What Did You Learn From This Recession?

There are those who say you should never look back, only forward. I disagree. Looking back can be very valuable when you are learning from the past. The question every business owner and manager should be asking is “What have I learned about running my business during this recession?”

A good analysis will enable you to perform better in the future. So how do you analyze the situation? Here are a few questions that will help you.

Did I anticipate a recession and when it could start? You may wonder how you can anticipate a recession. Once again, look back. A quick review of previous recessions will show that our economy goes through cycles. When we are in a growth cycle, consumers and businesses tend to think that the growth will last forever. They tend to over-borrow, over-spend, etc. This causes some kind of artificial boom, such as the dot-com boom or the housing boom. When everyone realizes that the boom item (such as housing prices and the mortgage supply) is inflated, then spending, borrowing and everything else stops and into a recession we go. If you look at the years that past recessions started, you can get a good idea of the length of each growth/boom period. You may not know exactly when that is going to occur, but you will have a general feel for the potential start and be better prepared.

Did I respond quickly to the recession? Did you continue on your merry way even though you knew the economy was slowing down? Did you find yourself reacting when it was too late? I can’t predict the future but I can guarantee you this will not be the last recession our economy will experience. Therefore, you should have a “recession plan.” Based on what worked and what did not work for you during this recession, develop a plan so you will be ready for the next one.

Did I only make short-term decisions? Sometimes during a recession, we make decisions to cut costs that save us money now, but hurt us for the future. Did you lay-off your best employees? Did you cut your marketing too much? Did you cut ties with valuable suppliers who may not give you favorable terms in the future? Take a hard, realistic look at the decisions you made and determine what you should have done differently. Make that part of your recession plan for the future.

I think we all agree that we should learn from our mistakes. The difficulty that some people have is admitting that we have made mistakes.

Be honest with yourself. Analyze the past carefully and thoroughly. Develop a plan and be ready. Another recession will come.

How to Set Prices

Business owners and managers make a lot of difficult decisions. Setting prices falls into that category. Fortunately, there are only two factors that need to be considered when setting your price - (1) margin, and (2) what the market will bear.

Margin (or margin contribution) is what is commonly called "gross profit." Gross profit is the difference between selling price and the cost of goods sold. It is the "contribution" that you have to cover overhead and (hopefully) have enough left for profits. Here is an example. If you sell an item for $10.00 and it costs $3.00 of material and $2.00 of labor to produce, your cost of goods sold is $5.00 and your gross profit is $5.00. For each item that you sell, you have $5.00 to put toward paying your overhead and for profits.

Your overhead (rent, insurance, utilities, etc.) stays basically the same each month. Assuming your cost of goods sold per item stays the same each month (your supplier does not increase the price of the material and you do not give any wage increases), your gross profit goes up or down based on the volume. Thus, the first area to examine is how many items you need to sell at a $5.00 margin or gross profit to cover your overhead. If your overhead is $5,000 per month, you would need to sell 1,000 items to break-even.

That's arithmetic. It is the easy part since your costs are a known (or easy to forecast) factor. The difficult part is determining what the market will bear for a price. Are there 1,000 customers every month who are willing to pay $10.00 for your item? ......or are there 2,000 customers willing to pay $7.50 every month? ...... or 5,000 customers willing to pay $6.00? How many customers are willing to pay MORE THAN $5.00 (your cost of goods sold per item) for your item? That is the difficult question.

If you are selling a product or service that is currently being sold by other companies, you know what their customers are paying. That may make setting the price easier, but your challenge becomes getting those customers to become your customers.

If you are selling a new product or service, setting the price becomes more difficult. You need to do some research. You may need to take some surveys. You may want to compare the features and benefits of your product with the closest existing substitute and then adjust accordingly.

When you finally arrive at a starting price, it is wise to start a bit higher rather than lower. It is easier to reduce a price to generate more sales than to increase it to create more margin. If your price is too high, customers are faster to respond to a reduced price. If it is too low, you may lose too many customers when you increase the price.

Unfortunately, there is no exact formula for setting a new price. Some trial and error is involved. Just remember, it is better to err on the high side.

Those are my thoughts on setting prices. I welcome your commetns.

Don't Apologize When You Increase Prices

Don't apologize when you increase your prices. Businesses increase prices for two main reasons - either their costs have increased so they need to increase prices to maintain margins, or the business believes that the current prices do not adequately reflect the value of the goods or services they are now providing. So there is no need for the business owner to be defensive and to apologize.

