What return should I expect?

What return should I expect?

This is a common question I get from the owners of businesses with whom I interact.

There is  no right answer, but when you consider that putting your money in a bank term deposit at no risk will currently generate you about 3%, and a diversified share portfolio held over the long term will earn 7-10%, you have to consider the risk/reward you are prepared to accept.

The question should really be expanded into two:

  • What is the financial return on the capital needed in the business
  • What is the personal return that might accrue.

Dealing with the financial return, it is a simple equation:

EBIT/Net Assets = Return on Capital employed (ROCE)

EBIT, or Earnings Before Interest and Tax  is a good measure as it reflects the true costs of running the business. Definitions do vary a bit, but usually it includes depreciation, a cost of replacing productive assets, but before the externally imposed Tax and interest which have little to do with the operations of the business.

Net assets is simply the result of subtracting Liabilities excluding equity, from the total assets of the business.

Businesses that have even moderately sophisticated financial management have usually reflected on the rates they see as acceptable, but as a rule of thumb, most manufacturing businesses  should have an explicit minimum hurdle rate not less than 15% before new investments can be approved.

A business that has very few fixed assets, such as a consulting practice, could reasonably expect a far greater return on the assets employed, simply because there needs to be so few of them, the key asset is knowledge. The calculation here is more about the return on time spent rather than fixed assets, way harder to measure, but directly related to revenue.

Clearly the type of business has a profound impact on the numbers, so commercial context is important.

Dealing with the second perspective, the risk/return of being your own boss is a highly personal equation, resistant of any useful quantification, so my advice is always to do what ‘feels right‘ to you.

 

 

 

How do you set your prices

How do you set your prices

Most times people set prices as a function of three things:

  • What their costs are,
  • What margin the budget demands,
  • What the competition is charging.

All are the wrong way to go about it.

Prices should be absolutely dependent on what customers are willing to pay.

This bears no relationship whatsoever to your costs, or what the boss wants by way of margin, but has a lot to do with what the competitors are charging, assuming your product is substitutable.

The challenge therefore is to ensure that there are no substitutes for your product.

In many categories, perhaps most, this is a real challenge, one that makes marketing all that much more important, as marketing should be focussed on the delivery of value.

Most businesses set out to deliver all the bells and whistles, and the reasoning is that they are trying to help customers by giving them as much as possible, and some choice. However, looking at a product feature by feature and figuring out which ones customers are willing to  pay for, and which are just in the way, makes more sense.

The better you know your customers, it follows, the better you will be able to determine which features they are prepared to pay for, and how much they are worth to them. It also follows that the more specific the niche you are in, the easier it becomes to understand their purchase motivations. Nobody can be all things to all people, choices simply have to be made.

There is an electrician in my local area with a strong proposition.

In an environment where we do not expect tradies to come on time, and when they do turn up, they tramp through your home, and leave a mess behind them. This bloke makes several promises:

He will be there at the nominated time, + or – 15 minutes, or you do not pay him,

He leaves the work area at least as clean as he found it, or you do not pay him.

He will give you the price before he starts the job, and it is a fixed price, it will not change.

He charges a premium rate, and the biggest problem for a potential customer is the waiting list. If you cannot wait, or do not like the hourly rate, he does have the numbers of others he will give you, without any guarantee of performance.

Many people in the area would not use him, as he ‘charges too much’. They are the ones who see little value in the propositions that make him different, and he is fine with that. In fact, he seems to enjoy directing potential customers elsewhere, as it highlights the fact that he is really busy, and has become a price setter, not a price taker.

Back to the challenge of price setting.

When the cost of provision of something that adds value is less than the value customers see, then it makes sense to provide it. In my electricians case, he leaves himself some spare time to ensure he can make good on his promises, and he charges for the privilege, simply because the certainty offers great value to his client base.

Simplicity is a key, the simpler the better.

Simple to explain, deliver and understand.

 

 

 

 

How to make your website really work for you

How to make your website really work for you

A friend of mine recently drafted a website for a product he is launching, and asked me to have a look before publishing it. Not a great thing to be doing, as by the time I had finished commenting, he had tuned out. There was just too much bad news.

There are millions of websites out there, so the question  now is not just how to get your website seen by those to whom it is targeted, but how do you then get them to take some sort of action, without which, it all has little point.

A few simple rules

Clarity of purpose. Ensure it is crystal clear what you do, in essence why the site exists. The simpler the better, remove all the detail, all the jargon and fancy words, opting instead for simple statements and graphics that illustrate why you are there.

What problem do you solve. Customers buy solutions to problems, not products. The purchase of everything from the groceries to expensive luxuries are in some way connected to a problem, real or perceived that the customer has. Tell them which one you are solving, how, and why they should buy from you.

They are not interested in you. Almost every site has an ‘About us’ page. It is useful to give some background, demonstration of expertise, and how you care deeply about the ‘bilbies’, but less is more. People are interested in you only to the extent that it confirms their decision to purchase from you. The fact that your grandfather who founded the business was apprentice of the year in 1935 is supremely irrelevant, as are the awards you may have won in 2000.

