thinking/critical

As the jewelry industry heads into its biggest American show of the year, designers are questioning the best way to price their lines. What follows is a reflection on some important considerations when establishing a pricing strategy for a designer jewelry label.

Designer and brand jewelry lines must be very careful to avoid commoditization. Whereas non-differentiated manufacturing concerns price based on the current precious metal market, to do so as a brand or designer will reduce the design aspect of the jewelry to the equivalent of ‘labor’, which can only precipitate a race to the bottom. This is tantamount to saying that two paintings that required 22 hours, oil paints, and 17 brushes to produce hold the same value, though one was painted by Gustav Klimt and the other by a technically competent reproducer of others’ original works.

Designer and brand jewelry executives must consider a number of concerns – some of them conflicting – when establishing pricing strategy. This topic can hardly be covered in the space of a blog, but I will address the high points in the hopes of launching a meaningful discussion within the jewelry design community.

On Avoiding Commoditization

The only defense against price competition is differentiation. Though it is difficult to differentiate on design – and I strongly encourage designers to include elements of differentiation in addition to design – differentiate you must. Let Cindy Edelstein’s be the voice in your head on this point: Cindy preaches that all the designers in an aisle at a tradeshow should be able to commingle their jewelry in the aisle, and she should be able to tell from design characteristics alone to which designer each item belongs. Without a distinctive voice the buyer will ultimately force you to differentiate on price because you will have given them nothing else to work with.

At the risk of seeming like I am downplaying the difficulty of finding good retail accounts, remember that you don’t need all the customers, you need the right customers. A retailer who only focuses on the price of your product based on the metal and gemstone content is not an ideal target. If he can’t see the design value for himself, what is the likelihood he has trained store staff to see and sell design to jewelry consumers? But once you are pulled into the retailer’s non-design-focused pricing strategy, it is nearly impossible to charge the right price when you encounter the right sort of retailer. You will do better working your tail off to find designer-focused retailers than to try to convince generic jewelry retailers to pay the right price. Sound difficult? It most certainly is. But that is the challenge of going into a designer business. If you had decided to be a high-volume producing manufacturing business, your big need would be the capital to invest in the production techniques and technologies necessary to produce in volume. The challenge for a designer business is the creative strategy, brand identity, intensive marketing research and analysis, promotion, and sales activities necessary to find the right customers.

On Variable Costs

You must know your variable costs to protect your margins. Variable costs include the raw materials and labor to produce each piece. Obviously, the first time you produce an item will take longer than subsequent production efforts, so you want base the labor on standard production. Estimating variable costs is, well, a big no-no. If your estimates are off and you negotiate a large order at the wrong price, you may run completely out of cash before you discover your error. Know your exact variable costs.

Metals are the big worry right now. Should you price gold at a $1300 market or $1500? Everyone has heard a horror story of $2000 or worse. Here are a few thoughts to consider when deciding what market to base your pricing strategy on:

• Investment demand for gold continues to hold at fairly high levels, bolstered by concerns about inflation and investor worries about the European economy. On 5/17/10 Kitco projected that gold could go up to $1700 this year, and most forecasts are eyeing the $1350 – $1500 range.
• Johnson Matthey is projecting platinum prices in the $1600 – $2000 range for the balance of the year.
• Silver has been experiencing market resistance in the $19 range, but if it manages to break through that resistance it could track up sharply and take many people by surprise.
• You must be aware of how other designers are pricing their lines. If you are at an $1800 gold market and everyone else is at $1300, you’ll likely be priced out of the market. Watch Cindy Edelstein’s blog this week for her report regarding current designer market bets.

Some will argue that it is better to be safe than sorry, and will price their lines at a specific market and tell retailers that orders will ship at the actual metal market the day of shipment. This may be fine for commodity-level manufacturers and distributors, but I advise against it for designers. As I said before, once you train the retailer to think about your line as a commodity + labor offering, you have thrown your design value out the window. I recommend a harder – but ultimately more sustainable – road for brands and designer lines.

Pricing for Margin and Value

So what’s a non-financial-analyst designer to do? Start by considering what price your target consumer is willing to pay for your line, and what margin your target (i.e., ideal) retailer wants to get. This involves market research. Trade shows are a terrible place to do consumer market research, because you can’t assume your competitors have done their consumer research. Pay attention to what your competitors are doing, but don’t fool yourself into thinking this is a replacement for consumer awareness. Listen to actual consumers, study what they are buying, find comparable items to your designer line, and learn what consumers are willing to support with their debit cards. This is where the real value of social media exists by the way. At any given moment hundreds of thousands of conversations are taking place, and many of those people are talking about what they buy, how much they spent, and where they bought it. These conversations are yours for the eavesdropping. Learn to listen in and you’ll begin to understand what consumers really think.

Once you have a sense of what consumers are willing to pay for jewelry like yours, subtract the target margin of the retailer. Now cost your line at a $1350, $1500, and $1700 gold market. Answer the following questions:

1. Can you meet your financial obligations and generate organic cash flow to cover your growth requirements at each of those margins?
2. If the answer to #1 is ‘no’, do you have outside financing available (already committed) to you?
3. If the answer to #2 is ‘no’, how will you fund the metal purchases, labor, and operational costs necessary to keep filling orders?

