Is Your Pricing Strategy Anti-Customer Centric, Creating Distrust?

Pricing anything about services – food, SaaS products, etc. – is a delicate balance between creating margins and what a market will bear. I’ve always referred to it as an art and a science.

In most sectors, competition is high, and companies are always seeking ways to prohibit or dissuade customers from making a jump, while retaining them as valuable purchasers.

One would think, regardless of how a top tier or economy company was positioned, they would want to make their customer experience as seamless and friendly as possible in order to capture those dollars.

Here’s one example where it didn’t work.

A few days ago,I was pricing flights for a long weekend trip to visit friends who had relocated to a new city. As it was going to be relatively quick flight, although not quite commuter, I decided to price out major carriers against the economy no frill carriers.

Using comparison sites such as Kayak, Cheaptickets and Expedia – I was surprised at how prices shown can vary amongst them, I decided to purchase from a the no frills carrier as they had reasonable flight times and the tickets were about $40 less per person.

Navigating their interface, I selected the flights and proceeded to the next screen, where they asked for all the extensive information you need in order to fly these days. I then entered my credit card info, no problem.

Expecting a confirmation screen at this point, I instead was presented with another screen of things I would need to pay for in conjunction with my flight, which included picking a seat, as each one had a dollar amount tied to it, and paying for my carry on bags.

This immediately created a sense of distrust for this airline. If I was getting charged after the fact when purchasing a flight, what other costs would I incur that I didn’t currently know about? What level of comfort did I have trusting them with my credit card info as well?

All told, the options added $100 extra to the flight, pricing it higher than the major carriers on the same route.

Cancel.

Customer relationships are the most important key to sales. If the purchasing process isn’t seamless and forthcoming with information that’s clear and easy to understand, companies lose their competitive edge with selling. It also creates a situation where they’ll have to answer a higher amount of customer questions and likely, complaints, adding overhead, as well as lost time and opportunities due to frustration.

Me? I’ll be cattle herded to the back of a plane in a few weeks, but at least I consciously know what I paid for when I bought the ticket.

What situations have made you distrust a company or service?

Are Your Operating Costs Costing You?

It’s the most wonderful time of the year when companies large and small are wondering how they can reduce next year’s operating costs. If you’re not wondering, or you haven’t forecast your company’s, or your group’s, upcoming costs, take the time to investigate now and potentially set up your company for a better 2014.

Take time now to insure your company is a well oiled operations machine.

Take time now to insure your company is a well oiled operations machine.

This is especially important if you’re just looking to launch or finish developing a product. The overall cost of everything is given to rise year after year, even the basics if you’re paying attention – food, gas, utilities, insurance. These increases impact your business’ every day spend, even before the product gets out the door (or escapes, as one of my friends likes to term it).

Why is this important (other than you should know where the company is spending its money)? The lower the company’s operating costs or ratio to costs of goods sold, the more profitable a company generally is. At the end of the post is a basic calculation for how to get to the ratio.

Expenditures for core business operations, such as production costs, salaries and benefits, rent and utilities, sales and marketing and inventory are numbers which should all be included.

Pick a timeframe to conduct the information gathering – whether it’s the past fiscal year, past 6 months, or somewhere in between Looking at the numbers over a period of time will help you identify variances (or variables), areas where there could be potential savings, or areas where spending will possibly rise.

It’s a rare company that doesn’t have to horse trade currently running expenditures vs. future spend planning; who wouldn’t want an uncapped operations budget? For the rest of us, by analyzing where the company encountered bumps, unanticipated (or anticipated) increases in operations spending will give us information as to how the next set timeframe will look. Even the simplest things such as giving your employees a raise will be reflected on how the additional cost plays out over the timeframe.

As mentioned above, if you want to take this a step further and see where your company’s operating ratio lands (and you have the other pieces of financial data on hand), test out the formula below and see what percentage comes back.

Operating Ratio = Operating Expenses / Net Sales (for the same period of time)

Here’s a useful description of what the resulted number means.

At a high level, any ratio less than 100 means there’s some profit being generated in the company. Anything over means that for every $1 in sales, your company is spending that dollar + x% to make the sale. It also indicates the company is running at a deficit due to some circumstance.

Regardless of what your operations analysis resulted in, the numbers are important to not only track, but to assess at specific points to see how and where the money is really being spent vs. budgeted for in your company.

How often do you review your company’s operating expenses? Have you found any surprises?

 

 

Surviving Your Business Partnership

Now that you’ve completed the dating dance of creating your business partnership, what is your plan to survive it? Ostensibly in forming the partnership, an operating agreement was created (and signed) describing everyone’s role, rules of engagement, and buy out/dissolution terms. It’s in all partners best interest to have partnership agreements in place, and if you’re remotely questioning whether the one you have is detailed enough, go back and review it now. For everyone’s protection, here’s some guidelines as to what an agreement should entail.

Imagine if your partnership contract was set in stone.

Imagine if your partnership operating agreement was set in stone.

Once you and your partner(s) are set to get down to work on the business, below are some thoughts as to how to keep things running as smooth as possible.

