ll have to beat every competitor’s price, even competitors who happen to be 1,000 miles away.  Here’s another law of the universe:  If you sell only on price, you will NEVER be the lowest.  There will always be somebody, somewhere, willing to sell for less.

If you choose the luxury buyer, be prepared to offer the best brands and the best service and don’t be afraid to charge accordingly.  You will not be able to target both the bargain hunters and the luxury buyers.  You can’t be all things to all people.

On the other hand, you CAN focus on the luxury buyer and the value shopper.  Let’s look at Mercedes Benz.  You can buy a C Class Mercedes for around $30,000.  Based on quality and resale that’s a good value.  But, if it’s luxury you want, they offer cars with prices well into six figures, including the SLR McLaren, which will set you back nearly $1/2 MILLION!  Obviously, you can serve the middle and the high end quite nicely.

Your retail strategy must match your pricing strategy.  You can’t charge luxury prices and give bargain basement service. 

Remember we said earlier that price – cost of goods – expenses = profit (or loss).  We also said that you will NEVER have the lowest price.  If you accept that premise, then you will agree that the difference between the lowest price and your price is the added value that you offer to the customer.  The customer must agree that the extra benefits of buying from you re worth the extra cost.