To generate organic cash flow, you must have margin. If you give up significant margin, you must generate so much additional volume that you can produce the number of dollars necessary to fund growth. If you can’t support the demand operationally once you get those additional orders – or if the number of dollars you need remains persistently out of reach – you’re out of business. Landing a few choice accounts won’t keep you in business. The key to remaining in business is producing more dollars. So giving up margin to snag a few choice accounts is rarely the road to success.

Look, if you’re going to put yourself out of business anyway, it’s probably worth your time and effort to get on the phone and call every retailer in the country yourself, just to find the 15 or 20 retailers who get it about designer jewelry and understand that it is not a commodity. There are more than 20,000 retail doors in this country, and most of them (sadly) are treating jewelry as a commodity these days. But not all.

Enlightened retailers exist. There are (dare I say it) more than 15 or 20 of them. There are at least several hundred retailers who understand that the key to turning consumers on about jewelry is being turned on about jewelry themselves, and training their sales and purchasing staff to be turned on about jewelry. They are using this advantage (yes, differentiation) to put their retail competition out of business, and because they understand love-of-margin, they are charging the right prices and doing the hard work necessary to find the right customers and encourage those customers to pay those prices.

Does this mean that when you find those retailers you will automatically solve your price problems? No, it doesn’t. You still must have tremendous control over your production, you need to know – not estimate – your variable costs, and you need to do everything in your control to keep your costs down so you can enjoy healthy margins after some reasonable negotiation with your retail partners.

You already know being in business for yourself is hard work. But working this hard for no money? That’s just not worth it. So don’t take your need for margin off the table. Differentiate. Do your variable cost homework. Do your consumer research. Price according to consumer demand and make sure you turn a profit. Strategize, brand, market, promote. Find the right retail partners. Sell your intrinsic value and differentiation (not your materials + labor!).

Make some money. You’re worth it.

(c) 2010. Andrea M. Hill

If it were true that the only thing consumers care about is price, then the arrival of a Wal-Mart would automatically kill every other business in a town. And though popular opinion suggests that this is the effect of Wal-Mart, studies (Artz & Stone 2006; AAEA 2006) have found that although the introduction of a Wal-Mart Super Store has a negative effect on rural retail initially, after two years the Wal-Mart effect dissipates. One of the lasting results of the Wal-Mart effect seems to be generally lower prices in a market, but it is difficult to discern to what extent lower prices are driven by Wal-Mart versus by a trend toward lower prices in general.

Of course, consumers do care about price. Ask them what influences their buying behavior, and they’ll tell you that price is the thing they care about most. Follow them around and study what they do, however, and you’ll discover that price is just one decision-driver, and generally not the most important. Why do consumers say price matters most when their buying behavior does not support this? No one is quite sure, but market research professionals suspect two factors: 1) consumers feel guilty about the amount of money they spend, and so report heightened virtuousness relative to price consciousness; and 2) faced with a sea of sameness across all consumer product categories, the only differentiator consumers experience in most cases is price, so price stands out.

I won’t even attempt to address consumer guilt, but I find the second issue to be of significant importance to small business owners – particularly those competing in luxury markets.

When a company fails to establish compelling reasons to buy its products, it is reduced to competing on price. This is market reactivity as a form of strategy, and it’s an excellent formula for going out of business. The only time competing on price is effective occurs when competing on price is the strategy. Wal-Mart’s strategy is price. Part 1 of the price game looks at all product competitors within a particular market and prices against them. That’s the easy part. Part 2 of the price game develops strategies for reducing the costs of operations and products to protect margins once prices are dropped. To build an organization that can successfully compete on price, a company must focus all energy, resources, and capital on creating systems and supply chains with maximum efficiency – all costs must be rigorously controlled and the rate at which products and cash move through the system must be very high. This strategy is out of reach for most – if not all – small business owners. Unfortunately, most small business owners play Part 1 of the price game, but lack knowledge or capital to play Part 2. The result is reduced cash flow and a fight for survival. So what’s a small business owner to do?

Consider playing a new game, a game that also has two parts.

Part 1: Develop a strategy that does not depend on price to attract customers. A good strategy considers multiple elements. Most business owners focus on the what I have to sell element exclusively, but that element is too limiting. What other compelling reasons to buy can you offer?

• Do you have specific knowledge of your customers, knowledge that significantly improves the customer experience?
• Do you eliminate any undesirable effects, making your company or product perform better than competitors?
• Does your product or shopping experience save your customer time, improve his or her ability to make a decision, reduce your customer’s risk, or contribute positively to his or her self-image?
• Can you sell your product in a way that solves a problem, creates new opportunities, or improves the shopping experience for your customers?
• Can you offer any exclusive benefits?
• Do you offer complementary products or services that enhance your overall value?

The process of determining three or four distinct strategic elements around which you will build your brand, on which you will base your selling and marketing strategy, and through which you will differentiate your company in the mind of your customer is the process of strategy. Good strategy is the first defense against mindless price competition.

