A few points on the pricing emotions.
In this post I outline just a few points on the psychology of pricing. People tend to buy emotionally and justify intellectually. How many houses have been bought for emotional reasons? Then afterwards intellectually we say it’s a good investment.
There are three pricing emotions:
1. Price resistance.
2. Price anxiety or buyers remorse.
3. Payment resistance.
In educating our clients during the sale process we need to be able to address these pricing emotions. The mere obtaining of sticker shock is not necessarily a negative as once a client is educated to the value then they will often be your best customers. It’s a known fact that the luxury car ads are aimed at existing customers more than potential owners. These companies understand that after making such a large purchase, customers want reassurance that they have made a good decision. People don’t go out and buy a BMW because they saw the ad on the TV. But those who have bought the latest and greatest BMW or Mercedes or what other marquee brand and have spent a significant amount of money need to be assured. These companies understand that they need to address these buying emotions. It does not mean that they are addressing it by reducing the price, it means addressing it by educating their customers.
Prices need to be set at the beginning or as early as practical so that we get the pain out of the way and then deal with the pleasure. We get the ability to educate the client on the value at they are receiving but of course, we need to understand the value equation to be able to do this.
Pricing is a marketing issue. Pricing by itself as has been countlessly realised in the dust heap of business will not lead you to business success but pricing coupled with great service, understanding what the customers expectations are and delivering value can lead to increased net profit, increased revenue to the business and increased loyalty of your customers which in the long run will be the best growth strategy for your business. Don’t neglect pricing.
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The 5 C’s of Value
In my previous post I discussed that pricing is a marketing strategy. In this post I discuss the need to look at the value being delivered to the customer.
So let’s look at the 5 C’s of value:
1. Comprehend the value being delivered to the customer.
2. Create value for customers.
3. Communicate the value you create.
4. Convince customers they must pay for value.
5. Capture value with strategic pricing based on value, not costs and effort.
So many businesses look at the services and products that they offer from their perspective. But to be able to determine the appropriate price, you need to firstly comprehend the value to the customer. Why are they buying that service, what problem is it solving, what pleasure is it obtaining or pain is it avoiding and then what is that worth to them?
In business, we need to be able to create the value. We need to be able to create this value so that we are actually delivering the value to the customer. We could create value by the experience in dealing with you. It could be by the result of using or delivering the product or service. Value must be created.
The customers don’t always comprehend exactly the value that is being delivered to them and accordingly an important part of any service strategy of a business is educating the clients of the value being delivered. Often time the customer may think of an aspect of the value but have not thought through every aspect of the value. Alternatively it may be that they have not quantified the real value being delivered. Never assume - educate your customers on the value being delivered.
The fourth aspect of convincing people that they must pay for value is also very much tied up with the education of the customers. Now remember that not all customers are going to want to pay full value. Those customers, you don’t want to deal with. We only want the good customers who are willing to pay for the value. There are plenty of these paying customers once they have been educated because these are the ones that we can earn a profit from and have a far more enjoyable business.
Finally, once we have understood the value equation, we then can determine the pricing strategy.
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Pricing is a marketing strategy.
Too often in business, particularly service businesses, pricing is not seen as an important business tool to develop the business. Pricing is often seen as something that is set by the market. From accountants, engineers, financial planners to physiotherapists often the answer to the question of how you set your prices is usually one of two answers. The first option is have a look around at what everybody is charging. The second option is, work out my costs and add a margin that I want to achieve as profit. These two approaches are not a determined appropriate pricing strategy to ensure that the price being charged for the service is in any way reflective of the value being delivered. Unfortunately too many businesses do not look at price as an important element of their marketing strategy
So what do customers buy? We are all familiar with the old, they don’t buy the drill bit they buy the hole, they don’t buy the sausage they buy the sizzle. Theodore Levitt of Harvard Business School put it best when he said that customers buy expectations. They expect a certain result, a certain outcome, a certain problem be solved, pleasure to obtain or pain avoided and that is what they are buying. They are not buying time, they are not buying effort, they are not buying the cost structure of the business - they are buying an expectation, an expectation of a result. Being mindful of this fact, why on earth would any business therefore price its services on a time basis or some other anachronistic tool that is not focused on the value being delivered to the customer?
We need to ensure that as a business that we are meeting our customers expectations because that is what they are buying, that is what they are going to pay for.
In the United States it has become known amongst management literature an effect called the “Starbucks effect”. Approximately 12 to 13 years ago, 3% of coffee sold in the United States was premium. Today, more than 40% of coffee sold in the United States is premium. This is primarily due to the development of Starbucks. They selected a customer base, delivered an experience that that customer base wanted.
