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What Do High Growth Businesses Do Differently?

Over the past 5 years the importance of the “High Growth Business” and how this relatively small group of businesses disproportionally impa...

Thursday 25 October 2012

Get Profit from your Sales

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English: Cost-Volume-Profit diagram, showing b...
English: Cost-Volume-Profit diagram, showing break down of Sales into Contribution and Variable Costs. (Photo credit: Wikipedia)
A recent blog post on pricing reminded me that we tend to forget how important it is to make a profit and often how little room for manoeuvre there is when playing around with prices.

The average profit for all limited companies across the UK before 2008 was 7%, yes that's £7 out of every £100. I'll accept that many smaller businesses typically owner managed will depress their reported profits in order to reduce their tax liability.  Having said that there's not many businesses that regularly report profit before tax of 10% or better. What that really means is that pricing and getting it right is really important.

So point number 1 you need to understand fully what it costs you to produce your product or service. I don't mean guess it I mean know it intimately and in detail.  Recently I went to what appeared to be a reasonably successful retailer who were struggling financially. Superficially things appeared OK nevertheless I asked them to fill out a detailed spreadsheet itemising all their costs and not surprisingly their situation was much worse than they anticipated. What it had done was to get the business owners to focus on what it really took to run their business and that pricing was a much more important than perhaps they first realised, as a result now everything is priced on the basis that it makes a profit in its own right and in some cases that has meant a significant increase in individual product prices.

 For companies with a sales team, this message often gets lost, particularly as most sales people are rewarded against sales revenue and not profit per sale. Consequently if sales people are in a sticky position they automatically reach for the price lever and drop the price, after all a 10% discount on a 100k sale is only 10K  and that's relatively easy to find. The fact that it may have completely wiped out the profit on the sale is not on their radar.

So point number 2 get your sales team to focus on profit and not turnover. How can yo do this? Well how about giving them a little bit of training so they understand the mechanics of the business, and you could reinforce this by rewarding them on profit not turnover.

I've only be able to do this once but boy is the impact immediate. No more is there the argument that we had to sell this with a big discount to give us a foothold in this new account, nor is there the plea that "if I didn't give him that discount(and its usually a big one) we wouldn't have won the sale."  Why, because sales people don't want to go through all the effort needed to win a sale and end up getting no commission.

Interestingly what you do get are rather more searching questions like what does it cost us so much make this stuff, what else can we offer if we cant move much on price? This should lead both you and your sales staff to examine and really understand your company's value proposition and discover how to best promote them, which is no bad thing.

The important messages are that as a business owner, profit should be your prime motivator when selling. In order to do this you need to understand what your true costs of production are before adding in your profit and only after that setting your price.

Motivating your sales using profit has some beneficial side effects in forcing them and indeed to you really understand and to be able to justify why you sell what you sell at the price you sell it.

Exigent Consulting provides specialist services for High Growth BusinessesBusiness Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

Monday 15 October 2012

Social Networking How To Stop it Becoming a Time Sink

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Over the past 5 years, yes it's really that long, social media or social networking has moved from the fringes of marketing to centre stage. At the same time industry pundits are recommending that we engage with people across more and more platforms. Yesterday for example I was sent and an email entitled "the 9 must use social networks". 9! This is clearly getting out of hand, how am I going to do any work?

Social Networking How to stop it becoming a time sinkNow even a dinosaur like me recognises that I need to utilise this route to market but how can I  keep our social networking under control. We all know that the beauty of using social networks for marketing it is that it's free. The bad news is that using social networks for marketing is free. What do I mean by this? Because using social networks is free we tend to ignore one of the key measurements for successful marketing that of return on investment! All to often we become seduced by the fact that we can connect with all sorts of people without ever asking ourselves the key question what am I getting out of this effort. In this way social networking can easily become a time sink, where we are spending increasing numbers of hours without really looking at the returns.

If by contrast I send out a sales letter it's pretty easy to work out the leads from that mailing. The problem I have found, at least, for most businesses is that returns from social networking are a bit like wait for a bus, nothing much happens for a long time and then suddenly 3 turn up at once. 