Demonstrate that your solution works. This can take many forms from testimonials to statistics and demonstrations, but is an important component of building trust and credibility.

Have a designer design. The look of a site says a lot about you, and it is a designers job to interpret the important things visually. The choice of images, layout, use of white space, location of icons of various types are all done better by a pro. It does not have to cost a lot, and most of those who design websites who may be good technically are not necessarily good at visual and creative design. The bit of extra investment is almost always well worth it.

Tell them what to do now. Ask for the action you want a visitor to your site to take. Download something, watch a video, follow a link, whatever it may be, make it clear, easy to do, and ask.

My friend was sorry he asked, but a week or so later, showed me a way better version that will now be published as a part of his product launch in a few months.

Rethinking the 6 challenges of local advertising.

Rethinking the 6 challenges of local advertising.

Local businesses only need local advertising.

Right?

Usually.

So the choice is then between local analogue adverting and digital or a mix. How do you make the choices when you are a small local business with a small marketing budget. (The reality is that every business no matter what their size faces the same choices, it is only the scale that differs.)

Local analogue advertising includes everything off line, billboards, local sponsorships, letterbox drops,  and many others. In most cases, digital becomes  a choice between Facebook and Google AdWords . Often I see business owners make a series of compromises that dilute the effectiveness of their efforts by spreading it too far, and further they do not adequately consider the varying strengths and weaknesses of  the platform choices they are making.

Creating a simple framework against which to ‘score’ the alternatives against your   objectives is useful, but there are two critical questions to be answered first:

  • What is  the objective of the marketing spend. Without a clear objective, the rest becomes a potentially costly academic exercise, so lets assume you have that one nailed.
  • Who is my ideal customer. Being able to refine your communication in whatever form it is to attract the people you want to attract is key. No point wasting communication money reaching those who do not want, or cannot afford whatever it is you are selling. In addition  understanding the behaviour so you can refine the channels you use to communicate is a benefit that   is delivered by digital tools, but that knowledge is transferrable to analogue. Recently I saw an ad in a bus on a route in the north shore of Sydney for a specialist self managed superannuation provider. Firstly adverting such a service on a bus is perhaps not the best channel, and secondly the advertiser was located in Stanmore, so any ‘local’ advantage was lost.

Following are 6 simple things to consider that may assist the choices:

Longevity.

The sponsorship of a local sporting team lasts the period of the sponsorship, perhaps longer as the kids wear the jerseys running around the park. A Facebook ad that attracts page likes can be used and reused to the same presumably interested audience,  a Google ad is gone once the budget is spent on clicks, which may be from a potential customer, a competitor consuming your budget, or a bot in the Philippines.

Remarketing.

This has become flavour of the month as digital has made it seemingly easier, by providing tools that do it on autopilot. Google offers remarketing tools that can be remarkably effective, but they can also be remarkably annoying when you are chased around the web after a casual look at a website for any one of a number of reasons not necessarily associated with a purchase. However, it is an old idea, one that effective analogue advertising has been using for  ever, often called ‘leverage’. When you spend some money sponsoring the local kids soccer team, putting your businesses on the back of their jerseys, there is nothing stopping you giving out a voucher to visit your restaurant, shop, or for a discount on your services at the games where the kids are playing, displaying your sponsorship. This is simply leveraging the investment made in the sponsorship, ‘remarketing’ to the digital mavens.

Data.

On line you  can track everything, and generate an explicit ROI on your marketing expenditure, using the numbers to refine and focus the investment. This is way harder to do using analogue media, but there is no reason you would  not be able to track the redemption of the vouchers given out at the match noted above, and steadily refining the offers you made. It is just a bit more work, and nobody ever thinks of doing it. However, the value of  the data generated by digital media is huge, so long as you make the further investment in collecting, analysing, generating the insights, then actually using the insights to direct your efforts. Most local businesses in my experience fall down in this cause and effect chain.

Collaboration.

Local businesses have a significant opportunity to collaborate way more than they do. The dress shop with the shoe shop, real estate agent with the interior decorator, restaurant with local grog shop, the list goes on. Digital media makes this a bit easier, but only a bit, you still have to agree the terms, timing and nature of the offer, and how the costs and benefits are to be shared irrespective of the media.

Generating and using lists.

Analogue channels are not good at inexpensive list building, but it can be done, and has been done forever. However, the building and leveraging of lists, either by email, targeted digital adverting, or indeed  the combination of a list with old fashioned snail mail is a channel  where digital has the goods on analogue. However, many local businesses fail to build lists and the technology to leverage them although now well known and pretty simple eludes many, leaving money on the table.

Attention & impact.

Finally, perhaps the most important parameter  for which it is hard to have some tick on a list, is the impact of your communication. Paying for an ad or offer that is not sufficiently memorable or impactful to generate an action of some sort as a result of the ad is a total waste of money irrespective of the medium. Small businesses do not spend anywhere near enough time, effort or expertise considering this vital element.

