Oct 11, 2021 | Analytics, Change, Governance
The starting point of any review process is to define the current situation.
In every case, the trends are as important, and often more important than the immediate position, as they are often leading indicators of what might happen into the future that will impact your planning.
The trends give a picture over time of the success or otherwise of the organisation, which leads us to examine some areas in more detail than others, asking ourselves the ever-harder questions.
The four parameters are also cumulative and absolutely interdependent.
Under the ‘Strategic’ heading there is a wide range of areas for examination. The most obvious are:
Regulation.
No enterprise can survive, legally, if it is outside the regulations that control it.
Looking not only at the regulations that are in place now, but what might come down the pipe at you is important, in some cases critical.
For example: if you are exporting manufactured products into the E.U. it is likely that in the near future, there will be a tariff added to any that already exist to accommodate the imbalance between there being no carbon tax in this country, while there is one in the EU. In addition, the recent submarines decision will likely disrupt any movement towards increased access to the EU.
Competitive environment and your relative place.
What is the reality of your competitive position?
Being tough on yourself, ensuring conformation bias plays no role is important.
Strengths and Weaknesses are internal to the enterprise, while opportunities and threats are external.
Strengths and Weaknesses are always relative to those of your opposition, and/or what customers are demanding.
Just because you think you do a great job, and you may, it is not a strength unless it is a better job, in customers eyes than the opposition can deliver.
Similarly with weaknesses, if customers do not care, then why does it matter? Only consider weaknesses that impact on your competitive performance relative to the opposition, and to what the market is looking for.
Customers.
As Peter Drucker noted, ‘The purpose of a business is to create and keep a customer’
Your business relies on them, they should be the centre of everything you do, think and say.
Understanding the nature, shape, and trends in your customer base, what needs you are meeting, what needs may be there that you are not meeting, why they are customers of yours, and not someone else’s, what they think about the service you deliver.
Customers must see the value you deliver, or they will walk.
Similarly, it is reasonable to ask yourself ’are they the customers we want?
Measuring customer ‘stickiness’ is the key to a successful business, so much so that if you did nothing else, it would serve you well.
Three measures I use:
Share of wallet. (SOW)
How much of the money a customer spends on products you could provide, do they spend with you? What is your share of their ‘wallet’?
This always opens very interesting thinking and discussions about the scope of the wallet. E.g., Imagine you are an insurance company with a big share of the car insurance market.
Should your wallet also include home, life, professional indemnity? Or do you niche even further to vintage and collectable cars?
These are the strategic decisions that need to be made before a marketing plan can evolve.
This analysis does not have to be confined to individual customers, it may be applicable to a cohort of very similar customers, to give you a SOW of a market segment.
There are some tough choices here, you have limited resources, and need to apply them where you will generate the greatest leverage.
Leverage is a word I use a lot. We all know what it means: doing more with less.
Customer retention, churn, and lifetime value.
How long do customers stay with you, how much do they spend?
Both measures are useful when applied to differing groups of customers, geographic, demographic, or any other parameter that defines the behaviour of a group.
You cannot do enough work in this space, the better you know your customers, the better able you will be to serve them, increase your share of their wallets, keep them as custumers, and have them refer you to their friends and networks, still the most powerful form of marketing there is.
Lifetime Value is a good measure, simply the sales to a customer X the average life of a customer.
Customer Pareto.
The 80/20 rule is immensely valuable. Measuring the profitability, revenue, or margin, perhaps the three of them, offers insights to performance and highlights areas for improvement.
A catch with this approach: it will tend to focus attention on the currently most valuable customers. However, most of your best customers started out as small first timers. Some will be more strategically valuable for one reason or another, so do not let the Pareto discard them prematurely.
Market competitiveness.
Michael Porters competitive analysis tool has passed the test of time.
It is a little outdated now as the complication of all the new digital channels adds complexity, but the tool remains extremely useful.
There is no business where there is not some value in thinking through the competitive forces driving your industry.
Product & market lifecycle.
All products go through a lifecycle, of some sort.
Launch, growth, maturity, decline.
Even a failed product has a life, albeit a short one.
Businesses go through a similar lifecycle, it always holds, in one way or another.
It is a useful tool to consider at which point individual products, product groups, markets, and businesses are situated, and the pattern of their growth and decline.
Where would you put EV cars on this graph? Mobile phones? Cigarettes?
Occasionally a product, or business bucks the trend, and comes back, the product changes in some way, and finds a new lease of life.
