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Common Sense Business Solutions

Chasing ducks

When businessmen tell me that being low priced is the only way to stay in business, I am skeptical. Price is the simplest way for a consumer to compare and is overused as the basis for a decision to buy. Price noise is the screaming toddler in the room - demanding excessive attention relative to importance. And most businessmen pay excessive attention.

In the July 2015 edition of the Business Examiner, the owners of Command Industries admit their shock after quizzing their customers. A mentor had suggested that they speak directly with their top customers and ask them, why do you buy from Command? "I was sure the answers were going to be pricing related and focused on comparing costs with our competitors," said Rob Woudwijk. “But the results of those conversations shocked me. It was never about the money. Instead they talked about the way we communicated with them, the level of transparency and honesty we have as a company and our problem solving mentality."

Would price have figured in the equation at any time? Of course, but it looks like price was further down the list than they believed. In a study reported by Right Technologies by Bob Thompson called the Loyalty Connection, price features lowest as the reason that customers stop dealing with a company. In his analysis, customers leave almost 75% of the time due to customer service problems while owners see that as being important in only 22% of the cases. Quality is seen by customers as an issue fully 32% of the time while owners rank quality as the suspect only 18% of the time. It appears that staff indifference is a greater cause of losing customers than doing a bad job.

Similarly, price was ranked by owners as the number one issue at 45% of the time while customers felt price was important only 25% of the time.

And what about employees? Do they value their paycheque more than a great boss or satisfying work?

 

Does Money Really Affect Motivation? A Review of the Research

In “Does Money Really Affect Motivation? A Review of the Research” by T. Chamorro-Premuzic published in the Harvard Business Review, the authors reviewed 120 years of research to synthesize the findings from 92 quantitative studies. The combined data set included over 15,000 individuals and 115 correlation coefficients. In the study there is a weak, almost negligible correlation between pay and happiness and so they conclude that money is a weak motivator.

So, where does this leave the average business owner? To focus exclusively on price differentiators is evidently NOT the answer. My dog swims with determination after ducks, but she never catches one. Being cheapest in the marketplace leads in only one direction - the dumbest competitor will win. And after the ducks have flown, those left standing.. er, swimming.. will have the best employees, happiest bankers, most motivated bosses and HIGHER prices. Where do you want to be?

 

About the Author:

Andrew Gregson published his book Pricing Strategies for Small Business in 2008. The book is now available in Europe, India, Russia and the United States. Andrew holds a Master’s degree in Economics from the London School of Economics. He frequently lectures to industry and trade groups. Andrew has owned businesses and franchises; worked as a business consultant, and now works in finance in Kelowna, British Columbia. You can contact Andrew through his website www.pricingstrategies.ca.





The price of money: Part 2

Click here to read Part 1.

Money is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money change? This happens because your lender or investor does a risk assessment of you and your circumstances that affects what they will be charging. Let’s look at this from the point of view of a business loan. Here are nine things not to do when asking for a business loan.

 

1.  Does the bank understand your business? I have seen deals collapse because the lender could not figure out how the company stayed in business and why anyone bought their widgets. In the 1970s there was a chain of sandwich shops in London, Ontario all loudly decorated with RED stop sign wallpaper. They were always empty and we used to speculate that they fronted for criminal activity. Do your homework on a unique selling proposition that explains in 50 words or less, how you make money.

2.  I have seen transactions collapse because the ownership structure is just too complicated, prompting the lender to throw his hands up in despair. KISS. Keep it Simple, Stupid.

3.  Is this a start-up? Most start-ups fail instantly and sometimes haunt the lender for years before finally collapsing. Angel investors have told me that 13 of 14 deals in which they invest end badly. So the 14th has to make up for all the failures.

4.  Credit history. Increasingly, we are depending upon the snapshot of the credit report to tell us whether you manage money well or not. No lender wants to fund a business where the money is managed from the cash till, or places his “lifestyle” ahead of his obligations.