When you need a bit of assistance with all this stuff, call someone you trust, and who has the experience, as  the cost will be greatly outweighed by the benefits

 

This post was inspired by another of Hugh McLeod’s insightful cartoons that popped into my inbox, and I used it in the header for this post as well. Thanks Hugh.

8 rules for successful networking

8 rules for successful networking

Networking has become a ‘must-do’ for those in small business. As a group we have bought into the value of networking, being able to meet those with whom you may have something in common on neutral round, have a conversation, build a rapport, and perhaps do some business.

I go to a few groups, and see some consistent mistakes being made.

Never ask for something until you have given first.

To successfully use personal networking as a marketing tool requires that you are prepared to put yourself out for others, to share what you know freely, and be seen to be doing so, otherwise, why should any others do anything for you. You need to put stuff into the bucket before you take anything out. Be generous with your knowledge and time.

It takes time.

Networking is a human activity, being impatient never works, unless you get lucky, and run  into some one who has a problem for which you have a specific solution.

Take the initiative.

Leaving a meeting hoping that your ideal customer that you have just met will call you as you suggested should they ever need you is silly, pick up the phone, connect on LinkedIn, send an email, send them an article, whatever you do, take the initiative somehow.

Do not be a ‘card-ninja’.

As a kid there was a Japanese Samurai show on TV,  (I even remember his name, Shintaro) badly dubbed into English. The playground game of the day was mimicking the throwing of  the star knives the Samurai in the show used to deadly effect. I am often reminded of this when someone I have never met before approaches at a network event, says hi, forces a business card into my hand, and moves of to the next victim. Needless to say, they all get the round file treatment.

Do not ask for referrals too soon.

When I give a referral, implicit in that referral is the assurance that I would do business with the person I am referring should the appropriate circumstances arise. Therefore my credibility is at stake, and so I will be very careful about who I refer, and to whom I refer them. I certainly will not refer someone I do not know well, and in whom I do not have absolute confidence.

Do  not ‘landscape”.

How did you feel when talking to someone who does not look you in the eye, and does not give you their attention? rather they look over your shoulder seeking someone more interesting, obviously seeking to move on? You do  not like it, and you will avoid them in the future, so why do you allow yourself to do it to them?

Be yourself.

Trying to be someone you are not will get you found out very quickly indeed,  and forever labelled as  a fake. Not a useful outcome. Not everybody will like you, relate to you, or even be vaguely interested in what you have too say, so there is no point in wasting time trying to be someone you are not. Humans have a very well developed social instinct, work with it, not against it.

Apply common courtesy .

This is almost a catch-all of the above, but the little things count, such as being punctual, remembering names, welcoming new members, and just simply offering a smile. A member of one group I am in is consistently late. While it is a little thing, him almost always coming in late is disruptive to the meeting flow, and is a poor recommendation of his personal habits, and I would never refer him as a result.

Networking is a powerful and pleasant way for small business owners to not just build revenue, but find others with whom they share common challenges, and learn. However, like any commercial activity, it should be undertaken with due regard to the objectives you have, and the costs involved. perhaps most importantly, the owners of small businesses are usually pretty time poor, so reflecting on the productivity of the time you spend networking will pay off.

The most important question to ask yourself

The most important question to ask yourself

Working with clients to develop a sustainable, robust and commercially viable strategy is usually not just a walk in the park that leverages my 40 years of doing this stuff.

The technique I usually employ in conversation is what I call hindsight planning, a process that develops a picture of what success looks like, then works backwards to examine and understand the drivers of that ‘success’. A common affliction of those in business for themselves is that they have too much to do, and too little time. Finding a way to easily enable them to leverage their time to get the best return possible is a core part of the business improvement process.

During the prioritisation and optimisation process I find myself consistently asking the same question;

‘Why does that matter’

Asking this simple question often serves to stop the flow of words, and brings the conversation back to the things that will really add value, and lead to business success while giving back the owner some of their life.

As a result, it can also be very confronting.

Some time ago I worked with a book-keeper on his sales pitch. He is a bloke who is very good at keeping the books of his range of SME clients, but struggled to get new ones in a pretty competitive market.

The conversation when I asked him how he added value to his clients went something like this;

Him. ‘I make sure all the entries are made, and bank recs are done’

Me. ‘Why does that matter?

Him. ‘So they always have a clear view of their financial position’

Me. ‘Why does that matter?

Him. It removes a source of great worry, and frees up a lot of time

Me. Why does that matter?

Him. It means that my clients have  more time to do things that are important to them

Me. Why does that matter

Him. My clients all want to work to live, to enjoy their lives, but keeping the books is a huge barrier to that outcome.

I ran into him recently, and he has refined his elevator pitch. Even further to: ‘Would more sex be a nice idea…… get your book-keeping  done to free up the time to enjoy your life.

He told me the uptake was ‘enthusiastic’