Four strategic tasks for the owner of a successful SME.

Four strategic tasks for the owner of a successful SME.

 

 

Success of an SME means they have crossed that shark filled river where most SME’s fall over.

They have sufficient scale to employ functional personnel to address the day to day running of the business, and are returning the cost of capital and a bit more to the owner.

For some this is a level of comfort that is satisfactory, but to most who have strived to get across that river, it will not be enough, they are of a personality type that will be looking for the next challenge.

So where should they look?

Do yourself out of a job.

When you can go away for 3 months and wonder why nobody missed you, the business has reached the point where you are no longer needed daily. Accept that and get a life, or knuckle down to scale the business. For many that might mean becoming a non-executive chairman, staying engaged, but well away for the week-to-week challenges. You have created a manager system and ‘bench’ that does that. Leverage it.

Identify the industry constraints.

Every industry has a set of constrains that are rarely even noticed, they are just the edges of the status quo. Every useful innovation that has evolved, has done so by addressing a constraint that few, if any had even seen. The outcome of this insight is to deliver the opportunity for significant value addition.

The exempla was Steve Jobs. He saw the constraints in personal PC’s when he saw the work being done at Xerox Park developing a Graphical User Interface. When deployed in the Mac, the GUI changed Apple from a hobbyist into a leading PC. He repeated the magic with the original iPod, then the iPhone, and the App store. Each of them operated in an existing environment, with existing technology that could be deployed in ways that removed the accepted industry constraint, changing the face of that industry. You do not need to be a huge organisation to do this. In my local area there is a plumber who guarantees his work, and guarantees the time he will turn up to do it. Failure to address either means the client does not pay. He charges a significant premium, and now has a number of vans on the road, simply because he redefined an existing constraint in this local area.

Identify and remove internal constraints.

As with an industry, every business has a range of internal constraints that together become the culture and status quo in that enterprise. There are always opportunities to do things better, but are often overlooked, by simply not being seen, or miscategorised.

A former client removed an internal constraint and added 10% to his gross margin overnight by doing so. The business, a medium size in his industry had kept three suppliers of the core item in his manufacturing operations holding roughly equal share of his business, for roughly equivalent products. There was little to no internal competition, each of the suppliers did so from their price list, while maintaining very friendly relations with the MD and purchasing manager. We instituted a competitive bid for a guaranteed 80% of the purchases, with the remaining 20% to go to the runner up as a consolation prize, and ‘backup’ to the major supplier. The cost reduction that came from that relatively simple exercise dropped straight to the bottom line.

Currently the evolution of AI is creating huge opportunities for enterprises to deploy tools that will optimise existing processes and enable scaling at little or no added cost. There is a learning curve, an investment required, but not engaging means you will quickly fall behind competitors, while ignoring the opportunity to go quickly past them.

Build performance consistency.

For those with a view to one day selling the business they have built, there is no substitute for being able to show consistency of performance over time.

Even when an exit is not even contemplated, seeking ways to build consistency has the result of simplifying an enterprise which almost automatically adds margin and cash.

To build performance consistency takes time and effort. It requires a combination of being ‘in the weeds’ implementing processes that recognise and address tactical and operational improvements daily, and taking a ‘helicopter’ view that enables strategic positioning. This combination is easy to say, hard to do.

A buyer is buying two things, both of which are extremely valuable, irrespective of the inclination to exit the business:

  •  Optimise the existing business processes and infrastructure,
  • Map the path that best delivers future cash flow.

Demonstration of positive performance consistency on both these parameters will give you back time, and optimise the buying price if and when you exit.

 

Header credit: My thanks to Hugh McLeod at gapingvoid.com 

 

 

What is the ‘right’ price for your product?

What is the ‘right’ price for your product?

 

This is one of the most common questions asked, particularly when configuring a new product.

The ‘right ‘ price will be the pricing model that delivers superior value to customers while delivering optimal returns to the seller.

Developing a pricing model involves a series of strategic and market driven choices. Packaging, high Vs Low, the channels used, marketing collateral deployed, shape of your business model, identification of your ideal customer, and a host of other factors that make up the ‘marketing mix’.

