Are you STUBBORNLY OPERATING A LOSING BUSINESS?

Head in the SAND???

Photo: Contributed

Some entrepreneurs are very stubborn and like ostriches they stick their heads in the sand when things go wrong.

A good illustration is a couple who owned a manufacturing business during the good years in 2003-7. When the economy turned down in 2008 their business slowed. Many competitors left town but the couple continued to believe that the upturn must be just around the corner.

They did not realize that this business climate is the new normal. The last great worldwide depression took a decade and a World War to turn around.

As a result, they did not cut operating costs and the profitability of their business gradually eroded into a deeper gorge of debt until it became a losing operation. Rent got behind, the suppliers were not paid and equipment leases fell into arrears.

When the bailiffs arrived at the door, the husband finally asked for advice from Floodlight. By the time we arrived, the business was living hand to mouth, the marriage was coming apart and the family home was on the point of being lost.

Six months beforehand the warning signs were urgently flashing red!!!

• The owner was spending time not selling but instead collecting money and cutting last minute cheques to suppliers. Sales were still trending downward.
• Phone calls from potential customers went unanswered because the call might have been a creditor.
• The worst days of the month were the 15th and 30th because payroll was due.
• Machinery was broken, vehicles were well past their service due dates and there was no money to pay for the work.
• The company desperately wanted a big order to get them out of trouble but if the order appeared suddenly on the desk, the company could afford not to buy materials.
• The owner’s credit cards were approaching the maximum and the company bumped the limit on the operating line every week.
• The bank was asking for frequent financial updates which took time away from selling.
• Liabilities climbed each month and assets eroded away, but no one knew because the financials were months behind.

In our experience at Floodlight we run into many entrepreneurs who feel they are alone. A manufacturer certainly cannot ask for help from another manufacturer who would know the answers. And asking for help from a family member or close friend takes a lot of inner strength and admission of failure.

Business help books are about the big boys’ ( GE and DuPont) best practices. A quick review on the internet will call up hundreds if not thousands articles that help… a bit- but with no integrated approach.

The purpose of this article is to encourage business owners to take action.

• If you see yourself in our example, call in the cavalry sooner than later and ask for help.
• It is less painful and cheaper to get help early on at the first sign of a speed bump instead of the hiding your head in huge chasm like the Grand Canyon.
• But please do something – even an ostrich has defied evolution and found a way to survive and so can you.

You just need to ask for help from a qualified source like a Business Coach or specialized Business consultant!!!

“How much?” is every customer’s question. A good answer from a knowledgeable salesperson will result in a sale. A bad answer typically means the customer will re-pocket his wallet and walk to the competition.

Photo: Contributed

What is a bad answer? Blurting out the dollars and cents, of course, with no embellishment, no attempt to offer value and no attempt frame this as a good deal. Good and well trained sales people find a way to create a vivid picture of value in their client’s brain before talking about price.

Step One: Train the staff to deal with sticker shock. Remember that a shocked response to your price is sometimes merely a buyer’s strategy to get a discount.

Step Two: Frame your price. Sometimes sticker shock reflects ignorance of the market conditions. If your competitor is within a few pennies of your pricing, your customer will appreciate knowing that you are competitive.

Tell him!

Step Three: Get value on the table before you talk about price. Build a detailed picture of the value that is offered by your product or service. Once the value side of the ledger is built up in the mind of the customer then the price on the other side of the ledger seems less important. Keeping the price to the end means keeping profit margins.

Step Four: Paint a vivid picture. Many years ago, a 300 pound Maytag sales trainer quietly positioned a tiny stepladder to the side of the heavy duty washing machine he was illustrating. He explained how special the steel in springs was and bored us with the technical details until all our eyes were rolling back into our heads. This huge man casually stepped up and into the machine through its open lid. “This is heavy duty”, he announced, while standing inside the washing machine with outspread arms and a gigantic smile on his face. That image has never left my memory.

Step Five: Get your customer to open first; telling you what price they thought they might pay. Most retailers and contractors will have a range of prices for similar goods that coincide with features and extras. No point in wasting time trying to sell a $30,000 boat to a man with a dinghy budget! Get him to the dingy aisle as soon as possible.

Step Six: Sandwich your price between the benefits you have already listed. This heavy duty washing machine with super thick springs will save you water and time by handling those really big loads. And at $799, it is a real bargain because of the 2 year warranty on parts and labour.

Step Seven: Try to create a pyramid of cost penalties for not buying. This is a one day sale. This is the last of our inventory until July. The next models from the manufacturer have a shorter warranty and are not available in this colour.

My final word on staff price training is to ingrain your staff with the idea that price is an indicator of value by itself. Low price signals a CHEAP product. Do you want to sell Cheap Products? Or would you rather be known for high quality products and service? After all, would a diamond ring be THE symbol of undying love and commitment if it was priced at $4.95?

The most rapid industrialization the planet has ever seen is reaching maturity. For a couple of decades now North American business people have been terrorized by cheap Chinese made goods that have clobbered profits and margins. These goods were remarkably cheaper than ones made here and customers found them irresistible.