Part 2: Look beyond the usual competitors. Business owners tend to assume that consumers are choosing between two similar products from two direct competitors. Let’s meddle with the sacred cow of the jewelry industry for a moment – the diamond engagement ring. When a young man prices a diamond engagement ring at Blue Nile, JC Penney, and the local independent jewelry store, is he creating a competitive space among diamond engagement ring sellers? Yes, he is. But are Blue Nile, JC Penney, and the independent retailer the only competitors in the arena? Definitely not. The other competitors are the florist, the cake baker, the wedding dress maker, the travel agent, the tourism promoters of a variety of potentially interesting honeymoon destinations, and (perhaps most important) the buyer’s self-image.

But wait! That’s not all! The diamond engagement ring seller is also competing against the restaurants the young man may choose not to eat at, the movies he may choose not to go to, the stereo equipment he will defer, the real estate agent showing him apartments or houses, and the iPad he wanted for his birthday. Most independent jewelers accept that selling on service is the alternative to selling on price, but after that, they run out of creative ideas for how to sell that idea. Part 2 of this game is NOT about trying to compete against all of these interests with every sale because that will just drive you crazy. Part 2 is about recognizing the full range of potential competitors, then crafting a compelling offer and image that sets your business apart in the mind of your potential customers.

This new game requires creative thinking, knowledge of strategic planning, the ability to project how various ideas will play out in the market, and ultimately, the willingness to make a choice about strategy and brand and then stick with it. The reward for a well-managed strategic process is the ability to run a business that is largely impervious to price competition. You’ll still have to price for value because consumers will always care about whether or not they are getting good value for their money. But pricing for value is a game you can win. And ultimately, that’s the only kind of game you really want to play.

© 2010. Andrea M. Hill

When Jackson Pollack was alive and painting, the art/critic world divided in two camps: those who thought his work was beautiful but couldn’t understand it, and those who thought his work was not art. There wasn’t much room for discussion because nobody could explain, really, why Pollack’s paintings were so noteworthy. How does one argue with “I know what I like when I see it?” Only with “you don’t know diddly.”

In 1975, 19 years after Pollack’s death, Benoit Mandelbrot coined the word fractal, which is an irregular geometric pattern that repeats itself at many degrees of magnification. A snowflake is a fractal – its smallest element is roughly the same shape as the finished snowflake. It turns out that nature’s patterns are largely fractals and that the human eye is finely tuned to fractal patterns. This idea was – and continues to be – tested heavily by Richard Taylor, a physicist at the University of Oregon. In 1995 Taylor produced a painting using wind, rain, and tree limbs, which unexpectedly led to something that looked remarkably like a Pollack painting. Intrigued, he scanned Pollack prints into his computer and analyzed the patterns. It turns out that Pollack was painting within nature’s most common fractal range (this story and much more can be found in Matthew E. May’s In Pursuit of Elegance: Why the Best Ideas Have Something Missing).

It took nearly 40 years for someone to articulate the reason that Pollack’s work is so gripping, but the patterns were there all along.

The Internet presents a similar problem today. It feels like a lot of noise. It’s difficult to sort the valuable information from the muck. At the low end of participation, small business owners and corporate communications staff monitor Internet conversations about their companies, celebrating the endorsements and dreading the oh-so-public complaints. At the broad-sourcing end of the spectrum, companies collect customer feedback on social media sites, ask the masses to participate in product naming and design, and put software development bids out to the public.

What are businesses doing with all that data? Data isn’t information. As a high school debater, I quickly learned that one could find a fact – complete with citations – to support any position one wished to argue. Later I worked with a woman who would regularly mobilize entire corporate departments to make sweeping changes because of a single customer complaint. “Ah,” you say, “but we’re turning that data into information.” But as I’ve mentioned before, if indeed information is power, librarians should be the most powerful people in the world.

Never before have so many conversations taken place in one forum. So much information is startlingly present at our fingertips, and there is significant temptation to read too shallowly, give credence too readily, and draw conclusions too quickly.

The actual value of all that data, the beneficial information that could be gleaned from it, is presenting itself to a select few individuals and companies who examine the conversations on the Internet in the way Taylor examined Pollack’s paintings.

Perhaps we would all be wise to view the Internet as a new kind of fractal. Step very close and observe only an inch of it. Back across the room and take in again. Business must develop the ability to recognize complex patterns in broad conversations, to comprehend their meaning, and to develop appropriate responses. The value is in the patterns.

People who know to look for the common threads, who have trained themselves to read a little deeper, listen a little harder, who have honed a skill for seeing patterns, these are the people who are figuring out why the Internet is beautiful. Do you know who these people are? Probably not the guy with the degree in statistics or the young lady with a PhD in computer science. Not unless they also spent considerable time learning to interpret literature and poetry, studying art and art history, or have deep knowledge about history, anthropology, or psychology. In this new renaissance that is the Internet, only the richest collaboration of arts and science will yield its ultimate benefit.

Do you know it when you see it? Only time will tell I guess.