Decide How To Work Together

Everyone has their own way of completing work. Deciding frequency and methods of discussion will eliminate distractions and allow you to focus on your own tasks. Whether its an end of day check-in, weekly round up or 5-minute morning google chat, come to consensus as to what’s going to be most useful for all involved. This especially helps if you’re located in geographically different areas (as in not sharing office space).

Set Goals Based on Skills

There’s much to accomplish and chances are your partnership was based on forming around complementary skills. Review what in each area needs to get accomplished first and who’s best to do it. Not all goals can be accomplished individually, however assigning ownership to foster them through completion gives all partners the opportunity to contribute to the company’s success.

Communicate, Plan to Communicate, Communicate More

If you and your partner(s) were separate meetings describing the company, would your messages sound the same? Communication and over communication is a key between partner(s). Insuring you all agree on the company priorities, discuss strategy or upcoming challenges keeps everyone on the same page while moving the company forward. It’s fine to table issues that may be too large to come to agreement with in one sitting, however make a plan for follow-up on them in the short term.

Create Rules for Financial Decisions

One partner wants to travel to an expensive conference to meet with potential strategic partners, another needs to hire a developer consultant to make additional headway on the product – the company has limited funds to work from. How do you decide? Having a set of operating rules in place that determine revenue vs non (or not immediately) returning revenue streams based on where you are in your product and earning cycle help steer the decision and insure one partner doesn’t appear favored over another.

Be Realistic

We’re all people, and people change as well as their situations. Any outside event could alter a partner’s ability or interest in participating in the company.

Set Evaluation Points

As with monitoring your business health, set aside time to evaluate yourselves as partners. Are all partners still committed to the business and the priorities? Has anyone had a life-changing event that detracts from their business priorities?Are you all satisfied with the direction the business is running? Your partners are your first tier support mechanism for running the company, and if a partner isn’t pulling their weight or wants to step back, having a forum to discuss any issues that could derail the partnership is important to establish.

Partnerships ebb and flow, and regardless of duration, if you create initial guidelines of how to work together it will save much cost and angst at the point it comes to an end. I once watched a partnership dissolve when one partner moved across country from the other without any discussion about it because the partner’s spouse had received a good job offer. The partners were running a retail store.

You tend to hear more about partnerships that end in disaster (like above). Have you seen any strong ones?

Dollars to Donuts – The Importance of Business Financial Planning

There’s an adage that goes “no business planning? plan to have no business”, and while some recent upstarts have been running around waving their arms around proclaiming “you don’t need a business plan, don’t waste your time”. At some point, you do. It might not make sense to create one at the inception of an idea of what you’d like your business to be, however, once you start thinking about customers and marketing, that would be a good point to put some financial data together. Remember, even the most disruptive, game changing, thought leading companies out there still need to pay their rent and employees. (How was that for buzz word compliance?)

My other favorite adage of recent note is “your company should be producing revenue whether or not you’re at work that day”. In fitting along those lines, as part of my role in the company I’m working with, I’ve been thinking about ways to create reoccurring revenue via licensing streams and reseller opportunities. Neither of these options are going to spring alive fully formed and ready to go. Both paths will take time, effort and cost to set-up relationships and build customer bases for.

Regardless of which, if either, path we choose, I’ve entered into running multiple forecasting scenarios for upcoming revenue. Forecasting is a good exercise to conduct a couple of times a year, it allows you to take a look at where you are, review variables for how successful (or not) your current revenue streams are, then make informed decisions – like where to expend marketing effort, from the results.

I like to run the worst case scenarios first. I feel as though if you can conquer the worst case scenario for any situation, you remove much fear, unknowing and doubt from your actions. In my spreadsheets I have scenarios of “what our revenue decreases by 50% for 6 months” (it would be a struggle and after month 2 we need to reassess the business goals and opportunities ) as well as  “what if we run out of operating cash” (less survivable and probably game over). While no one wants to mange themselves out of a job; what the exercise is doing is to help establish where you might run into trouble on your current course walking the line between revenue and overhead.

Now that you’ve looked at the worst case scenario, it’s easier to approach where it makes sense to address growth opportunities. Growth comes with costs, whether tangible or intangible. It invariably means more overhead expenses including equipment and or possibly moving into a larger location to support additional staff. Many pundits are advocating slow-growth company cycles. This is not a bad idea as until you are running your company, it can be tough to you see where the potential for increases are, and having initial slower growth periods can help identify them.

Back on the upside, along with growth, doing periodic financial budgeting and forecasting will allow you to arrive at a company valuation, and personal equity in it, regardless of what, if any exit strategies you might have. In addition, if you’re going for funding, having a solid understanding of what your company is worth, will be a benefit in the negotiation process.

Knowing what your company valuation is, is useful in other areas as well. Perhaps you just need something as simple as a corporate credit card, or a line of business credit to help with short term purchases. Banks want to know who they’re dealing with and what the risk value is of the credit they’re extending. Being able to walk in and talk to a banker with your balance sheet in hand goes a long way to getting approvals and building relationships with them.

Businesses inherently have many moving parts, but in order to keep the momentum, it’s important to check in and see how the financial part is moving, and what steps need to be taken to keeping it so.

How often do you review and forecast your company’s financial data?