The BCG tool is well known. It is a tool through which to consider your product portfolio.
A dog, to be euthanised. A cow, to be milked, A star, to be nurtured and protected
Who knows, it will become a dog, or a superstar, you must decide what to do with it in terms of marketing investment.
Business model.
Your business model, is the means by which you turn your value proposition into revenue.
Clarity about your business model, and how to optimise the mechanics is a key component of considering your current situation, and how best to leverage it.
The strategies that will work for one model may not work for another.
E.g., The wholesale model is becoming redundant, as the net has opened the communication channels and opportunities for buyers and sellers to collaborate, and manage ordering and logistics, a role wholesalers used to fill.
Two sided and subscription models are the ones that have flourished with the net. eBay, Airbnb, Netflix, Amazon prime, all the SaaS software you use.
You must be clear about your business model, as experience suggests that two different Business models sitting under the one roof is very uncomfortable and creates friction.
Every business requires money to operate, the ‘Working capital’ of the business.
Every business also has some fixed costs, even home businesses. Insurance, power, communications, and so on.
Every business that has any sort of manufacturing, from a simple transformation to complex manufacturing has the cost of goods sold, plus the equipment and labour necessary to do the transformation, as well as the fixed costs of factories. The processes to forecast and manage your money need to be robust and subject to continuous improvement.
Budgets.
Given we are talking about the future, we know it will not be as we expect, so the budgets flowing from your forecasts will be wrong, question is by how much, how well do we adjust, and how much did we learn on the way through.
I strongly favour rolling budgets, usually 3 months, which parallel rolling marketing review, and forward planning.
You have in effect two reporting dimensions.
Financial accounts.
The financial accounts are the ones we see in every annual report. There are statutory formats, lists of required information, and the definition of how varying situations will be treated. They are for public consumption, analysis and comparison, and come in three standard sections: Cash flow, Profit and Loss from trading, and the Balance sheet.
Management accounts
These are the reports used internally to manage the business.
They use the same raw data, and the same 3 core reports as the financial accounts, but go much deeper, and have an entirely different purpose.
The management reports are what you use to allocate resources, track their application, monitor the financial outcomes of the decisions you take, and manage the assets, tangible, and intangible, of the business.
For SME’s, the most important measure is your cash flow. Without cash, you are dead, so a detailed understanding of your cash position is essential.
Hidden within the management accounts are the seven financial levers that should be measured and managed. Price, Volume, COGS, Overheads, A/c Receivable, A/c payable, and inventory.
Businesses are usually structured vertically. However, customers interact with businesses horizontally.
A customer has no interest in how you are organised, and how you work, their only interest is in having the product they paid for perform up to or beyond expectations, in relieving the itch they feel, solving the problem they have.
Putting the customer at the centre of your efforts, which is where they need to be in order to be successful, means that you focus on the horizontal, external customer experience, not the internal, vertical organisational experience.
Forget this basic fact at your peril.
Businesses are made up of a series of processes. Order to delivery, Cash to cash, Raw material to finished product, Acquisition of and retention of customers, and others.
Every one of these processes is critical.
Culture is most often defined by repeating Michael Porters assertion that: “culture is the way we do things round here.” However, this leaves the question of what drives the way things are done.
Performance management.
The manner in which KPI’s are allocated, and usually they are financial KPI’s that dominate, is a critical consideration, as they are often in conflict, driven by functional considerations of no interest to customers.
For example. If your factory manager’s KPI’s are all about the efficient running of the factory, with no allowances for the downtime, experimentation, and pilot runs, that are necessary during the product development stage, you will have trouble getting a new product that is OK on the development bench validated through the factory.
This always leads to problems in the market.
A similar scenario comes from many salespeople, they often do not report to marketing, but are crucial in the marketing plan implementation.
Overlooking ‘Culture’ in the preparation and execution of a plan often sounds the death nell at execution time.
Flow.
Imagine a river, running unimpeded by rapids, narrow bits, waterfalls, and varying depth along its path.
It looks leisurely, smooth, but more water passes through than a similar river with all the impediments.
The latter just looks busier, more activity, turbulence, conflicting paths around the impediments.
Processes in a business are similar.
Smooth processes that hand a task over, one person to the next, one part of the process to the next at the critical time, with the minimum of disruption, the better.
More gets done.
Flow is a state that comes from a place of communication, collaboration, and continuous improvement.
All are enhanced by tools, but in the end, you need people to work together, communicate and continually improve to achieve that state.