© 2010, Andrea M. Hill

or

Distilling customer relationship publishing into one simple blog post

One good example of this is found in the literature related to customer relevance, relationship marketing, and customer loyalty. Every B-school has at least one professor publishing on the newest, greatest, latest methods for building customer relationships. Those ideas are then adopted by every POP and CRM software vendor eager to sell customer management tools, repackaged as gotta-have-it-or-risk-your-business enterprise solutions. No wonder business owners are perplexed.

Most of the information and solutions are quite good. Put them all together to gain insight across the spectrum of customer relationship management. The one remaining weakness is that business owners are frequently offered solutions for which they have not yet defined the problems. Problems are defined by asking questions. So let’s start there. The answers to customer relevance are found by asking these simple questions:

1. Why do my customers purchase my products or services?
2. Which features and benefits of my products are meaningful to customers?
3. How do my products stand out in customers’ minds?
4. How do my customers use my products?
5. Are any of my customers using my products in a manner that surprises me?
6. What are the biggest hassles my customers encounter when buying from me, and what could I do to eliminate those hassles?
7. Are there any specific barriers to being my customer? If so, how can I remove them?
8. Which of my customers require substantially more or less sales attention than the others? Why? What insights can I glean from this? How can I find/develop more of this type of customer?
9. If my business were shuttered, to whom would it matter, and why? Which of my customers would miss me the most? How long would it take another business to fill the void?
10. If I were just launching my company today, would I sell the same things? What would I do differently?
11. What experience does my customer associate with my products, and how can I create an experience that adds value beyond the inherent value of the product/service?
12. Which methods of communication are most relevant to my customers?
13. How do those methods affect the messages?

Developing the answers to these questions is not difficult. It requires research, compiling existing customer data, and analysis. Some of the answers may require expertise you do not personally possess, but which you can access in your employees or business advisors.

It doesn’t matter if it takes a while to answer these questions – if you didn’t answer them, the time would go by anyway, right? And it doesn’t matter if you don’t know precisely how you will go about answering them, because just knowing they must be answered will lead you to methods for finding the answers. What matters is that you ask the questions, chip away at assembling the data, and start to make better decisions. Because when it comes to relationships, it’s best to work on them a little bit every day.

These questions were first posed in an article written by Andrea Hill in MultiChannel Merchant magazine, May 2008.

© 2009. Andrea M. Hill

Note to my regular readers: My apologies for the long delays between posts! The challenge of keeping my arms around a rapidly growing business seems to push blogging to the bottom of the priority pile too often. I’ll try to be a little more consistent now that my most recent staffing challenges have been addressed. Thanks for sticking with me!

At the 1904 World’s Fair in St. Louis, Missouri, an ice cream vendor was doing so well that he repeatedly ran out of bowls. The neighboring booth, selling Zalabia (a Persian, wafer-thin waffle), wasn’t doing well at all. Capitalizing on the neighboring booth’s success, the Zalabia vendor rolled his wafers into cones and offered them as an alternative to dishes for serving ice cream, and the ice cream cone was born.

It happens fairly often that we have something customers wish to buy, but it’s not the thing we think we have to sell. If you have paid a small fortune in trade show fees to make relatively undesirable waffles, and you are lusting after the success of the ice cream booth next door, you might just be jolted into a fit of creativity. But most of the time, we’re simply stuck in our offices, studios, or ideas, wishing things weren’t as difficult as they are, instead of imagining how successful we might be.

We find it very difficult to get past our acceptance of reality.

Of course, we’re supposed to deal in reality, aren’t we? We’re supposed to accept the way things are, deal with the facts, lie in the beds we’ve made, and make silk purses out of unseemly materials. But from that mired state of thinking comes a host of assumptions about why things are the way they are, which ideas we should be committed to, how we should be doing business, what activities constitute the correct activities, and for whom we should be doing all this work. We make annoying little speeches to our eye-rolling teenagers about what it means to ass-u-me, but then we turn around and invest the majority of our energy into validating our own assumptions. Asinine? Yes. But my, we’ve been trained.

Or rather, we haven’t been trained. We’ve been indoctrinated. From the dawn of our individual existences we have had experiences, become familiar with results, and drawn conclusions about how things work – even if the experience was that of a 2-year-old, or presided over by an elder 8-year-old sibling. Even if the experience was taught by an uneducated parent, a miserable or bored teacher, or simply stumbled into alone (I am already rethinking my offer of only paying half of any therapy my children may require . . . ), we have taken each experience and cataloged it in our subconscious as an answer to something. And even now, at an age at which you can run your own business, your hyper-efficient brain goes surfing through all those conclusions – the 2-year-old ones as well as the college-age ones – to help you resolve any puzzle you may stumble upon. This, dear reader, is the foundation of your reality. And it’s why your reality is different from mine, and each of our realities are different from everyone else’s.