Who would have ever thought that we would be paying the money that we are for bottled water. Something that we can get for free, it is not scarce in reality There is a plentiful supply of drinking water in the western world yet we are buying bottled water. To make this even more of interest is to have a look at the company Evian who sell premium bottled water. They make an experience out of bottled water. Maybe it is not coincidental that Evian is naïve spelt backwards.
Evian, Starbucks - they have loyal delighted customers. This wasn’t done by charging a fair price or catering to discount shoppers. It was done by delivering an experience to a particular customer base that wants that experience and charging appropriate for it.
Pricing can assist in the development of a business in so many ways as it transmits so much information. Take a minute and look at the lead pencil that you may have on your desk. Think of all the businesses that have been involved in putting that pencil together from the tree - the logger, all the way through to the end salesman from which you purchased that pencil from. Every which point, a price was charged. A price that was transmitted value to the next stage. Even in the humble pencil, the price mechanism is at work.
So the question is - how is the price mechanism at work in your business and is it being looked at properly.
The first point in determining what is the price is to look at the value side. Customers are only going to deal with your business if they see some value from doing so.
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You can’t measure everything
“In mid-18th century London a mathematical prodigy called Jedediah Buxton was taken to see David Garrick perform Shakespeare’s Richard III at the Drury Lane theatre. When asked whether he had enjoyed the play, his reply was that it contained 12,445 words. His analysis did seem to miss some significant things. ”
This is the opening paragraph of speech given in September 2006 at the Annual Conference of the Australian Institute of Judicial Administration by New South Wales Chief Justice James Spigelman.
He then goes on to say “The purpose of my address is not to deny the beauty of numbers. Nor their utility. My purpose is to emphasis, as Jedediah Buxtons’s reaction manifested, the inability of numbers to always identify what matters.”
As the Chief Justice so aptly put numbers are not everything. So many businesses measure everything. Many accountants continue this with numerous measures focusing on everything that they can put a measure around. This focus is usually the traditional accounting focus and particularly orientated towards costs. But often many of these measures just create unnecessarily administration and do nothing to get to what matters.
What should be measured?
The Chief Justice was railing against the use of numbers to find some “quality indicator” of the Justice System. Unfortunately many businesses fall in the trap of measuring everything in the pursuit of a quality indicator.
A significant problem with the measures being using in business is that they are based on the traditional accounting practices. The accounting standards were developed in the industrial age when everything was focused on the efficiency of the factory. The assets were the machines, equipment etc. However we moved from this to the information or knowledge age where the assets are the people and the information that they have in their heads. However in the profit and loss statements the money spent on people is an expense.
Whilst the financial statements are often misunderstood they serve a purpose. The purpose of these statements is not to manage the business. The profit and loss statement is best said to be a history statement. Any measures that are based on aspects of the profit and loss statement are looking at history.
There is a place for some measures orientated on the financial statements or costs because it is imperative that costs are kept under control. A business will not achieve true success with only these measures in place. Success is defined by the customer / client. It is necessary to measure that which the customers views as important. We need to find the drivers of the customer behavior and measure those.
But remember not everything can be measured. How can we measure the lawyer / accountants ability (or lack of ability) to communicate. A criticism made of lawyers and accountants is that don’t return calls quickly, not speaking in layman’s terms. How can the lawyers / accountants professionalism be measured. These are judged not measured.
Thus we need to focus on measuring what matters and have measures that matter. These are measures aimed at what is important to customers / clients. There is still a lot of work to be done on designing effective measures that are not just focused on various elements of the profit and loss or balance sheet. It is necessary to have a change of mindset from the industrial age to the knowledge age. Nowhere presently on the balance sheet is the huge asset that the loyal committed clients are. Nowhere in the financial statements is any information about customers found eg repurchase rate, referral rate etc
With the right approach it is possible to design a quality indicator that will reflect what is important to customers. There are difficulties and it will take a fresh approach to measures. Some businesses have already devised interesting measures aimed at getting to what customers see as important.
One of these is Fedex with the SQI (service quality index) which came from the hierarchy of horrors (a list of things that upset their customers). From this they assigned importance to each item on horror and from this they then created an index. This index thus showed how often or how little they were upsetting customers. Since implementing this quality index they have taken the taken the ontime delivery from 95% to 99.7%.
Another company is Enterprise Rent a Car (USA) and their ESQi which is similar to Fedex but is from a simple customer survey. There are other successful companies who do not rely solely on the traditional accounting measures but are focused on the customer.