Flow is an outcome of a positive egalitarian culture.
One of the most common problems I see in businesses as I wander around is constant never-ending firefighting.
That happens because adequate, repeatable processes are not in place,
Next time you walk into a new office, or factory, look for Flow.
You will know it when you see it and know further that this is a place with whom you want to do business.
Flow can be seen and felt, and it can also be measured by cycle time and throughput.
Culture is an outcome of all the interactions, big and small people have with each other.
‘The way we do things around here’
It is therefore critical that you hire the right people.
You can measure engagement, and how happy and fulfilled people are. A useful rule is to
Hire slowly, fire fast, and with great care. When you must terminate someone, it will have a profound impact on them. It is vital that you do it with empathy and make the landing for them as soft as possible. This will aid them immensely, but as important, is the impact on those who are left.
If they see the departed as a valuable member, they will be wondering if they are next. ’Why not me’ survivor syndrome, is a powerful psychological force. If they see the departed as a good riddance, the fact that you did it with empathy will also be noted and bind the remainers closer to the business.
Besides, when you feel you have to fire someone, it is usually your mistake in hiring them in the first place.
A further good measure is how time is spent. Keeping timesheets is not what this is about, it is a cultural behaviour that you leave time, block it out in your diaries if that works for you, to give your self-time to see what is around you. Most in modern businesses are so busy they do not allow the time to look up, observe, and see the opportunities that may pop up. We are so busy we miss them, confirmation bias dictates what we do see, so act deliberately to remove that inherent bias from time to time and look up.
For many SME’s, the opportunity to go to industry trade shows, forums, and formal networks of peers is a great way of doing this. Chance then can catch up with you.
Keep the bias to action without which you will get nothing done, but make the time to look around with clear eyes, meet new people, as opportunities are always attached to people, they do not float around looking for a place to land.
Bias for action, must be part of the culture.
Ask yourself the question ‘Do I really need more information, or do I need to simply act on what I have’
Most decisions are reversable so long as you have good feedback loops and are prepared to recognise early that a course of action is not going to deliver expected results.
Marketing is always about making choices with incomplete information, do not allow yourself to be paralysed by the missing pieces, act and be prepared to back away, having learnt something new. Bias for action is a cultural thing, demonstrated by the leadership.
The secret sauce of a successful business is to have a successful culture, one that ensures that everyone knows that what they are doing today is correlated and contributing to the long-term achievement of the mission, strategic objectives, whatever you choose to call it. Every person understands the contribution they are making today, for that long term achievement of the goals.
Defining your current situation is like having a detailed map of the block of land you intent to build on before you start designing the house. The better the map, the more functional and useful the house design will be.
Take the time, and make the effort to do it well. An independent set of eyes always helps.
Oct 8, 2021 | Analytics, Management, Operations
We are all wary, in fact, usually very reluctant to put prices up, in case we lose customers. We ignore the sage advice of Warren Buffett who knows something about making a bob when he said: ‘If you have to go to a prayer meeting before raising your prices, you have a lousy business’
Increasing prices is a valid concern if two conditions are not met.
- You are undifferentiated in a way customers value
- You are in a commodity market.
There are five strategic drivers of price, the items that should be considered in your strategic thinking that delivers your pricing architecture:
- Your business model
- Price packaging
- Strategic priorities
- Market power
- Behavioural drivers.
Before you consider the actual price you will be charging, you need to have built the pricing architecture that best accommodates the dynamics at play in your market, and the price elasticity of demand.. Any pricing decision has two dimensions:
Strategic: The pricing architecture that is consistent over time, which provides the structure of your price list.
Tactical. Price can be moved around as necessary, while always remaining inside the pricing architecture.
Many just leave price decisions to the end, a grave mistake, as finding the Optimum Price, the one that leaves a minimum ‘on the table’ will have a profound impact on your profitability.
If you produce a simple spreadsheet, such as the one below, you will be able to model how the profit changes at various price assumptions. It is almost always the case, that to a point it is better to put your prices up and take a modest volume loss, than to drop prices hoping that the added volumes will deliver greater profit.
The assumptions in the chart:
- The Price we charge is entirely our decision.
- The volumes we forecast at any price point are the combination of experience, assumptions, and gut feel. They can be very tactical, varying time to time, and customer to customer in some circumstances.
- Cost of goods sold/unit and fixed costs are unchanged at any volume or price.