So what does this have to do with what you have to sell? Only this. When you are confronted with a situation in which you are selling less than you would like to sell, capturing less profit than you require to maintain your desired lifestyle, or encountering less opportunity than you would like to achieve that desired lifestyle, you are confronted with a puzzle.  Your brain flips through the catalog of solutions you have developed for the past however-many years, and it comes up with solutions that are part of your present reality. The obvious solution is to toss aside reality and come at the puzzle from, what, unreality? Someone else’s reality? Virtual reality? Hey – as long as it’s different from your operating paradigms, it’s probably good. So how do you do it?

Any activity you choose that forces you to question and challenge your assumptions can work. It can be as straightforward as standing at a whiteboard or easel and making a list of every single “fact” you know about your business. Once the list is complete, return to the top of the list and indicate if each item is a fact, or an assumption. After you complete that pass, return to the top and challenge each item marked as an assumption. I have seen this process yield remarkable insights.

If you wish to make that exercise more powerful, invite someone with greater or very different knowledge than your own to participate with you. Such a person will likely challenge ideas you are less inclined to challenge and ask questions that cause you to think about things in a different way.

Another activity is to create a list of each of the functions of your business (for instance, design, production, sales, marketing, accounting, inventory management). For each function, ask and answer the following questions:

• What is the purpose of this function
• How does that purpose align with my corporate strategy
• How does this function serve that purpose
• What are all the ways a different company, selling different products or services, might fulfill the purpose of this function?
• If I were to consider this function strictly through the eyes of my customers, what would I think the purpose of this function was?
• How might my customers wish I would change/improve this function?

As with the first exercise, inviting a person with greater or different knowledge than yours can lead to creative conversations you may not have had otherwise.

Some games are already enshrined in business management process. From Lean Manufacturing we get the “5 Whys,” a game in which we take a problem, ask why the problem exists, then ask why for each subsequent answer, drilling down to the core reason for the problem. In nearly all cases five whys are all it takes to get to the bottom of things.

I like any problem-solving or assumption-challenging approach that turns the effort into a game. At the very least games are fun, and fun is creative. Taking a problem and turning it into a game also helps us think about the problem from different angles.

Whatever you do, try to remember that the way you have always thought about things (solved problems, earned kudos, even made fortunes) is reality, and reality isn’t the future – it’s the present, and it’s the past. To achieve a future that looks a lot like the present, keep thinking about things the way you already do. To imagine a future that is wildly, creatively, excitingly different? Toss reality to the side. You’ve already extracted what reality has to offer.

© 2009. Andrea M. Hill

Do you have a wine snob in your life? Everyone should have at least one. Wine snobs are important, because they teach important lessons about perspective, lessons which we all need from time to time. Right now is a good time for some perspective.

My favorite wine snobbism is that of the correct wine glass. Never a rounded rim, which drops the wine dully on the wrong location of your tongue. Large bowls to allow red wines to breathe, narrow flutes to retain the carbonation of a good bubbly, gently tipped out rims to properly deliver a young white to the correct area of the palate. All good advice of course, meant to enhance the bouquet and taste of a fine wine – or even improve the performance of a lesser wine. But a truly obsessed wine-snob-with-a-glass-issue can turn a simple dinner into an embarrassment of instruction if given a poor choice of glass – and woe to the restaurateur (or host) who does not have a better glass to offer. At this point, one would hope the expostulating oenophile would simply accept that the glass is but a delivery device, and that the true value of the wine can be found in the wine itself – even if you’re drinking it from a jelly jar.

Which brings us to social media. Social media is but a delivery device. For only a very few will it prove to be actual content, and most of those people are already in play. For the rest of us, social media is a delivery device. A marketing delivery device.

Back to the wine for a moment. My nephew and his wife are 20-somethings with two small children. They don’t have much money, but they love fine wine. Not long ago my nephew (while handing me a glass of his newest discovery) said, “Every time we have a little extra money we mean to buy good glasses. But then we decide to spend the money on the wine instead.” He said this as an apology, but I acknowledged that his priorities were in the right place. Given a choice between delivery devices and content (assuming the delivery device isn’t required to get at the content) one should choose the content! I would have been concerned had he offered me Boone’s Farm in a fine crystal goblet.

So, back to social media. Right now the internet is rife with Boone’s Farm in crystal goblets. It takes very little talent or skill to establish a Facebook account or post what you ate for lunch on Twitter. It takes very little time and almost no money to download your Yahoo mail addresses and send an invite to everyone you know on LinkedIn. In fact, not only can your middle-school student do it – they led the way.

But it takes a great deal of thought, planning, and discipline to integrate social media into your online presence in a way that is meaningful to your customers. It takes time to build customer relationships, and it requires sincerity and genuine concern for getting to know them. Beyond social media, it requires discipline to develop a marketing strategy that delivers relevant information in a timely manner to the right customers.

The fact that marketing media options continue to expand is directly related to the evolution of customer experience – not product superiority – as the surest route to competitive advantage. It is exciting to have so many choices, from radio, TV, newspapers, direct marketing, and events, to websites, blogs, video and podcasts, and yes, social media. But your responsibility, oh marketer, is to take great care in defining, refining, and crafting your message, then selecting the medium that is best suited to each message and your overall brand image.