I have often seen letters from suppliers that begin with an apology. "I am sorry to inform you that due to increased costs, we find it necessary to increase our prices." Why do they feel it is necessary to apologize for wanting to make a reasonable profit? Why apologize when you want your price to reflect the value of what you supply?

First of all, no one really cares about anyone else's costs. When you buy a car, do you really care about how much the dealer is paying in property tax? If you are getting a new roof for your house, do you really care about the workers compensation premium paid by the roofing company? Of course not. You are concerned about getting the most value for your dollar. Most people choose products based on whether or not it brings them the value (or pleasure) that they want. Just because a person can afford a $50,000 car does not mean they will buy a $50,000 car. The $25,000 extra that they can afford to pay for buying one car instead of another, may not bring them $25,000 more value (or pleasure or satisfaction - whatever term you choose to use). Thus, no one is willing to pay more just because the seller's costs have increased. So why even talk about your costs.

My advice to clients is to notify clients in a positive manner not a negative manner. Let clients know that you offer a product that is certainly worth what you are charging. Tell them that based on the value (quality, special service, warranty, etc.) that you provide, you are now increasing your prices to reflect that value. That's it. No further explanation is needed. If they agree, they will continue to buy from you at the higher price. If they do not feel that your product provides a value equal to the price, they will not continue to buy from you - regardless of your increased costs.

Be positive. Be direct. Be bold. You need to make a reasonable profit and you need for your prices to reflect what you offer. That's my opinion. Please feel free to express yours in the comments section.

Expand Your Markets to Grow Your Business

You don't need to expand your product line to grow your business. You can grow your business by expanding your markets. It costs less and the rewards can be great.

Business owners often think that to grow their business they need to add more products or services. While this may help, it can be difficult, costly, and sometimes even confusing to customers when you have too large of a product line. Thus, your alternative is to sell your current products or services to new markets.

Here is a good example. Dave Hill of A-Pro Home Inspection Services inspects homes mostly for buyers and occasionally for sellers. That is what the great majority of home inspectors do. To grow his business, Dave did not add a new service, he simply decided to perform the same service to other markers. One market is owners of newly constructed homes that are still under warranty. Dave inspects those homes before the warranty expires. That lets the owner know what he or she should have the builder repair before the warranty expires.

Dave also inspects homes for renters. Sure, the landlord will pay for repairs if the renter moves into the house and something needs to be repaired. But what renter wants to move into a home that is in constant need of repair? Dave's inspection can help a renter choose a property that needs little or no repair. That certainly improves living conditions for the renter.

In addition, Dave does inspections for homeowners like me - those who know little about home repair and would like assurances before they purchase a new roof - or before they have their basement waterproofed - or simply to know that they are paying a reasonable price for the service they are about to purchase.

Dave didn't add any new products or services to his business. He simply found new markets for his existing service. That is a wise move for Dave and for many other businesses as well.

Before you decide to spend the money to increase your product line, or before you decide to spend more marketing dollars to sell more products or services in your current market, do what Dave has done. Look at new markets. The rewards can be great for a very low cost.

That is my suggestion. I welcome your comments and suggestions as well.

Why Do You Compensate Employees?

Why do you pay your employees? Is it because they work hard? Is it because they have a special skill? Or do you pay them because of the knowledge they possess? If you are paying them for any of those reasons, then you are paying them for the WRONG reasons.

You are probably wondering why you shouldn't be paying employees for those reasons. Well, just think about it for a minute. There are probably thousands of football players who can work as hard as Tom Brady. But ........ can they produce the same RESULTS as Tom Brady during an NFL game? There are probably thousands of golfers who know as much about the game of golf as Tiger Woods. But can they produce the same RESULTS as Tiger at the U.S. Open? And of course we know many athletes who had great skills but got traded from team to team because they were troublemakers or were underachievers. Or some individuals are like John Daly who has great golf talent but just doesn't seem to use that talent because of his personal problems. Despite their skills, they never produced the RESULTS needed for success.

So why do you pay your employees? You pay them to achieve the desired RESULTS needed to make your business successful.

Many business people are obsessed with work, that is, the number of hours their employees spend on the job. Let me ask some questions. If you had to have a major heart operation, do you want the surgeon who has spent the most amount of hours in the operating room, or do you want the surgeon that has had the most successful operations? Is it the work that is important or the results? Do you want to hire the salesperson who has the record for working the most hours per year making sales calls, or the salesperson who holds the record for making the most sales?

