Nominal versus Real
In recent time inflation in Australia and most parts of the western developed economies has been low. However it has been the case particularly here in Australia that some years ago we had high levels of inflation. Inflation has a role to play in marketing of our products and services.
Many marketers say that if you have a product that is for sale at $50, don’t sell it for $50, sell it for $75 discounted to $50. As time goes by inflation could eat into your profit and you’ll have to raise the price, but if you have it advertised as a reduced figure you can reduce the discount. So the price would still be $75, discounted now instead of $50 to say $55 or $60.
This technique is often done by a lot of the retailers and as consumers we look at the top line price, even though the reality is that top line price was never probably a real price. The issue of understanding the power of inflation in pricing is important to consider.
Photo by:- Alan Cleaver
The Decisions We Make About Price
The decisions we make about price have some important lessons for us in selling our products and services, so lets consider a survey question that was asked by two researchers in determining how people make decisions about price.
“Imagine that you were about to purchase a jacket for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store located 20 minutes away. Would you make the trip to the other store?”
This question was asked in 1981 when $125 and $10 was appropriate, so accordingly we could rephrase the question to maybe say a jacket worth $300 and a calculator or some computer device worth $150. Now the calculator/computer salesman informs you that the item that you wish to buy is on sale for $120 at another store, would you make the trip?
When this question was asked the majority of people said they would. The question was slightly varied and another group of people was asked. In the different version the jacket was only $15 and the calculator $125 and now the calculator was on sale for $120 at the other store and the question was, “Was that worth the trip?” and most said no.
In both versions of the question the buyer is planning to spend $140 total and the drive saves exactly $5 so why are we more willing to drive across town to save money on a small purchase than a large one? It is this understanding of the behaviour that is driving these pricing decisions that is important for us to understand in pricing the products and services of our business.
Photo by:- Andres Rueda
Models Are Useful Until They Are Not
Matt Church of Thought Leaders Global recently stated “Models are useful until they are not.” This comment has provoked some thoughts for me.
This statement is probably best illustrated by the financial services industry which has lead to the global financial crisis of 2008 and 2009 relied on some investment models, but unfortunately could not see when they were of no use.
In business (be it small or large) we can get trapped into relying on a model of business, a model of how they service their customers, a model of how what services and products they provide and don’t realise when they are no longer useful.
Within a business people can get trapped with respect to their understanding of various aspects of their business eg. customers. They may have three years ago had an exact picture of what their customers looked like, where they shopped, how they shopped, how they behaved, what the decisions were that they were making, but is that model of their customer still the case today? Or have the customer’s behaviours changed and altered in some way that the business needs to adjust for?
Models are useful until they are not.
When do we recognise when the model that we are operating under is no longer useful? The business needs to have a culture of constantly looking for new information that would enhance their way of operating or mean that they need to change what they are doing. The management of the business needs to have the attitude of being able to be willing to explore all possibilities, to watch the information, but they need to be willing to measure and review the necessary information. If the information that you are looking at is the profit and loss statement and balance sheet, then that’s useless; it gives you no understanding of whether the model under which you are operating needs to change. You need to have a complete and detailed understanding of your customer and exactly know what they are doing to determine whether the model you are operating under is useful.
So models are useful until they are not. Is the model that you are operating under still useful?
By the way I am a Mentor at Thought Leaders Global. If you want to know more individual or organisational thought leadership then please contact me.
Photo:- by woodleywonderworks
Cash Flow Measurements – Some Useful Metrics
As you know from reading my blog, I’m a firm believer that there is one main metric in a business of which we need to focus on. This does not mean that there aren’t other support metrics which can be useful to the management of the business. The one main metric provides an insight to the future whereas the other support metrics usually are financial and provide analysis of what has happened.
Today in this blog post I’m going to cover a couple of cash flow metrics, which give an insight into the management of cash flow in a business.
The first one is cash flow to sales ratio. This is calculated as: -
(Net Income + Non-Cash Expenses – Non-Cash Sales) ÷ Total Sales
This shows cash as a percentage of sales and its variation from the net profit margin is where we need to analyze. If there is a significant positive or negative variance, then we need to look at what is throwing off cash, or soaking up cash.
This metric can be also done on a product or service basis, so that we’re looking at the cash flow generated by each product, to determine whether there are products that are soaking up cash more than they should. Even though whilst profitable we may need to look at how these product lines are dealt with.
The second metric is the fixed charge coverage ratio. This is calculated as:-
fixed costs ÷ by the cash flow as defined above.
In respect to fixed costs these are all the commitments that the business has to meet no matter what happens. So it could be loan commitments, lease commitments, rent commitments on an office space or factory premises etc.
All of the fixed costs that are necessary to the management of the business.
This fixed charge coverage shows how much cash flow is being generated above the fixed cost coverage. It is assumed that if we aren’t meeting our fixed costs then we would not be able to keep our business doors open.