Be careful though. I am not recommending the plethora of customer satisfaction surveys. These abound and usually are useless. In short these don’t work because they ask to many questions, the wrong people respond, are used for marketing purposes and probably the most importantly are not linked directly to what matters.
It is possible to develop a quality indicator but not using traditional accounting measures. A fresh look at the business is necessary. What the customer values in your product or service must be ascertained. Once this is understood then we need to devise a measure around this.
In conclusion what are you measuring? Measure what matters and have measures that matter. Remember not everything can be measured.
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10 elements of outstanding customer service.
Here are 10 elements of good customer service. This is by no means comprehensive but these 10 points are very important.
1. Finish strong. We often have heard of the saying “First impressions count”, however with customer service last impressions count more. The final customer interaction is what resides in the memory of the customer. That is not to diminish the service throughout the experience but just put particular emphasis onto the last impressions.
2. Get the bad experiences out of the way earlier. Save the best for last. Get the unpleasant side of business out of the way early in the process. It is often found, particularly with professionals ,that they like to leave the fees to last or don’t discuss it all and just send a bill. So the last impression that they are leaving is the nasty bit. Freeing the customers of the bad experiences early allows them to focus on the positive aspects of your service.
3. Combine the pain, segment the pleasure. Our time perception is linked to the number of breaks in the experience. Smaller chunks of pleasant experiences will be perceived as greater than one large segment.
4. Build commitment through choice. Providing your customers with choices in the product or service delivery can assist in customer service. A study has revealed that blood donors experienced less perceived pain when they had a choice of which arm the blood would be drawn from. However in this aspect of choice it is also important to be aware that too many choices end up confusing the customers. It is a fine line but if you only have one option then it may be worthwhile considering giving the customer the choice in the matter and this will assist.
5. Give people rituals and stick to them. People find comfort in regular repetitive rituals. However it is imperative to note that if you set the rituals you must stick to them because missing them has a massive hit on customer service.
6. Attention to detail. It is all the little things that add up to a perceived experience. Usually these little things surround the core service or product. Immaculate attention to detail on the liitle things that matter will lead to a superior customer experience. The core product or service must also be of high quality. This is the starting point. If we can get the little things right the customer will believe that we can not anything right. On this matter I often give the story of Rod McGeoch, the head of the Sydney 2000 Bid Committee for the Sydney 2000 Olympics when the delegates came to Sydney he always organised that every traffic light would be green whenever they were travelling around Sydney. The purpose of this was to show the delegates that they could do it, that they could actually change the lights to suit so they could easily hold an Olympic Games sized event. It was this attention to detail that assisted the bid being successful.
7. Choose your audience. You do not have to accept all customers as customers. Not everybody will want to deal with the business the way that you will want to deal with them. Not everybody will want the service or the product in the manner that you wish to deliver to them. Not everybody therefore is a suitable client for your business.
8. Empower your team members. The Ritz Carlton, which has achieved an extraordinary reputation for customer service, gives all its teams a card which has a message that in essence says that a customer’s concern is their concern and it’s their responsibility to fix it. And in this respect they are given significant power to fix a customer’s issue. No matter what grade of team member, they are given the power to deal with the customer’s issue. It is these people who are dealing with the customer that need to be able to provide the customer service that gives your business the reputation. They cannot do that by always having to check back to some superior. If you care for your team they will care for your customers.
9. Encourage complaints. The Marriott did a study some time ago that discovered that the likelihood of a customer making a return visit increased dramatically if they encountered a problem and it was resolved. Their survey showed that :-
(a) if there were no problems encountered during the stay, 89% of people would return
(b) if they had a problem during the stay and it was not corrected to the customer’s satisfaction, 9% would return
(c) if however they had a problem during the stay and it was corrected to the customer’s satisfaction ,94% of those customers returned.
If a customer complaint is properly handled you will actually build a more loyal customer. Sometimes customer complaints are seen as some threat or judgement on an individual’s self esteem. Complaints should be viewed as valuable information and opportunities to increase customer loyalty and good will. If you go the extra mile in correcting any problem the customer will remember this outcome long after the original error has been forgotten. Also if you examine the stories of great customer service that people relay, you will often find that it is about a situation that went wrong and how that company was able to rectify it and fix it on their behalf.
10. Personalise. Remember that profit is a result of behaviour and the behaviour is what is going on in the customer’s head. Every customer is an individual human being. So whilst we will have service standards in a business, we must have the team empowered to personalise the service to each individual within sensible guidelines. If you were caring for your customer, your team will be aware of what matters to that particular individual and how to deliver that. If we feel that it has been personally targeted, personally directed for us then we will feel that that company, those individuals serving us, have taken the time to care about our needs.