The ideal wine collection includes different types of glasses to accommodate different wines. But where would you rather spend your time – at the wine bar with gleaming glass racks and substandard wine choices, or in the company of a terrific little bottle of Cabernet Franc and four juice glasses?

© 2009. Andrea M. Hill

Shopping on sale in the midst of a recession is akin to indulging in a delicious vice. You know you want to do it, indeed, you’re going to do it. But you also know it’s wrong.

OK, maybe you don’t think that shopping on sale is wrong. But from my perspective, it’s like smoking a cigarette or having an affair. Why? Because every business that drops its prices to get customers in the door is doing so at the expense of their business safety and future. Who among us would decide to go into the sugar, flour, facial tissue, or copy paper business? Yet that’s what we do when we reduce our business premise to offering the best price. Price sensitivity is the nature of a commodity business.

Margin is essential to survival. Without margin you can’t pay the vendors, pay the rent, pay the taxes, pay your employees, or pay yourself. Every sale price you mark comes at the expense of margin. This is not to say that there’s never a good reason to have a sale. To score big wins, business owners must take regular measured risks, and those risks frequently result in excess inventory. Eliminating such inventory while making customers happy is smart, and sales based on those conditions are wise.

But the sale prices we see today are the desperation moves of companies that have run out of ideas for getting customers in the door. Margins are essential to survival. Always.

There are two ways to maintain margin. If a company wishes to compete on price and still maintain margin (note: if a company wishes to compete on price and NOT maintain margin, that company is out of business), it must reduce costs sufficiently to protect margin while reducing the selling price. Make sure you know how to reduce those costs before you reduce the selling price! One of the most common business mistakes is to assume that once a company has additional volume, the costs will come down accordingly. They drop the selling price to build the volume. Voila! They shrink the business. Make sure you have purchase commitments from customers and cost reduction commitments from suppliers prior to making that move. Even if you have figured out a failsafe way to play the price-reduction-with-margins-game, learn what Wal-Mart already knows: cost reduction is ultimately a zero-sum game.

The second way to maintain margin is to (drumroll here) maintain your prices. What? Not reduce them? But everybody’s reducing prices! How are we supposed to compete if we can’t get the customers to consider us because we’re not as cheap as everyone else?

The only way to maintain prices is to offer something that makes not only your products, but your business, worth more to your customers. The phrase, “you cost more, but you’re worth it” has always been music to my ears. It is the ultimate compliment, an endorsement of a company’s value and a commitment to help the company stay in business.

The biggest impediment to achieving that valuable customer endorsement is the ubiquitous industry trend. Actually, the trends aren’t the problem. If all your competitors get caught up in the trends – and you successfully avoid them – it would be good. For you. Which industry trends are a problem? All of them. Product trends and service trends represent ideas that are being offered simultaneously by everyone in the industry, and when something is offered simultaneously by everybody, it leads to price trends. Instant commoditization.

Bucking industry trends is not easy. It requires an understanding of the concept minimum standard necessary to compete. As each industry develops, standards evolve over time. These standards relate to customer service levels, speed and quality of delivery, and quality of products. Every business must operate at the minimum standard necessary to compete. A good example of this is shipping times. In the early 1980s it was common for direct marketing businesses to offer 6-8 weeks for delivery. Within a few short years, same week delivery was the standard, and any company that could not offer the new standard lost market share.

Every company must honor its industry’s minimum standards necessary to compete. To buck the trends and maintain margin, it is essential to offer something unique, something beyond the minimum standards. Each business must analyze its strengths, consider unmet or poorly met customer needs, theorize on emerging market conditions, and find a way to set itself apart. At one time, product differentiation was synonymous with corporate differentiation. Today, differentiation depends increasingly upon creative ways of building relationship value with customers.

The biggest danger to a business owner is lack of originality – generally demonstrated by virtue of getting trapped in his or her industry’s trends. Industry trend following simply turns your business into a commodity business. Avoid the trap and maintain your margins. When you do it well, your customers will gladly trade the guilty pleasures of sales prices for a superior offering.

© 2009. Andrea M. Hill

In a recent meeting with the president of a Chamber of Commerce serving a community of roughly 50,000 people, I learned something I can’t stop thinking about. He was speaking of the difficulty of attracting young professionals to the area. I asked if the reason was that young adults want to live in larger metropolitan areas. No, he didn’t think that was the reason – many people prefer small communities. Did he think the reason was lack of opportunity? Not at all – the region is doing quite well economically. He let me ask a few more questions – based on all the usual assumptions –then he said, “No, I don’t think it’s any of those things. I think it’s technology.”

“Technology?”

“Yes, technology. The business use of technology is low, though most businesses have set aside money for more automation. But they haven’t spent it.”

Not wanting to play the Q&A game anymore, I simply asked, “And why is that?”

“Because they don’t believe their employees will accept it or even be able to use it once it is in place.”

Whether this is a genuine concern for business owners who are themselves technologically enlightened, or if this is a convenient excuse for the technologically impaired I’m not sure. I suspect the latter is more likely. Ultimately it doesn’t matter, because the result is the same. Organizations that fail to invest in technology – including investment in the technology skills of the owners and executives – will eventually cease to be competitive.