Faced with this situation I wanted to come up with a few key questions I used  to help me and subsequently my clients work out how important the use of social networking might be as part of their marketing mix, and therefore how much time should be committed to social networking. The list is by no means exhaustive but it short at least help people get social networking into some sort of perspective, they are:-

1 What do I want to get from my social networking effort? More leads, more profile or more sales?
2 Are my prospects active on social networks? If not why bother?
3 Are my products/services something that is currently actively marketed through social networking? If not. Is there a good reason?
4 How widely spread are my potential customers. Does it matter that there's billion users on Facebook if my customers base is limited to 3 miles from where I live?
5 How much time can I reasonably spend on social networking? 30 mins  or 3 hrs a day?
6 Do I understand enough about social networking to use it effectively, if not, do I have the desire to learn through training?
7 Which social networking platform is best suited to my needs?
8 Do I understand that using social networking is for life. Not just for Christmas.

So what do I use?
Twitter daily, LinkedIn daily, Blogging twice monthly, Email marketing twice monthly and a bit of Facebook but mostly social stuff, it is meant to be social networking after all.

Exigent Consulting provides specialist services for High Growth BusinessBusiness Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

Tuesday 2 October 2012

Pricing objections - what they really mean

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Pricing is perhaps one of the most misunderstood issues in business, if used properly it's one of the simplest ways to help you maximise your profits. Easy then, so what's the problem?

The problem with owner managed business is that they assume that they must be the cheapest to survive and are often very reluctant to raise prices, even in the face of ever rising overheads, just think of energy, fuel and courier(UPS) costs to mention a few. If I had a £1 for every time I've heard a company owner say "if I raise my prices I'll lose all my customers so I have to keep them as they are" I'd be very rich – sadly I'm not.
Gas Prices Are Up!!! Feelin' the Pinch...
Gas Prices Are Up!!! Feelin' the Pinch... (Photo credit: Clan UiBriain)

Why do so many people think like this? Much of it is conditioning, whenever we are not satisfied with a company for whatever reason we complain about the price. 

Let me give you some examples:

You're visited by a salesman who can't articulate the benefits of his product. 
What do you tell him when he asks for the business,"I'm sorry but I don't see a reason to buy this" or do you say "I'm sorry but it's too expensive".

You're visited by a salesman who you just don't like. What do you tell him when he asks for the business,or do you say "I'm sorry but I just don't think you're trustworthy" or do you say "I'm sorry but it's too expensive".

You're visited by a salesman who just doesn't get the point you're trying to make. What do you tell him when he asks for the business, "I'm sorry but you don't understand my problem so I'm not interested" or do you say "I'm sorry but it's too expensive"

You're visited by a salesman who's too pushy. What do you tell him when he asks for the business, "I'm sorry but you're the last person I'd buy anything from" or do you say "I'm sorry but it's too expensive"

You should be getting a message by now pricing is rarely the issue, price objections are mostly a cover for some other objection. So what does this tell us? The first thing is that raising your price is nothing to be afraid of. The second is that if pricing is seldom the real issue, raising your prices even in a recession wont frighten off your customers. Why? because the reason they are staying with you are not price related, it could be that you're convenient, they like you, they love your brand, you've helped their business, you are reliable, and so on....

So now you know let's look at what you can do. Well one thing you could try is to increase all your prices by 1% immediately. Why, because you can; if you're selling something for £100 pounds people aren't going to stop buying it because it now costs £101.

"I can't we're in the middle of the worst recession in living memory you must be nuts" – you say.

I say "no, its your conditioning that says that". 

I can in all honesty say that in almost every company I work with; one of the first things I do is to get them to increase their prices and having done so they are surprised that they don't lose any customers in the process. Yes even in the worst recession in living memory. Why? Am I a genius – I hope so – but no. Am I a magician – no. The answer is almost invariably, because most small companies are selling their product or service too cheaply because they've been conditioned to this as those people who don't want to buy from him use price as the objection.

Realistically as a small business owner you should understand that price is only factor among many people assess before purchasing and its by no means the main factor. Your price should reflect your costs and be sufficient to give you a decent profit. In order to price correctly you should have a detailed analysis and understanding of your costs. This is something that many businesses don't have. Only by understanding what and how your costs are made up in detail can you accurately set your prices over the long term. Whilst the general rule with pricing is that your sales price is 2.4 time manufacture costs, it's still a rule of thumb and likely to lead to a guess-timate of costs which will almost always be less than the real costs.

You should be increasing your price at a minimum annually to keep in step with the inevitable rise in your costs and additionally if there is a major change in the price of components. Don't worry if you are not the cheapest because it is rare that you will be as there is always likely to be a business with a lower price. Anyway you don't want to be the cheapest because down there is no customer loyalty.

So remember that pricing objections are more likely a cover up for other deficiencies, so don't be afraid to raise your prices and ask those price objectors what they're really unhappy about.

Exigent Consulting provides specialist services for High Growth Business Business Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business.