These two metrics are useful in the measurement and management of cashflow.
Photo: Ivan Walsh
Look Ahead Rather than Behind – What data are you using.
A lot of the data that is collected in companies tells the owners and managers how they have performed in the past; whether it’s the past month, 6 months, or 12 months. The financial statement that we prepare are only a record of the past. The profit that is revealed in these financial statements is only revealing customers decisions made in the past.
This is not to say that financial statements don’t have a place, and I’ll do a blog post in the next few days on what we do need to use them for. We cannot lead a business or even effectively manage a business when we’re only looking behind us rather than ahead.
We need to therefore ask what data is necessary that will help us get ahead of the curve, instead of just reacting. This is where we focus on non-financial metrics to give us an insight into customer’s decisions right now, or potential future customer decisions. It is these insights that then can lead us to better decision making.
Does your data help you look ahead rather than behind?
Photo: – By John Poplett
Are We Asking the Right Questions?
Often in business we are questioning how we undertake the operations of the business, we question the available financial data, we put questions around the efficiency of the team and the processes, but are these the right questions?
The questions that we need to be asking are those that are focused on the value being provided to the customer.
We need to be determining what the customer see’s as important, how the customer defines success, what the customer thinks of our business. From this information we can then ask the questions of what data or metrics do we need to have to ensure that we are able to provide this value to the customer.
Just because the data is available, just because the financial information is being compiled on a regular basis, does not mean that that is useful information. We need to have the one focus measure and the various support measures that are answering the questions about what value is being provided to the customer.
This usually means that the financial data that we are compiling for monthly accounts etc is not the main focus area. This is useful information, but it’s telling us what has gone on in the past. We need to be asking the questions about what the customer is doing in the future, and having the data that gives us an insight into this.
Are you asking the right questions? Do you have the one measure clearly identified that will drive the future value of the business.
Photo: – by fontplay.com
The Evidence & Intuition.
In a recent blog post I outlined the 5 aspects that make our intuition unreliable and inconsistent. We need to consider the alternative to purely relying on human intuition in business. There are numerous factors in play in business from the various market forces to the various customer, direct customer base to internal team issues, government issues, economical issues etc. Even the simplest business has a number of factors at play and relying only on human intuition means that some flawed decisions are being made.
I must reiterate that I’m not saying that we must never use human intuition. My point is that leading & managing only by intuition is a problem.
As I have asked in recent days “how do you know”. We must look at data and understand what pattern is in the data. But it is not just any old data. Just because it is easy to get it does not necessarily mean that it is important.
The first step is to understand what is driving the business and then determine what we need to measure.
There are a raft of statistical techniques designed to find patterns and I don’t wish to complicate the management of small business in referring to statistically techniques however a number of these are very simple to utilise in a small business but can be extremely useful.
The use of statistically techniques can be applied to any setting including wine evaluation. Princeton economist Orley Ashenfleter predicts Bordeaux wine quality and hence eventual price using a model he developed that takes into account winter and harvest rainfall and growing season temperature. Massively influential wine critic Robert Parker has called Ashenfleter an absolute total sham and his approach is so absurd as to be laughable. But Ashenfleter was correct and Parker wrong about the 86 vintage. Also his way out on a limb predictions about the sublime quality of the 89 & 90 wines turned out to be spot on.
It’s not just wine that we can analyse the data to determine a more accurate prediction or to make a more informed decision.
But we need to measure what is important to the success of the business. This success factor will be found in the operations of the business not the financials.
To illustrate the power of looking at the evidence a paper in 2000 surveyed 136 studies in which human judgement was compared to algorithmic predictions. 65 of the studies found no real difference between the two and 63 found the equation performed significantly better than the person. Only 8 of the studies found that the people were significantly better predictors of the task at hand. If you are keeping score that’s just under 6% win rate for the people and their intuition and a 46% rate of clear losses.
So why is it that we continue to place so much stock in intuition and expert judgement. Overall it is clear we get inferior decisions and outcomes in critical situations when we rely on human judgement and intuition instead of hard cold boring data and measurement. This may be an uncomfortable conclusion but it’s the fact. We need to make better judgements thus we need to have those boring data and numbers.
Again I’m not proposing that we remove or dispense with the human expert or the human business owner but rather we couple the humans in the middle of an evidence based process. This has been the situation with medicine where the evidence conducted from numerous studies of techniques and processes and drugs pave the way for doctors to provide the correct diagnosis but it hasn’t removed the need for intuition of the expert specialist to make a judgement call. They are just being able to make it with the cold hard facts and the knowledge of the studies undertaken previously.
In a business if we have the information if we have the right numbers, if we have the right measurement then the management will be able to have this as their starting point for making decisions and determining the future of the business. Surely these decisions will be better informed as a result.
The one main number is not found in the financials.
Businesses are used to collecting the financial information and with their accountants compiling financial reports. But the one main number that is driving the business is not found in the financials. The one main number that will predict where the future of the business is going is not in the financial data.