Developing a simple model is just maths and a range of assumptions, but we use it too infrequently. Our instinct is usually to drop prices in a crisis to preserve market share, rather than thinking about the impact on profit. If you have a gross margin of 40%, for every $1 you drop your price, you have to gather in $2.50 in added revenue to break even.
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Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Price/unit |
$15 |
$18 |
$21 |
$25 |
| Quantity/period |
100 |
85 |
80 |
55 |
| GOGS/unit |
$6.0 |
$6.0 |
$6.0 |
$6.0 |
| Fixed costs/period |
$400 |
$400 |
$400 |
$400 |
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| The profit outcome of the various options can be seen below |
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| Revenue Price X Quantity |
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| Minus Total cost = ((COGS X Quantity) + fixed costs)) |
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| Equals Net profit |
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|
Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Revenue |
$1,500 |
$1,530 |
$1,680 |
$1,375 |
| COGS |
$600 |
$510 |
$480 |
$330 |
| Total cost |
$1,000 |
$910 |
$880 |
$730 |
| Net Profit |
$500 |
$620 |
$800 |
$645 |
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| Breakeven point. |
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| Fixed costs/Unit Gross margin |
44 |
33 |
27 |
21 |
The break-even point also changes. This is one of the most under-rated but simple calculations available to businesses to gauge their financial health.
Whatever you do, there will be some for whom the price is too high and will not therefore buy.
There will be others for whom you are pricing below what they would have been prepared to pay.
Either way, you leave profitability on the table when you pick a single ‘Optimum price’ point.
This is represented by the left-hand graph in the header.
When you can have two price points, you tend to increase the profitability.
I.e., You drop one price below the ‘optimum’ single price, and pick up those ‘cheapskates’.
You have a second option with prices higher to capture those who are willing to pay the higher prices.
The challenge is, how do you effectively fence off the two, so you are not just delivering an extra reward to those prepared to pay the higher price, just to capture the cheapskates?
It is in the ‘Fencing’ that the creative strategic thinking must take place.
This is represented by the right-hand graph in the header.
The obvious example is economy airline seats. Every economy seat is almost identical, yet there are price fences based on time, and ticket flexibility. Book early, cheaper than in peak booking time. Book very late, you might get a very cheap price, or you might miss out altogether. This is in addition to loadings on location: aisle and window, forward and aft. This is also in addition to the fences that exist between economy, business and first class, which has similar demarcation, for time, as well as the premium to be there instead of cattle class.
A final thought. Many SME’s are not selling time, or input costs & materials, they are selling the results of knowledge and experience and the value they can deliver to their clients.
How do you put a price on experience?
We all have trouble with that, at least I do, and most people I have come across do also. There are three basic rules to follow as you consider how to price for a job.
- Price the client rather than the service. This means if you make them a million, shoot for a share of the outcome. This involves a ‘value conversation‘ early on. E.g., If I was able to deliver you added profit of 100k, how much would that be worth to you? This sets a benchmark, from which you can come to an arrangement. Remember, that a client asking you to do something for them is all about removing risk. You cannot offer guarantees with certainty, as there is always risk involved, but a bit of creativity can expose some useful ways to share the risk and reward. To quote Peter Drucker: ‘In business all profit comes from risk‘. Therefore, the answer to how much they are willing to pay would be tempered by the risk and reward to both parties.
A further example: A friend of mine is a hypnotherapist, and often helps smokers become non-smokers. The value conversation around her services should not be about the price/session, but by how many packets of cigarettes it was worth, in which case, success would mean an ROI in a couple of sessions. E.g., How much does a packet of ciggies cost? How many packets a week do you smoke? Quick mental arithmetic… that means that success here will save you $250/ month on cigarettes, and that is before you factor in the health benefits. What a great deal!!!
- Offer options. Where possible, offer more than one option at differing price points. A premium version, and one or more cheaper versions that have had some features removed. Think about the SAAS software options offered on the web. There are differing features listed for various price points, and it is always three.
- Anchor high. Three price options, start with the highest first, it acts as an ‘anchor’. This is opposite to what we do automatically, we tend to price low as it seems that will be more effective at closing, but the opposite is true. Price high, usually they will go in the middle. In addition, it is far easier to price high and give a discount than it is to price low and try to add features at an increased price.
None of this is easy, if it was, everyone would be doing it. However, it can be done with some creative thought, experience, domain knowledge, and good feedback mechanisms to enable ‘fine-tuning’
Note: Please excuse the dodgy graphs in the header. I am a strategic thinker, not a graphic artist! However, despite their dodgy state, I hope they convey the message.