Not even a decade ago, business owners could get away with not knowing how to use eMail. Frightfully, some of them still refuse to use it. Their convenient excuse is that eMail is a time-waster, which happens to be true. But if an executive is proud of his ability to use Microsoft Word, Excel, and burn CDs; if he thinks he has mastered technology because he has figured out how to produce his own reports, he is sadly misinformed. It would almost be better to be the executive who refuses to use eMail – at least he knows he is not technologically adept.

Using software applications is essential for productivity, but it does not make one technologically savvy any more than being able to use a pencil and paper makes one a writer. So what is it that these folks who never wanted a job in the IT department in the first place need to know?

Today’s business executive has a responsibility to master IT in the same way business executives readily acknowledge they have a responsibility to master finance. No president worth her salt thinks she can ignore finances because she has an accounting department. The same should be true as it relates to IT. Managers must have enough familiarity with tools to imagine their use within a proper context. Executives who insist technology can do anything – simply because they have imagined it – are no less annoying (or damaging) than executives who fear and refuse technology at all.

So what does a technology-savvy executive know?

• Basic knowledge about the infrastructure of IT – the differences between server systems and desktops (it’s not just price); the basics of scalability; the pros and cons of redundancy and general understanding of the various ways to achieve it; how the various communication systems of a company can (and cannot) work together. An entrepreneur tooling up a new manufacturing plant would participate meaningfully in equipment purchase decisions and would be concerned about how the building layout impacts quality and productivity. IT infrastructure is at least as important.
• Every executive should be able to describe the difference between a relational database and a flat database environment and be able to draw on a white board the exponential complexity of relational environments as they scale. This knowledge is as essential as the ability to forecast various margin changes on the bottom line. Executives who cannot demonstrate this knowledge seriously risk underestimating the cost and complexity of programming changes.
• Executives must understand the types of application environments available to business, and how to use them. They must know the difference between ERP, CRM, accounting systems, MRP, sales force automation, publishing environments, and office/productivity tools. They must understand the basics of integration and be competent to weigh the pros and cons. Hosted or resident? Linux or Microsoft? If you think these questions are just for large businesses, think again. Small business owners must do all the same things big business owners must do – just on a smaller scale. The cost and volume capabilities of the software available to them will be lower, but the concepts remain the same.
• To buy or to write? A home-grown application environment is referred to as a legacy environment. Most legacy environments were built using the same planning logic as rural New Mexican adobes; have another child, add another room, mother-in-law moves in, add another room, etc. etc.. Nobody wins any architectural awards for these structures. Even worse, nobody can figure out how to get to the kitchen quickly. To answer the question of build or buy, business executives must understand the pros and cons of each approach, and must be able to comprehend the differences in costs and why those differences exist.
• And finally, executives must understand how to manage their personal technology:
  • In a world where the business cycle no longer stops for night-time or weekends (according to whose clock?), productivity is essential. In the time it takes to dictate a letter, write a bunch of numbers on paper, or ask someone to look for something, most tasks could be completed using basic office software.
  • The internet is a powerful tool, and people who are unable to use search engines effectively, discern the difference between reliable and unreliable databases, or remember their passwords are cooking over a fire with sticks while others are building commercial kitchens.
  • How to use wireless systems. The executive who cannot figure out how to navigate her own wireless card from one airport to the next is not only a nuisance to her IT staff, she is crippling herself professionally because she can’t stay on top of essential information. Alternatively, she is inflating the cost of her support staff by causing them to do work for her which she could easily be doing for herself.

This list may seem daunting to some. There was a time when printing more than one book at a time, farming more than 40 acres, or figuring out how to deliver products overnight was daunting too. But times changed and so did the business people of each era. Computer technology is our printing press, our International Harvester combine, our streamlined jet-fed logistics network.

I can imagine some folks claiming that the list above is representative of what IT folks need to know. That would be entirely incorrect. Volumes of books have been written about each bullet in the list above, and each bullet represents specific areas of IT expertise. No, this list is the equivalent of expecting a high school student to know the difference between math, language arts, history, sociology, and science well enough to describe each discipline accurately and to know which discipline (or disciplines) to turn to for answers to specific problems. Most of us would be incredulous if a grown man insisted on using a math formula to answer who won the Battle of Saratoga. Yet executives do the equivalent in IT every day, with little awareness of the damage they are doing to their bottom lines.

On the other hand, leaders who are comfortable with technology can initiate intelligent conversations about how to use technology for greater profitability, can understand the problems their IT, finance, and operational staff are struggling to solve, can imagine the potential benefits of expensive investments, and can even influence an environment to go through difficult change. And when young professionals find a business with a leader like that at the helm, they frequently jump on board – even if the business is small, even if it’s located in a small town.

© 2009. Andrea M. Hill

Ah, the lure of something free.  Mothers have long worried about it, the best things of life are made of it, and the Ginzu knives people perfected it. Today, thousands of business people are falling into the trap of it.