However, despite most of us knowing these things, typically price is set on a cost-plus basis, mixed with what others are charging for the same or similar/substitute product.

For an entirely new product, it is a guessing game that has potentially serious consequences. At one end you kill the product, at the other, you leave money on the table.

Dutch economist Peter van Westendorp introduced a method that ended up being named for him in 1976. It has been used sparingly since, but not as widely as it should be.

It is a simple and reasonably reliable method to determine the ‘right’ price for a product or service.

There are four questions that will set your price ‘guidelines’:

  • At what price would it be so cheap that you would question quality?
  • At what price would you consider the product to be a bargain?
  • At what price would you start to think the product is getting expensive, but you still might consider buying it?
  • At what price would you consider the product to be too expensive, and you would not buy it?

Analysis of the responses will give you the point at which you are attracting the most customers who make the trade-off between buying intention, price, and quality perceptions. Putting this on a simple two-dimensional chart makes explanation easy.

Header courtesy Wikipedia

 

 

Why are supermarkets so hard to deal with?

Why are supermarkets so hard to deal with?

 

Anyone dealing with Australia’s two supermarket gorillas knows how hard it is.

You know the old adage:

Question: Where does a 400 kg gorilla sleep?

Answer: Anywhere they bloody like!

Over the 45 years I have rubbed up against them, beginning as a young bloke when there were a number of now disappeared alternative retailers, it has only become harder. However, the rules of dealing with them have not changed much, just become clearer and more cut-throat.

Some years ago I did a presentation to the CEO’s of the SME group of companies who were members of the food industry lobby group AFGC. Looking back on that presentation, republished in several places, it is clear little has changed, certainly not for the better for battling SME’s.

My advice to those I work with also has not changed much, and can be summarised as:

  • Have a solid commercial foundation before you contemplate the challenges of distribution through supermarkets.
  • Never forget that retailers might be your customers, but they are not your consumers. At best they are a massive barrier between you and your consumers.
  • Be relentlessly focussed on your long- term strategy, while recognising retailers are only the means to that end, not the end itself.
  • Unless you are clearly differentiated from others, particularly in the minds of consumers, you will be a retailers breakfast.
  • Know your numbers intimately. This is the barrier upon which most are wrecked, they have insufficient control and understanding of all their costs, margins, risks, and cash flow.
  • Be very willing to say ‘No’ and live with the consequences, as they will almost always be better than the consequences of saying ‘Yes’.

These basic rules, and several others were the topics of conversation in a podcast with Chelsea Ford, published yesterday. The links to the podcast on Spotify and Apple are below.

🎧 Spotify: https://lnkd.in/dWzMN5mN
🎧 Apple Podcasts: https://lnkd.in/dq7yWGJZ

 Is your market research project just a crutch?

 Is your market research project just a crutch?

Every market research proposal must answer a duo of critical questions before it proceeds, if it is to be of any value.

What is it for, and how will it be used?

Market research is done for all sorts of reasons. Many commissioned projects have little to do with the examination of the critical factors in driving success.

They just provide a convenient crutch.

Several projects commissioned and paid for from marketing budgets I controlled would come in under the ‘what the F&&k’ category. However, in my defence they were usually quant studies designed to generate the numbers necessary to pass the accountants various thresholds. This enabled me to progress projects that qualitatively and ‘in my guts’ were winners. That is the way they usually turned out!

In the absence of clearly understanding how the research results were to be used, how they would add strategic, operational, or technical value, why should you bother?

There is a further tier of understanding that is required: Are you looking to define an objective outcome, or are you seeking understanding and insight?

In the case of the outcome required being quantitative, simple yes/no, black/white answers to a question are sufficient.

When you are looking for insight, there may be a few numbers, way below a level of statistical significance, but they can be reassuring. However, the value lies in discovering the connections, implications, options, and potentially hard to anticipate consequences.

Research is a critical step in successful marketing programs. However, in the absence of a very clear and compelling answer to the ‘What is it for’ question, it should not proceed.

The header illustration is the only AI used in this post.