5.  Assets to lien? Since the 1950’s banks have been encouraged to help people buy their own homes, thereby creating a careful lender game of deciding if the loan can be backed by recoverable assets. The poorer the asset quality, the higher the rate will be. Think of business assets as the poor relation to that home on the lake that the banker can seize.

6.  Skin in the game? Forget borrowing if you do NOT have your own money in the game. Until recently, that has been the only truth. But Canada has some great rules to govern crowdfunding and protect the unwary investor. Seedups is the Canadian version of an Irish company which helps start-ups get the initial tranche of cash they need.

7.  Strength of the management? The owner of the company typically makes the pitch to the bank or the lender to get more money. A long history of uneven results , while everyone else is doing well, points to rotten management. Doing poorly in a herd of low performers shows a management with no imagination.

8.  Strength of the balance sheet. Businesses can sell like crazy and still go out of business. In the 1990s my neighbour was a manufacturer and importer of children’s clothing, opening stores almost every month. Sales skyrocketed, profits were phenomenal but the stores failed. The lender will first look at your balance sheet and NOT the profit and loss statement. If your debt is high or you are experiencing a cash crunch due to high growth, be prepared for some tough questions about injecting more of your cash.

9.  Finally, going too late to the lender, bank or investor is bad. Arriving cap in hand because the business is now struggling shows poor judgment and controls. You can expect to pay more for your money and it will come with hooks.

 

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is a mortgage broker, economist, and author.



The price of money

Money is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Money, Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money fluctuate from person to person? Why do some people borrow at prime minus rates and some at 18%? It is because, in part, that your lender does a risk assessment of you and your circumstances that affects what they will charge. Let’s look at this from the point of view of a mortgage for your home.

The first consideration is location. If your home is 100 kilometres from the nearest small town of 4000 people, you might not get a mortgage at all, but if you do, the lender will add risk factors. If you default, will anybody buy the property and redeem the mortgage? Your Shangri-La is perhaps too unique to attract a buyer.

Then there is the home price bracket to consider. A home priced to sell in a hot price bracket is easier to mortgage than a million dollar home. There are simply more buyers who equate to an easier exit from the loan in the event of default.

Then there is the loan to value calculation. A high ratio means only that you do not have enough “skin” in the game and if things get overwhelming it is too easy for you to walk away, leaving the lender with your house. A higher loan to value ratio simply means you will pay a higher interest rate or have to give up your first born child.

Then there is your employment. Self-employed or just started a new job? You will pay more for your money. That is because the risk of not being employed or having too little money coming in to service the mortgage is higher than having a nice steady government job.

Then there is your credit report. Credit is something to be managed. Keeping your record clean and current shows that you are fastidious about paying your obligations. Having a low score means you are a deadbeat.

All of the above explains why some people pay 2.5% and some 15% on their mortgages. It is, in part, a reflection of the supply and demand function.

 

This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is a mortgage broker, economist, and author.



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Yard sale pricing

I have deliberately abridged this household tips article to illustrate pricing strategies. "Tips For Pricing Yard Sale Items” was written by Lynnette Walczak, and published in household-tips.thefuntimesguide.com

 

If you want to be smiling at the end of your yard sale and feel good that you’ve sold most of your items, then price everything very low! I’m not kidding.

[Left over inventory is a drag on your shelf space and should be liquidated, or returned to keep your retail store looking fresh.]

 

Price Tags vs Haggling

Unless someone is a seasoned yard sale shopper, most people aren’t all that comfortable “haggling” to get the best deal on a yard sale item.

[Know your customers – Canadians don’t like haggling.]

I’ve found that most shoppers would rather know what you’re asking for an item (thus, price tags or yard sale stickers are a necessity). And only about one-third of those will try to talk you down on the price. If you don’t have price tags (or table signs) on all of your items, then chances are the very shy people (or someone who is just mildly interested in an item) won’t ever speak up and ask you the price. People who might have bought, if they only saw a price tag on the item, will just quietly leave your sale instead.