Because we are measuring the accounting data it is easy to be tempted to use this information to lead and manage the business. The accounting data though is a history statement and is useful to review but you will never find the engine of the business in these statements.
The one main number will be found in the operations. The operations of the business drive the future of the business. But be careful. It is imperative that we understand what is important to the customer to determine the engine of the business.
A great example from a few years ago is Contintental Airlines from 1997. Gordon Bethune became the CEO the airline had as the one main number as :- cost per airline mile. Now whilst this significantly impacts on the bottom line it is not what the customer sees as important. It lead to behaviour to reduce the quality of meals, fittings etc. Gordon changed this to :- on time arrivals. This changed the focus to something that the customer value. The airline went from worst to first.
The one main number was in the operations. Importantly though it was what the customer see as valuable.
How will you know?
In the recent blog post I asked a question that was provoked by a podcast by Joseph Michelli about “How do you know?” In other words, what data are you relying on in your business to make decisions?
The question now is “How will you know?” I’m here looking at the future, that you have some goals and objectives in the business, but how will you know whether you’ve achieved them?
See, often goals and objectives can be nice words but it is not clear that we will know when we’ve achieved those nice words. Words are important in a business, critically important, but also just as important is the data.
What number are we focusing on? What is the critical main number that we are targeting in the next 3 months, 6 months, 12 months? What is the number or the measure that matches those nice words in our strategic objectives and goals?
It doesn’t matter whether the organisation is a small local business, a big business, or a not-for-profit organisation. We all have a purpose with the services or products we are providing and we all want to achieve a better result in the future than we have in the past.
So the question that I ask is “How will you know” that you delivered a better result? What is the one main thing that will tell you that you have delivered a better result?
Do Your Frontline Staff Look At Things From The Customer’s Perspective
Recently I travelled to Tasmania on business and stayed at the Mid City Motel. I was there for 2 nights and the motel room itself is quite well appointed. The lady on reception was a little bit vague when I checked in. I got up to the floor and the swipe cards that had been presented didn’t work but housekeeping were there cleaning out other rooms and let me in and were quite friendly. I went back downstairs thereafter and the check in lady (reception lady) corrected the cards. so this point in time I’m still neither extremely happy or in no way could I say that I was unhappy. In the room it advertised that breakfast was a buffet breakfast available in the restaurant on the ground floor.
The next day I went downstairs to the restaurant and I couldn’t see the buffet breakfast so I asked the lady present and I was told no we don’t have buffet breakfast you just order al-a-carte. I’m thinking to myself that this is a little odd as it was contrary to the information in the room. But then it started to deteriorate from there. I was asked as to what room I was in and I stated the room 506 and she went off to her computer and came back to me and said nobody is in 506. I said well I am and showed her the envelope with the swipe cards in it that quite clearly showed that I was in 506. She asked for my surname went off and came back and said “No, you’re not in 506 you’re actually in 603.” I said “Well I am in 506, but obviously your computer system is saying 603.”
The upshot of the conversation was that this lady did not in any way believe that I was in 506. So that I could actually enjoy breakfast I signed the voucher as 603 and I’m thinking the poor person in 603 is going to end up with my breakfast bill, but I’ll go to reception straight after breakfast and sort it out. So after the breakfast I went to the reception and I was told by the person there that I was in room 603 despite me quite clearing saying where I was and the envelope. But they continued to disbelieve me.
The next day at breakfast again I thought “No, I’m not going to go to the motel’s breakfast service.” So I went off to a restaurant elsewhere to have breakfast, rather than argue which room I was in; so the business lost that service. Then I came to checkout, which could have been … well a tad intriguing. And once again I was told I wasn’t in 506, but 603. To which I then asked “Was there a difference in room rate?” And there was – $20 a night difference, so then an argument ensured to prove I was in 506 which after a few minutes they finally amended the bill to reflect that I was in 506 and I checked out.
The upshot of all this is that at no time did anybody that I dealt with try to actually take the situation in hand and resolve it. Customer service was not even in the consideration. The computer must be right, the customer must not have a clue as to which room he is in.
So the little thing of the sign in the room about the buffet breakfast became a big issue, because suddenly you are looking at everything.
Now I am telling the world and using the experience as an example of poor customer service. The attitude from the people was not of trying to help but rather it was “customer get away, you don’t have any idea, you are a pain”.
They did not even try to look at it from the customers perspective.
Do your frontline staff look at things from the customer’s perspective? How many clients are you annoying because of your systems and processes? How many customers are you turning away? Not because of necessarily hugely bad service, but just because of an attitude of ‘we are right, the customer is wrong’. I think lessons can be learnt from this example that in no way did they try to distinguish themselves from other accommodation in the town, but rather had the attitude of the customer is wrong. Suffice to say, I won’t stay there again and suffice to say that I’m recommending to everybody else to look at alternative accommodation.
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