4 critical strategies for FMCG profitability.

4 critical strategies for FMCG profitability.

 

Price promotion is just a price subsidy to consumers, and margin subsidy to retailers in disguise. .

In consumer goods, most volume that comes from a price promotion is just bringing forward sales that would have happened anyway, just over a longer time-frame. Alternatively, it is volume taken from an opposition product by buyers who will avoid ever paying the full retail by switching products based on price. It is common in FMCG for consumers to have a basket of ‘acceptable’ products that they shop from via promotional pricing.

Over the 45 years I have spent in FMCG, I have seen the terminal erosion of most proprietary brands on supermarket shelves as a direct result.

In times of inflation, the gap in real wages and price widens. This pressure will only increase over the next year or so as retailers push for better and better price promotional deals, despite the current focus on their pricing tactics.

Now is a great time to go broke being successful at securing price driven promotional slots.

To dodge the ‘go broke’ outcome, there are a few simple to say but very difficult to implement marketing practises.

Understand the elasticity of demand for your product, and tactically market accordingly. This requires that you quantify the break-even points between the tactical volume increases you generate while on promotion, the lost margin from the discount, and the cost of the promotional slot. The strategic challenge here is that erosion of margin happens over time, as buyers from whom your product is in their ‘basket’ wait to buy on promotion, and most often only buy then.

Zig as others zag. Many, if not most suppliers will stop advertising, and direct the funds into short term price and promotional activity. This offers the opportunity for those brave enough to take it to generate a higher share of advertising voice for less. Over time. the body of research that examines the relationship between brand health and price delivers irrefutable evidence of the negative impact of price on brand health. Advertising share of voice is a leading indicator of market share. In tough times, most cut advertising investment to salvage the bottom line, as advertising is seen as an expense rather than an investment in future profitability.

Understand the reality of attribution. It is way too easy to make simplistic single source attribution of price promotion as the driver of volume. This moves the sightline from the more important ‘delivered’ margin. We now have the tools to do a much better job than has been the case in the past of separating volume and margin. However, the explosion of digital channels and tools has led to a quagmire of conflicting attribution claims, most of which are no better than marginal contributors.

As a kid, the Arnott’s red trucks delivering biscuits to supermarkets were always polished to a high level, no blemish in the polish was allowed. Even now, over 60 years later, that stays with me as an indicator of the effort put into quality which feeds into my view of the Arnott’s brand, despite the years, and ownership changes.

Resist the siren song of volume. For an SME to be successful, they need to make a whole series of tough choices. Amongst the most seductive of those choices is the perceived trade-off between price and volume. I say perceived because most see the trade-off as the traditional price/volume choice drawn as the graph they saw in Economics 101. It is grossly misleading to see it in this one-dimensional way. Consumers make their purchase choice on a whole range of ‘value-delivery’ parameters, of which price is only one. When you allow it to be the only one, it will logically dominate. As a marketer, your task is to make price a minor component of the purchase choice consumers make. While short term that may dampen volume, and even deny you distribution in a retailer, the point of being in business is to make enough to remain in business. You will not do this by giving away margin for no return.

Know your costs. This seems pretty obvious. However, the number of SME’s that do not understand the detail of their costs and the difference between marginal costs and overheads never ceases to amaze me. One of the most valuable tools, previously noted, in the SME toolbox is a sophisticated understanding of their break even. When you have this model working it enables you to add in some assessment of the impact of price and volume over time. It enables consideration of the impact of pulling forward your sales volume and delivered margin on promotion, the volume and margin delivered off promotion, and volume and margin impacts of competitive promotions.

Following are a few of the many research reports that articulate the linkages between price, volume, and brand salience. I include them to demonstrate the views expressed above are way more than just my opinion.

https://tinyurl.com/496vwphy Ehrenberg Bass. Brand health (podcast)

https://tinyurl.com/4wzkebav Ehrenberg Bass. Brand salience

https://tinyurl.com/4b5er6rc Amity University. Impact of price promotion on brand equity.

https://tinyurl.com/36fr8xwf Research Gate. Long term effects of price promotion on brand choice and purchase quantity