As the economic gloom deepened and companies went on cost-cutting sprees, many organizations cut marketing to the bone. Any business expert knows this is a risky strategy at best – reserved only for those at the clearest risk of imminent business failure (and even then, questionable). But marketing is generally one of the big cost items in a corporate budget, so it stands out like an extravagant thumb when cost becomes the focus. Short-sighted folks may not be able to imagine the future, but they sure as hell can see a giant red thumb sticking up in front of them. Snip snip.

The obvious solution for many of these business executives has become the internet. The free internet. Of course, this isn’t entirely new. Since the internet became the world-wide-web, I’ve had more than my share of arguments with business owners who have insisted that the internet would replace their call centers, the internet would replace catalogs and all other print media, the internet would solve all their operational cost headaches, the internet would make marketing free.

Though some of these predictions have occurred for some segments of some businesses, brick and mortar businesses have generally not been transformed from organizations with marketing and operational costs to heavenly virtual profit centers. Why? Because real consumers don’t spend all their time in front of computers. They are out driving around. They are listening to radios, watching TV, and some of them are still reading magazines and newspapers. They are at the beach, volunteering at the school, and at work. Some of the folks at work are not on FaceBook, Twitter, MySpace, LinkedIn, YouTube, or any other social networking site. Strangely enough, some of them are actually working.

If a business converts its entire marketing effort – or even the bulk of its marketing effort – to the internet, it better develop a very solid financial model to support it. The financial models for marketing involve identifying who the existing customers are, how much they buy and how often, who potential new customers are and how to reel them in, who has stopped buying, and what it will take to win them back.

Email is a terrific medium for communicating with existing customers – if they appreciate it. Most people are overwhelmed with email so email messages must contain something of clear interest and obvious value. If you create those meaningful email messages and send the right ones to the right segments of your customer list, you may motivate customers to buy more products more frequently, and you may be able to build relationships.  Email can also be used for connecting with customers who have drifted away, though you must take pains not to be too impersonal or to further ruffle the feathers of a customer who has become upset due to quality or service problems. Of course, to a prospective customer, email is probably just SPAM.

After the dot-com bubble burst, there were just as many business executives patting themselves on the back for not investing in one of those useless websites as there were people throwing themselves out of windows for their paper losses. Today it would be difficult to argue that a website isn’t necessary (yet as many as 60% of small businesses don’t have one!). Even if you don’t sell products through a shopping cart, even if you have no intention or desire to find customers through search engine optimization, even if your entire business community lives within 15 square miles of you, you need a website. Not because it will replace every other form of marketing, but because a significant percentage of shoppers will look for a website to determine if the business is legitimate, to learn more about the business, and to quell feelings of buyers’ remorse when it occurs.

But unless your business has a powerful search engine component and is attracting dozens of new buyers each day through Google, Yahoo, links, and other internet forums, your website isn’t likely to solve the problem of finding new customers. The majority of business websites serve the purpose of enhancing business relationships through providing more information than could be offered in print, making it more convenient to order for those who are comfortable doing so, and alleviating concerns new customers may have about initiating a business relationship.

Next, consider the free marketing opportunity to be found in blogs and social media. No doubt blogs and social media can expose your business, your brand, and your philosophy to thousands or even tens of thousands of potential customers you would not have reached otherwise. Blogs and social media can be used to create a sense of connection between businesses and their consumers, which is a boon to brand value. But they are definitely not free. A blog the length of this one takes approximately 45 minutes to write (and I’m considered a fast writer). Even if you combine your Twitter, FaceBook, LinkedIn, FriendFeed, or other social media status updates, even if you manage them all through toolkits, it still takes time to log in, write, post, and respond to others. And never mind the times when you realize you’ve frittered away an hour checking everyone else’s status. But blogs and social media have yet to become big revenue drivers (except for internet businesses that are selling blog and social media services and software). The purpose of blogs and social media is to build relationships.

So a company with a web store that writes a weekly blog and posts daily on their Twitter account and FaceBook page is possibly building better relationships with existing customers, getting in front of prospective customers, and selling a few extra products a bit more often. But if you take away the sales force, the print ads, the outbound phone calls, the catalog and direct response mailings, the billboards, and the radio, you lose access to the people who are not glued to their computers while at work or after work. You miss out on the people in their cars, the people watching That 70s Show reruns, thumbing through the Sunday paper at the coffee shop, and sitting down to look at the mail while cracking open a beer. You miss the opportunity to tap into multiple types of attention – because people pay attention differently to different media, and typically a combination of impressions is required to motivate buyer behavior.

A favorite and ignorant saying of marketing-averse business executives is “half of all marketing works. Trouble is, we don’t know which half.” That’s kind of like saying “half of all the air we take in is carbon monoxide. Let’s stop breathing because we can’t figure out which half.” Don’t cut your business off from its air supply just because you fear its cost or you believe there’s something free out there. Remember your mother’s wisdom. If something seems too good to be true, it probably is.

© 2009. Andrea M. Hill

Don’t miss today’s MentorWords blog, which examines how business owners are reacting to the economic downturn and provides a list of questions you can use to examine your response.  Catch it here ->    http://mentorwerx.com/wordpress/archives/128