Why Small Business Can Succeed in a Tough Economy

In many of my blogs and articles, I’ve emphasized that the key to starting and maintaining a successful small business is to find, sell, and satisfy customers. If you can do this, I believe there are lots of opportunities for new start-ups and growth, despite the condition of the economy. I read a story this week in the New York Times that illustrates this concept clearly. I have reproduced it in its entirety.

There are two quotes in the article that I would like to bring to your attention:

Referring to the right store she found. . .”where people who are making far from royal salaries still care about doing their jobs well. They even knew my name.”

Referring to why she makes it a point to patronize this “nice” store…”because being nice matters a lot in this brave new entrepreneurial world.” (Small things make Happy customers)

 

Finding Community, Even in a Chain Store

By JANE GROSS

Published in The New York Times: February 18, 2012

It is two minutes before 9 at night. The Staples store I use, for tasks I once did in an office, closes at 9. After I press my face to the glass door, pleadingly, holding work that must be finished tonight, the kindly manager lets me in. Then I join a half-dozen others still busy inside, at the copier or the scanner, dropping off FedEx packages, or picking up their new business cards with amorphous job titles.

I used to go to a different office supply store. Then came the day it ran out of FedEx envelopes. Oops, the store employee at its FedEx counter said, directing me to his counterpart at its United Parcel Service station. There, no one mentioned that it, too, had run out of padded envelopes. Then, without a word of warning, an employee put the CD I was sending, containing a video of a speech I had made, into a plain manila envelope, tagged it with its destination and rang up the bill in record time.

But, I explained, the CD would never get to its destination in one piece the way it was packaged. “Sorry for the miscommunication,” I said. (Yours, not mine, I muttered to myself — but not out loud, being a believer in honey rather than vinegar.) “Please give me my money back and I’ll take it elsewhere.”

“No you won’t, lady; it’s already rung up.”

“Yes, sir, I will take it elsewhere. I clearly asked for a padded envelope and an important job depends on this.” Anger, hard as I fought it, rose in my throat.

The argument that ensued is best not described here. In any case, I was too cheap to take back the overnight package I’d already paid for. The CD — for a potential client to view before deciding whether to hire me for a speaking engagement — indeed broke en route. I did not get the job.

Then I went looking for a new store to patronize.

This is my brave new world of entrepreneurial life, which began after I took a voluntary buyout from The New York Times in 2008. After working as a reporter and correspondent for 29 years, I was eager for a midlife adventure.

After I left, though, it felt strange not to work in an office, with its regular hours, bosses and, most important, co-workers and a sense of community. I joined the legions of solo operators who took their computers to places like Starbucks, seeking the sound of other people breathing. We knew the mental-health danger of staying home for weeks in the same dirty terrycloth robe, talking only to our animals.

I missed my office friends a lot. But I expected that. What I didn’t expect was how much I missed the copy machine, the scanner, the FedEx pickup, and the I.T. guy, whom I didn’t have to pay to repair equipment.

Could I have bought all the necessary machines for my nifty home office? I could have, though it would have been very expensive, and it’s a tight fit in there already. Besides, I hate gadgets, so the fewer the better.

Could I call for home pickup from U.P.S. or open a FedEx account? I guess I could. But I like going to Staples, now that I’ve found the right one, where people who are making far from royal salaries still care about doing their jobs well. They even know my name there.

There used to be a neighborhood store, Office Inc., but it closed as the big chains grew. I loved Office Inc. For years after it was gone, I’d see the owner around town and embarrass myself by tearing up. The sight of her would make me think that the bad guys, in some I-don’t-know-where corporate headquarters, had won.

Yet each big-box store, once you get past the fact that it looks the same as the others, has its own personality. The one I use now, with the manager who lets me in at two minutes till 9, has employees who help people slide balky credit cards through supposedly self-service fax and copy machines. It has a middle-aged woman selling computers because other middle-aged women don’t like doing business with dudes who call them Ma’am, or who condescend to them as if they don’t understand speedy technospeak, or who don’t even answer questions because their iPod buds are in their ears.