These are 10 elements of customer service - what do you think? Have I missed something obvious?
Until next time
Steve Major
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Five Steps to Make KPI’s work.
There has been considerable effort and attention given to all manner of indicators. Unfortunately three things end up happening :-
1. Too many indicators are created
2. Once created the information provided by the indicator is ignored (or not understood)
3. The indicators focus only on the internal performance of the business.
So should we be concerned about this? Yes absolutely yes. But why?
Because what you measure and reward is what you get. Recently the Australian Financial Review asked a number of successful business people for top 5 things that help business succeed and one of items that they stated was - know your numbers. Numbers can tell a story of the business.
But there are 5 key steps before KPI’s work :-
1. Decide what constitutes success
This sounds obvious but the success I am referring to is not your bank balance but what will make the business grow. Success must be defined the way your customer defines it. How the customer defines success or value will often include aspects that you may consider trivial. But it is these little things that the customer values. Often time the focus of measurement is on the cost or production. This is not where success lies. All it will bring is reduced costs or increased production efficiency but not necessarily customer delight. It is imperative to look at your business the way your customer does. What is important or valuable to your customer?
2. Measure the right things
Businesses fail because they want the right things but measure the wrong things. People are smart so even if you define success right but still measure and reward the wrong thing your team is going to give you what you measure eg if you were to measure employee adherence to an employee manual then you will have employees who abided by the letter of the internal rulebook but probably give lousy customer service.
When measuring the right things don’t go overboard. It is usually only necessary to have 1-5 items that are measured right across the business and that everybody knows and follows. There may be other measures for separate sections of the business but there will only a couple of headline measures. Too many measures lead to people losing focus.
3. Make sure everybody understands the goals and measurements.
If people either don’t know or understand the goals and metrics they will create their own which are probably nothing like what you want. The goals need to be communicated to everybody regularly. The team must understand what the goal is and how they form part of it. Every decision then needs to be made in the context of the goals. If an idea is brought up, before effort is wasted it needs to be determined whether it helps achieve the goals. The goals and the measure need to be presented in such a way so that it is easily understood. Numbers are not appealing to everybody so make it fun. Numbers can be expressed in many creative ways that everybody then understands. We need to keep the score in a manner that everybody can determine how we are going. The scoreboard must be available constantly. When we attend a game of sport we want to know at all times how our team is going and the scoreboard is always plain to see for everybody. Lastly the goals and measurements must be reasonable. An unachievable goal is no goal at all. It will only lead to dispirited and cynical team.
4. Reward
For behaviours to change the measurements need to be coupled with rewards. We only get what we reward. Gordon Bethune in his recount of turning Continental Airlines around states that this was one of the most important things he did. Each employee got a monthly bonus if they reached the onetime arrival target. The behaviours changed to meet the target.Once rewards are promised then they must be delivered if the target has been achieved. Keep your word. When people are given clear direction and clear rewards they will achieve. This is applicable to all levels of the team.When the rewards are given make it certain that they know they have got the rewards. For instance if there is a monetary bonus then instead of the funds going in with the normal wages then it should be a separate payment. This has more impact. Anything that can be done to intensify the experience of the reward makes the message stick. Don’t reward the wrong people. If a company wide goal that has been achieved then everybody gets the reward not just senior management. Everybody is necessary for the success therefore reward everybody.
5. Never stop
When driving a car we rely on a number of measurements which we are constantly referring to e.g. speed, fuel. If we decide that everything is fine or that we are too busy to look at the dashboard then this will only lead to disaster. We could run out of fuel, be caught speeding, have an accident through speed. We must refer to the dashboard to know what is going on.Never, never, never stop measuring what matters. The dashboard of the business will have a couple of important measures that must be constantly measured. There will be a number of other measures in the business just like the car e.g. km’s travelled, tyre pressure, coolant level, oil level etc. However the headline metrics (ie the dashboard) gives us a good indication of how everything is going. If you do keep an eye on the measurements, as soon as a problem shows up you’ll know about it and you can take action to fix it. It is necessary to ensure the accuracy of the measurements. If the speedo is out then this can give us a false sense of comfort. Over time the measurements in a business must be constantly refined and made accurate. Measure more and measure better. Measure everything that matters.
Conclusion
These five steps will ensure that measures work in your business and not just become despised numbers. To achieve success you must know your numbers. That is the numbers that matter. So in conclusion - MEASURE WHAT MATTERS.