I am sure I can practice as many hours as Tom Brady or Tiger Woods. But no one will pay me to be quarterback of their team or bet on me to win the Masters. You can find hundreds of statistics in every sport, but you can't find one that states how hard the athletes work. Don't worry about how hard your employees work. Worry about the results they achieve.

You may say that results are not possible without hard work. My answer is "Maybe." It depends on the individual. Some individuals work very hard to achieve results while others do not. The point isn't whether they work hard to achieve the results or not. The point is ...... did they achieve the desired results?

A good manager develops an environment which enables his or her employees to achieve results. A good manager focuses on results by rewarding employees for achieving the desired results and not rewarding people just because they show up for work every day. Good managers develop performance review systems that measure results. Good managers develop compensation systems that reward results. Do you really care how hard the surgeon works on your operation or do you simply care about the results?

Those are my thoughts. I welcome yours.

Keeping in Your Name in Front of Your Customers

Out of Sight .... Out of Mind. Have you ever heard someone say, "Oh yes, I forgot all about old Bill?" Or what about, "Oh yes, I seem to remember that company. I did business with them years ago." Out of Sight .... Out of Mind.

It always amazes me how someone will do business with me and then never contact me again. They seem to think that just because we did business once, I will always think of them when I need the product or service they sell. Actually it is quite the contrary. When I do not continue to hear from someone, I simply feel that they neither want nor deserve my business.

A good business person/sales person constantly keeps her name in front of her customers and potential customers. You want to be the first person who comes to mind when your customer needs the product or service that you sell. It's not magic, it's not rocket science, and it's not difficult. It does take work and diligence.

When I moved to Minneapolis in 1979, I asked my real estate agent to recommend an attorney. I used that attorney to assist with the legal matters of purchasing my home. I was satisfied with his service but I never heard from him again after the closing. Three years later, I purchased my first business. Needles to say, I used a different attorney. That second attorney continued to do legal work for me (and receive substantial fees from me) for the next 14 years until I moved from Minnesota. Just think what the first attorney lost by never keeping in contact with me.

In his book, "How to Sell Anything to Anybody," Joe Girard talks about how he stayed in contact with his customers. Each month they received a card from him. It might have been a card wishing them a happy holiday or simply a card to say "Hi." No matter what the content of the card, he made sure his customers saw his name at least once per month.

Jeff Slutsky states in his book, "How To Get Clients" that he sends his clients note pads containing his name and picture so they will constantly have his name and picture on his desk.

Many businesses use newsletters to keep their name in from of their customers. I have always believed that an informative newsletter is a great way to both provide useful information to your customers as well as keep your name in front of them.

No matter what method you use, just remember ..... Out of Sight ... Out of Mind.

I would like to hear about any methods you use. Your comments are always welcomed.

Who Really is Your Competitor?

Do you really know who your major competitors are? Most business owners think it is the business down the street that sells the same product or service. Maybe it is ... or maybe it isn't.

A major competitor does not necessarily have to be someone who sells the SAME product or service. It could be someone who sells a SUBSTITUTE product or service. It could even be a change in lifestyles or a change in technology. Here are some examples.

Suppose you own a bowling alley with a small lounge. The members of the Tuesday night bowling league typically stop in the lounge after bowling and have a sandwich and a drink. Your state legalizes casinos and a new casino opens in your town. The league members now go to the casino after bowling instead of going into your lounge. Eventually, the members of the league decide to stop bowling and go to the casino every Tuesday night. Your competitor is not another bowling alley or another lounge. Your competition is another recreational activity.

Many country clubs think that their main competitors are other country clubs. In addition, they think that for the past 10 years potential members haven't had the money to join. That's wrong. Their main competitor is a change in lifestyle. Ask anyone who is 60 years old or older and you will find that there were very few organized activities for them when they were 10 years old, and they were able to walk to them. Today, most parents are driving their 10 year old to organized activities four nights per week and on Saturday. Parents don't have time to join a country cub. It is not that they don't want to golf or don't have the money to pay the dues.

Take a look at daily newspapers and other publications. Some newspapers are in towns that have no other newspapers. Yet they are going out of business. It certainly isn't a competing newspaper that is causing their problems. It is a changing technology.

Of course, competitive situations differ from business to business and industry to industry. The important point is that as a business owner or manager, you ANALYZE YOUR COMPETITIVE SITUATION. Take a careful look at your situation. Make sure you are not making business decisions based on the wrong competitive situation. Those kinds of decisions can put you out of business.

If you have a unique competitive situation, I would love to hear about it. Please post your comments. They are always welcome.