WOULD I choose to be in a Staples at 9 p.m. if I could help it? Not on your life. At times like this, I miss the perks, shrunken though they may be, of being a lifer in a big corporation.

But even out here in each-man-for-himself-land, there is kindness and camaraderie. That’s why I make it a point to patronize this “nice” Staples: because being nice matters a lot in this brave new entrepreneurial world.

 

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Pricing For Profit

One of the most important aspects of launching and growing a successful product is correct pricing, one of the major components of profits. The right price gets you an order and maximizes your chances for reorders. The wrong price—on the low side—leaves valuable profits on the table. The wrong price–on the high side– may decrease your orders, your chances for getting reorders, and invite competition.

This may not appear to be a Bootstrap strategy. It is included because a high percentage of businesses do not give enough attention to this important profit element. They too quickly determine price by their costs or by what competition or perceived competition is doing. The result is that profits are left on the table, or more succinctly, you are depriving yourself of precious cash…your life blood.

All too often, companies put a selling price on their product or service when they’re under some sort of time pressure—for example, when they’re dying to rush out there and get some orders. It’s not until later that they discover they didn’t account for some important costs in that selling price. These costs might include commissions (yes, people forget commissions), extra trade discounts in key markets, displays, servicing, advertising, or whatever. Now comes the trap: in many cases it’s very tough to raise prices. (We’ll return to this shortly.) So they find themselves stuck with a low-margin item or without the money to run a successful marketing program.

Think of pricing as a balancing act. If you have a unique product, a patentable product, a time advantage, a manufacturing edge, or some other kind of competitive advantage, you can and should get a higher than average margin. At the same time, your high margins may hurt your sales and are very likely to act as a beacon for competitors or knock-offs.

In light of these many calculations, I suggest that you involve all the relevant constituencies within your company in initial pricing discussions. Your accountant may claim that this is his/her domain exclusively. If so, don’t let him/her win this argument. Salespeople, production personnel, and even your key customers can provide valuable insights into the pricing decision. You as the manager have to balance these sometimes competing interests and arrive at an appropriate course of action. Notice that I didn’t say the “right” course of action. In many cases there’s more than one legitimate pricing strategy that can be pursued.

Pricing needs to be revisited regularly. You may find that in order to maintain your margins, you are under pressure to raise your prices. Be forewarned though that you may have major customers who won’t accept price increases despite your increased costs. This is particularly true with large quantity buyers. The small company does not have the leverage to demand a justified price increase. I would encourage you–with good humor–to ask for this increase, pointing out your increased costs. If your effort fails and you don’t want to hold firm and risk losing the account, you might want to change the product. This change could be accomplished by altering its appearance, adding value to it, changing the package, and even changing the name. Give it a new style number and inform your buyer you are dropping the old one and adding a new one. This can aid a sympathetic buyer who has been instructed by his management to accept no price increases. This way they get around this unfair rule. You should be aware of the fact that if you play hardball and raise your price, you sometimes can win and keep your customer buying the product. Remember it is the buyer’s job to keep pressing for the best price. A lot depends on how important the customer’s volume is to your business and your mental toughness.

There are four major components to creating profits:

  • Selling price
  • Cost of product
  • Overhead
  • Volume

Before you settle on a selling price—especially a price that you may not be able to change easily–here’s a list of the selling price and cost of product components you may want to consider. There are also some strategic considerations to weigh before final pricing is done. Not all factors may apply to your product.