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What is an entrepreneur?
What is an entrepreneur?
Recently I posted a tweet (Twitter) discussing the fact that entrepreneurs have had to take a pay cut in this current economic situation. In response to this tweet I had a couple of comments that have made me question the definition of ‘entrepreneur’.
An entrepreneur is a person who has possession of an enterprise and assumes significant accountability for the inherent risks in the outcome. It is an ambitious leader who can combine labour and capital to create and market new goods. That is the definition as per wikipedia.
I have always thought that a small/medium business owner is an entrepeneur. But it would seem that some seem to believe that only people like Richard Branson are entrepeneurs i.e. owners of large complex businesses. Obviously Richard Branson is an entrepreneur but so is the small business owner operating out of his/her garage.
Based on the comments I received from the tweet, people don’t necessarily go along with my viewpoint. I feel that there are entrepreneurs around us every day. It is entrepreneurship that will lead us out of this recession. It is on the back of small and medium business that the economy will will recover. People taking accountability for risk, who are willing to bear the risk of a business venture and who because of their passion for a particular product or service will grow their businesses and employe people. This drives the economy. The government at all levels need to encourage entrepreneurship in our community. We need to encourage those who are willing to take on that risk for the outcome of delivering value and innovation to a customer. May there be more than an entrepreneurship.
This brings me back to my original tweet - there is evidence that entrepreneurs i.e. small business owners are cutting their pay to ensure their business survives rather than quit their business. These are the people we need to support. Let’s encourage risk-taking and innovation in small business. What do you think?
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Have we lost the passion in small business?
Have we lost the passion in small business?
Recently I heard a comment that we have lost passion in big business. The person went on to compare the CEOs of the some of the large businesses in the US vs the founder of Sony. This comment has got me thinking and asking the question whether we have lost the passion in the small and mid-sized business community.
Maybe I should rephrase the question - has the passion for money overtaken the passion for business?
Why do people go into small business? There is a myriad of reasons but I suspect that the passion for a certain product or service does play a part for some, however I am not sure that it is the large majority. Unfortunately in this age of consumerism there have been some small business owners who are purely there for the money. But in the harder times this will be revealed. These are businesses that will not have an enthused team of people providing great customer service. That only comes with having passion for your business, for your products and services.
I am sure that unfortunately some people who go into small business with passion for their area sometimes get it beaten out of them because of inefficient systems, lack of planning, not understanding how to use the numbers in the business. These are people we need to work with because the underlying passion is still there - just covered up at the moment.
We desperately need passion in small business so that we will have inspired and innovative products and services.
Do you think we have lost the passion in small business? Do you believe that it is necessary in small business?
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Why don’t small business owners communicate with their team?
It amazes me to see business owners/managers reviewing the performance of the business and complaining about some area, however if you ask them if the team knows exactly what is expected, they give an uneasy answer.
So let’s think about a couple of things here. Firstly, let’s assume they are measuring something that is important, matters and needs to be measured. (This is not always the case in business). With this assumption, the next question is: does everybody in the business know and understand what is being measured? This is the question I want to cover a little today.
If people in a business don’t know expressly what is being measured, what their individual, team or group performance is being measured, they will guess. They will make up their opinions of what is important. They will interpret the actions of the owners/managers to form an opinion of what is important. We often hear the comment “that is the way it is done around here”. These become the unwritten measures or rules.
But these rules are often not exactly what the owner or management wants or is measuring.
Behaviours are being changed by the individual’s or team’s opinion of what is important. So why wouldn’t the owner/manager of the business explicitly provide the information to the team? Now, I am not necessarily saying that the small/medium business owner has to reveal every line item of the profit and loss statement (though I am not necessarily opposed to this).
What I am saying is that the owners of a business MUST simply, concisely and consistently share with the team what is being measured, what is important. They must communicate clearly and consistently to everybody in the team.
What do you think about communication in small business? Please leave comments of either great or horror stories involving communicating with the team.
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Small businesses that will survive this will do 5 things.
“An economy is governed by the will and imagination, creativity and persistence of its entrepreneurs”. George Gilder.
This statement was written in 1992 by George Gilder but it is particularly relevant at this time. Unfortunately I am not sure if the governments of the world understand this, though. The stimulus packages that have been passed in the US, UK & Australia don’t seem to believe that small business are important.
However as always, the persistence and will of the small business owner will come through.
The small businesses that come through this will be those who -
- Focus on the customer
- Understand the numbers
- Measure what matters
- Have an engaged team
- Do something different. Don’t just copy everybody else.
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