While there’s nothing like the adrenaline rush of pulling off a major business win, it often comes at the cost of too many sleepless nights. Staying on top of your business risks is the greatest challenge you’ll face. And are you even worrying about the right things? [track your sleeplessness with apps like Sleepbot or MotionX 24/7]
Your biggest risk is a missing or outdated strategic plan. A strategic plan is like a flight plan - without one, you have no way of knowing if a course correction is needed. All of your major business decisions need to be compared to the plan to ensure you are staying on track. I’ve seen successful strategic plans for small businesses on just a few pages. Businesses with high complexity will obviously require more detail. But all strategic plans will have the same key elements. Here’s a quick summary -- I’ll go into more detail on each one in related blogs.
What your business is about
Frankly, you should stay awake nights until you get your unique value proposition nailed down. You must understand your customers’ needs for your product or service, and how they like to purchase. What does the competition offer, both now and in the future? How will you reach those customers and tell them what sets you apart? And how will your business keep its sustainable competitive advantage in a rapidly changing marketplace? You don’t want to follow in the footsteps of Kodak or Sears.
How your business is structured
Your choice of business model (direct sales, franchising, licensing, royalties, etc) drives both your revenues and cost structure, and choosing the right one will go a long way to helping you sleep at night. Your strategic plan should identify key investors, customers, channel partners and suppliers, while avoiding the operational risks of being too dependent on any single one.
A viable financial plan depends on properly pricing your product or service to optimize both sales and profits. If you’re not sure how much to invest in sales or marketing or product development, trade associations often publish averages for your industry, and you can use that as a sanity check. The right amount and kinds of capacity will allow for growth, while keeping fixed costs at a manageable level, balancing flexibility against efficiency.
And as difficult as it is to develop a single realistic plan, one plan is not sufficient. You’ll also need an upside plan (to ensure sufficient capital, cashflow and capacity), and a downside plan to make sure your business can weather a slow sales ramp, product development delays, cost overruns and even loss of key personnel. Your investors or bank may require a separate, specific plan of their own. Each plan will be based on assumptions you’ll need to update as new information comes in.
How you get things done:
You already know that your business succeeds or fails because of the quality of the people who work there, but Gallup estimates that companies fail to choose the candidate with the right talent for the job a staggering 82% of the time. And even if you’ve chosen the perfect person for your start-up, you will likely find that person is not suited to running the business once it matures. Your strategic plan needs to highlight the current and future key personnel for each function. If you can’t afford to hire the people you need, consider using experienced consultants whose talents fill the gaps in your team.
A great strategic plan will identify which opportunities your company is going after, and why and how it will succeed. It will realistically present a range of financial projections for one to five years, and specifically address both risks and their mitigation. It will effectively communicate to your employees, your investors, and perhaps even your customers your goals and plans, and will increase the confidence of each group in your success. As a result, everyone can sleep better at night. Including you.
My future posts will provide a step-by-step guide to building a strategic plan for your business -- let me know if you’d like to know when they’re published by contacting us or by emailing me at firstname.lastname@example.org. In the meantime, what’s keeping you awake?
A new client came in and said she felt forced to sell her business. Costs were high and climbing, despite every effort to cut labor and material costs. Profits ranged from low to negative, and cashflow was a constant problem. I asked how long it had been since a competitive survey of prices had been done on the product line. The answer was what I suspected -- it had never been done in depth and the little that had been done was several years out of date.
Pricing is one of the most complex aspects of running your business. At its best, it’s a blend of art and science, and you will optimize sales and returns on investment. Done incorrectly, you can crash your financials. Avoid these risky pricing moves:
#1: Setting Price at Cost Plus
This is the simple way to go. You add up your per-unit or service costs and tack on an adder for overhead and profit. You risk pricing too high for the market (and losing sales), or lower than necessary (and giving up profit).
#2: Price Matching the Competition
In this case, just charge what your competitor charges for their product or service. This foolish method assumes that you exactly match your competitor’s offering (quality, brand reputation, packaging, performance, availability...) and that your competitor knows how to price properly.
#3: Undercutting the Competition
In this case, your price is some percent or $ value lower than the competitor’s price. Using this pricing method means you are hoping that customers will know that your price is lower, and will prefer to buy from you as a result. The risks are that higher sales may never come and that you are putting needless pressure on profits.
#4: Pricing over the Competition
This is the opposite of #3 and is an attempt to get a price premium because your product or service is “better”. In this case, you are hoping that customers both recognize, and value, the superiority of your offering.
The problem with all of these pricing methods is that they do not take into account what your product or service is worth to the customer. Correct pricing has to start with what customers are willing to pay for your specific offering. You will need to determine how demand might change with lower or higher prices. You can only successfully charge a premium if your offering is more valuable to the marketplace than the competitor’s. Once you understand the correct market-based price, you need to compare that to your cost structure (at various volume levels) to understand your short- and long-term profitability.
My client had set prices using the cost-plus method. Our pricing review revealed that the company was charging 30-40% less than customers were will to pay for these precision, best-in-class products. A carefully staged series of price increases put the company back in the black.
How to determine the relative value of your product or service
What price customers are willing to pay for your product or service is a function of how it stacks up in the marketplace, within the framework of supply and demand.
Factors that affect pricing include innovation, quality, reputation and availability. Is your product or service highly innovative or differentiated? Is your brand well-known with a loyal customer following? Is it very convenient to obtain from you? Does your packaging connote high quality? If so, you may be able to charge more than the competition -- but only if the market values this level of quality.
On the other hand, if your offering is commoditized or of low to mid-quality, if you are new to the market or unknown, or if your packaging or presentation is generic or unappealing, you will struggle to maintain even average pricing and sales volume.
Pricing includes not only your standard products and services, but also promotional activity such as bundling, quantity discounts, preferred partner discounts and limited time offers. Be aware that pricing is rarely static. It will need to re-evaluated continually and change according to seasonal demand or availability, and as the product matures and becomes less competitive over time.
Developing competitive and profitable prices is one of the key success factors for your business. Put your team’s best minds on this question and don’t take risky short-cuts. Your investment here will pay off in the long run.
Contact me at Verity Strategy if you have questions about pricing or would like an evaluation of whether your pricing is competitive in the market today.
The Price is (Not) Right
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