Selling Price

  1. Analyze the uniqueness of your product. What makes your product different? Are you unique and in a hot classification? Or is yours a me-too offering in a declining category, which is unlikely to command good margins? Is it a commodity product, which again will yield poor margins?
  2. Analyze the barriers to entry behind your product. What’s your sustainable advantage if any? Is it easy for anyone to replicate your business model or copy your products?
  3. Think life span. The shorter your product’s expected life span, the higher your margins should be. Remember that “life spans” apply not only to products but also to whole classes of products.
  4. Know what your market will bear. Is your product comparable in value to existing products but able to be produced at a lower cost? If so, you might consider pricing close to (or just under) the levels set by your competitors and thereby earning an above-average margin. Alternatively, you could price lower and go for more market share. Whichever way you go, don’t make this decision solely on a predetermined margin over your cost. On products with short life spans, what-the-market-will-bear-pricing can be very effective.
  5. Prepare to be imitated. Do you anticipate copies or knockoffs? If so, how much time do you have before they enter the fray? You may want to start with a higher margin, and then either lower your margin when competition enters the field or knock yourself off with a lower cost version.
  6. Think longer term. Will the success of this product lead to successful spin-offs or follow-up sales? If so, you may want to consider selling this original product at minimal or no profit in order to build and capture the after-market or add-on sales.

The classic example is Gillette pricing low for easy razor sales to capture the ongoing blade business, but there are many others. You can forego short-term profits to break into a new channel of distribution with good long-term growth potential, to help your company’s image, to gain market share, or to send a strong message to your competitors.

  1. Think strategically. This is an obvious follow-on to the previous point. Is there some strategy aside from profit that this particular product may help advance? Is this a case where you know you have lots of good (and profitable) follow-up products to put into the pipeline? Will it help you break into a new channel of distribution? Will it help you get a new sought after customer?


Cost of Product

  1.  Determine all your true costs.
  2. Establish what it takes to be successful in your key markets and with key  customers.Then put a cost on each of these factors. For example:
    • Will you need consumer or trade advertising? If so, to what extent?
    • Will your product require co-op advertising, and if so, what are the standard arrangements in the various markets and customers you’re pursuing?
    • Do distributors play a role? If so, what are their margin requirements?
    • What are the margin requirements of target customers in target markets?
    • Is servicing important, and if so, what is your service strategy?
    • Will you be using specialty reps? If so, what commission will you have to pay?
    • What inventory risks will you have to take? How will you handle guaranteed sales, stock balancing, backup stocks, and reorders?
    • What type of packaging will be required?
    • What display (if any) will be needed?
    • What are the standard payment terms in this market?
    • What’s the integrity level of this market and of your target customers? (Are you comfortable with those levels?)
  3. Determine the up-front, one-time costs involved in coming to market. What volume level will be required to recoup these costs at what price?
  4. Examine your cost to acquire a new customer.
  5. Understand your legal rights and what they may cost you. For example: if your patent or copyright is infringed upon, will you have the resources needed to start and (if necessary) sustain litigation?
  6. Identify your costs at various volume levels. Are there dramatic cost savings that come with volume? If so, what strategies and associated costs can you employ to achieve these volume levels?
  7. Examine the “spread.” What are your payments terms from suppliers as opposed to those you give your customers? The cost of money on the spread should be included in your overall costs and prices.
  8. Keep your eye on that license. If your product is licensed, you probably have both guarantees and royalties to worry about. If the guarantee is high, you may come up short, and you may want to price in light of this potential shortfall.


Strategic

  1. Determine and prioritize the channel of distribution into which you plan to sell.
  1. Think competition. You’re likely to have competitors and maybe even skilled ones. Will you compete on the basis of product superiority, price, service, quality, advertising, sales coverage, delivery time, or some combination? What costs are associated with this strategy?
  2. Understand the implications of your (limited) finances. If available finances limit your ability to produce and sell your product, then maybe you should opt for smaller, higher-margin markets. (Yes, there are bragging rights associated with “selling Wal-Mart,” but you shouldn’t wind up paying for those bragging rights!)
  3. Understand the implications of your (limited) resources. Again, if selling Target means you’ll sell out your limited run at a relatively low margin, think twice. Shouldn’t you look again at those smaller, higher-margin markets?

It has been my observation over the years that not enough time and brain power go into the establishing of your selling price. Maximum profits are good for you and your company’s health.

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