[Don’t make it difficult for people to buy.]

Here’s a tip if you are trying to sell something that is fairly high dollar and it’s a popular item that appears in catalogs or sale ads. Cut out the ad with the item in it (with the price showing of course) and tape it to your item. I’ve seen this done mostly with gently used children’s toys and such. It shows the buyer that spending $10 for an item that normally sells for $40 new is a good deal. Be selective if you use this this tactic, people will get turned off if you do it for every item you’re trying to sell.

[Referencing another price from a competitor or an almost identical product builds trust that you know what you are doing.] 

 

Make An Offer… No Way!

Another thing I’ve learned firsthand: People don’t like to “make an offer”. They want to know what your starting bid is first, so they can offer something lower.

At my last yard sale, I had a bunch of collectibles (Michael Jordan stuff, Nolan Ryan stuff, old-timey memorabilia from Kool-Aid, Campbell’s Soup, etc.) and, despite the “Make an offer” signs prominently hung in front of these items, people repeatedly asked me, “How much do you want for this?”

My reply of, “Make me an offer” was never accepted. They would all balk and cringe and mumble something to the effect of: “I don’t want to make an offer… I want to know how much you want for it.”

[Answer – giving a price range works.]

Only one woman forced me on the issue. She talked me into starting the bidding process. And I guess she liked the price, because she jumped on it, without any hesitation. That was my fear… Since I’m not into collectibles, I wanted someone who was to start the bidding process. Because if I started, not knowing the item’s true value, I’d likely start it too low and get “taken.”

[Do your homework and if you have no idea start with a really high price and move down with the market.]

 

What Do You Do If Nothing Is Selling?

Half-way through your sale (if not sooner), you need to take a step back and assess the situation. If items are selling, then you probably don’t need to do anything differently. But if you’ve hardly sold anything — or you just want to blow-out the rest of the items that haven’t sold yet — then consider having a “1/2 Off Sale!” Or, if it’s late in the day, and you see someone looking at a particular item for a few minutes longer than most, yet they don’t buy it. Before they leave, offer that item to them at 1/2 price. Most of the people I’ve done this with will actually buy it at the lower price!

[Lesson? Be flexible. Not all customers are the same, with the same tastes or same pocketbook. What some people will happily buy is junk to someone else.]

 

About the Author:

Andrew Gregson published his book Pricing Strategies for Small Business in 2008. The book is now available in Europe, India, Russia and the United States. Andrew holds a Master’s degree in Economics from the London School of Economics. He writes a column for Castanet.net, and is a guest speaker to industry and trade groups. Andrew has owned businesses and franchises; worked as a business consultant, and now works in finance in Kelowna, British Columbia, wine country. You can contact Andrew through his website www.pricingstrategies.ca.



Read more Common Sense Business Solutions articles




About the Author

Andrew Gregson, BA, MA, M.Sc. (Econ), holds a Master's Degree in Economics from the London School of Economics.

Andrew's experience working with an international business consultancy and being a business owner for 15 years was the impetus for his book "Pricing Strategies for Small Businesses". He brings his expertise in finance, pricing and debt restructuring to the table to help struggling manufacturing and service companies to return to profitability. This has helped companies to rebuild value and often to sell at much higher dollar values.

Andrew has contributed to trade journals, "Spark" on CBC National Radio and has been a guest speaker at business networking groups, colleges, universities on his topics of expertise - pricing, exit plans and debt. He is also a frequent contributor to blogs and online postings for business help.

Andrew is currently the President, Board Of Directors intent Financial Inc., his role is overseeing intent Financial Inc., Intent Investment Corporation and other related ventures.

 

Website link:  www.intentfinancials.com

Contact e-mail address:   [email protected]






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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.


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