But together with the low price came shoddy workmanship. The goods did not last or they presented a hazard of some note to us (think of the ground melamine added to milk products) or to the workers and environment in China. Not to worry; this is a familiar pattern. Japan, Germany, the US and Britain went through the same sequence as they industrialized.

All of that is about to end as labour costs have soared in China. Little by little, Chinese companies are investing in capital equipment (machinery) to produce goods faster with less labour and to a standard acceptable in its Western markets.

Interestingly, European manufacturers have already responded to this by finding producers closer to home where the wages are low (but not as low as Chinese); where the goods meet excellent engineering standards and are only days away instead of weeks. Porsche, Audi and BMW produce auto parts in Bosnia for a fraction of the price that they would cost in Germany and are paying 50% more in wages than the Bosnian average.

The past twenty years have seen a revolution in how we look at prices for goods and services, driven by Chinese goods and Indian services. There will always be a place for cheap and cheerful. But quality has poked in its long nose (think of how Toyota and Honda capsized the US market by offering cars that did not fall apart after a couple of years).

Then another disrupter walked boldly onto the stage – instant gratification. Immediate gratification has been with us for many years, but what has been missing was the ability to deliver instantly. Since the 1970’s we have paid attention to our supply lines, cultivating long term relationships with our suppliers that gave us Just in Time delivery. We have come to depend upon firm delivery dates of quality goods.

But recently a new and disruptive technology has emerged – 3D printers. With a 3D printer, anyone can print a race car part in hours. Don’t laugh it is already happening!

3D printers will first disrupt small volume producers. Then they will disrupt almost any business that is focused on an old model of doing business – masses of identical goods produced cheaply and delivered in six weeks. Our customers are looking for customization, delivery now of a quality product in a colour of their choosing. Will you win? Are you still fighting yesterday's battles?

Photo: Contributed

Business owners assume that their purpose is to set a price for a product rather than for the customer segment. But, identical products or services can be sold with many different price and profit levels.

The following three examples illustrate how to increase sales, increase profits and get more customers.

Analyze your customer

In 1954, DuPont introduced a new resin. While the new pipe looked exactly like the old pipe, it had a longer life and withstood greater pressure. Sales grew strongly despite the fact that the pipe was 1.9 times more expensive.

But there was a secret in this strategy’s success. In a typical use the pipe goes underground. It is clear that if the pipe bursts, it would have to be dug up. The value of the pipe was greater precisely because the salesman focused attention on the pain of having to dig up burst pipes more often than was necessary now that new pipe was available. The sales program was successful because it pressed the hot button labelled “dig all day in the cold mud looking for busted pipe”. At that point, the price difference became irrelevant.

Photo: Contributed

Market the BENEFITS not the features

Unless your customer is an engineer, the latest product specifications are gibberish. Your new resin, new alloy or new gadget must answer the WIFM question if it is to be sold. WIFM = what’s in it for me?

It could be new drill bits with titanium points. They are harder and can drill longer without sharpening. But that has to become a tangible benefit by translating from “longer between sharpening” to 14% more holes drilled. At that point, the potential user will price out his down time for drill changes first and then secondarily, the cost of re-sharpening. Price takes back seat to the cost savings.

Examine the customer perception of what is a cost

One manufacturer of laboratory instruments was plagued by a high number of very small orders for repair parts. The manager found that end users were annoyed at having to place these small orders because the administrative and shipping costs were greater than the parts prices. Furthermore, the manufacturing company was losing money on the parts for the same reason.

Even more costly, customers were upset at the downtime caused by not having these low value parts in stock. To alleviate the problem, the product manager developed repair kits with an assortment of parts and offered them to customers. The company’s picking costs went down, average invoice value went up, profits went up, shipping costs went down, and customer satisfaction increased because instrument down time was minimized.

There are three common threads in all these examples.

In each, someone did a careful cost benefit analysis from the CUSTOMER POINT OF VIEW. The salesperson painted a vivid picture of the annoyance and costs of repeatedly digging up pipe, idle production because the right repair part had to be ordered, or down time costs whilst changing drill bits.

Secondly, the penalties were identified first, not the price. Price was introduced after the benefit picture had been painted in stark, primary colours

Thirdly, the price was MORE than would have been invoiced based upon cost and mark-up formulations.

Want to build your business? Then develop an innovative pricing strategy and talk to your customers.

Andrew D. Gregson B.A., M.A. M.Sc.(Econ) of Floodlight Business Solutions
http://www.pricingstrategies.ca

 

About the author:

Andrew Gregson has many years of experience as a business consultant to small and mid-size businesses in Canada, the United States and the Caribbean. To date, Andrew has analyzed and assisted over 130 businesses in the service, wholesale, distribution, and manufacturing sectors. In 2008, Self-Counsel Press published his Pricing Strategies for Small Business, now available in Canada, the US, India and Russia. Andrew lives in Kelowna BC, speaks to business groups and works in finance.