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Revenue is Not Your Friend – Pricing For Profit

The Sausage Vendor said he bought his sausages for a buck, and sells them for $.95. When challenged as to how he would make money, he said, “No problem, I’ll make it up in volume.”

Business owners focus on Revenue when they should be focused on Profit. If they focused on Profit, they would raise their prices more often.

(This is Part One – The Mind Games of Pricing. Next week we’ll do Part Two – The Mechanics of Pricing)

The old saw is wrong – “If you worrying about sales, profits will take care of themselves”.
Neither Revenue nor Sales are a good place to focus financially – we need to focus on profit (actually cash flow, but that’s another blog.)

What barriers do you encounter in communicating your pricing to potential clients?
Competition, market conditions, aging industry, complex service, fear, not understanding how to price? Probably a little of most of the above.

When we aren’t sold on our pricing, what does that communicate to the potential client? It communicates that all of the above (competition, market, fear, etc.) are all good reasons not to buy my product or service from me. The best way to create pricing problems is to not believe in our own pricing.

A caterer friend gave his “best, lowest” price to a potential client, skimmed of any “excess” profit, and the client’s response was “Is there any way you can go lower?”. When we aren’t confident in our prices, we mentally set up shop in a place that attracts bottom-feeders like the guy above. Getting a lot of pushback on your prices? It’s possible its because your prices are too low!

Joel Spolsky is the co-founder and CEO of Fog Creek Software, said “I often meet people at parties and conferences who are starting companies, and they will invariably ask me, “Say, Joel, do you have any advice for start-ups? Since I know next to nothing about these people or their businesses, or even their industries, I usually just say, “Yes! You should raise all your prices!”

And we both have a good laugh, bwa ha ha, then the founder ignores me. But my advice was most likely right. That’s because almost every start-up I have ever seen has set its prices too low.

Of the three business owner Profiles – Market Focused, Systems Focused, and Product Focused, the Market Focused entrepreneur is most likely to have good pricing, and the Product Focused craftsperson will have the worst. The problem – the overwhelming number of businesses are started by Product Focused craftspeople. (The Systems Focused manager loves accounting-driven pricing that ignores all market conditions; they also start the fewest businesses.)

What makes for the most profitable company? One that focuses on providing VALUE, not COST! Lower prices is not value, it is simply lower prices (and may communicate less value).

FIND VALUE OUTSIDE OF PRICE!

If relationships are equal, there are only two other buying questions – 1) How much does it cost? (price question), or 2) Can you do it? (value question). If you’re getting the “How uch does it cost?” question too often, you’re not focused on adding value or you’re not confident in the extra value you’re delivering. Either one will lose you clients much more than your pricing itself.

What does having slightly higher prices communicate to the customer? We are confident in how our product performs.

How do we get confidence?

  1. Understand the value to your clients. Ask them – why do you buy from me? What are you buying that you don’t think I even know I’m selling? It’s the best question you’ll ever ask them.
  2. Stop thinking about how YOU think you perform (internal/craftsmen view), start pricing based on how you benefit them (see #1 above.)
  3. Get some support – have somebody hold your feet to the fire on WHEN you will raise your prices.

Raising your prices is usually the fastest way to create new PROFIT. If you’re already covering all your costs, then every penny of higher prices falls directly to the bottom line. Want to make more money in less time? This is one of the best ways to do it.

Next week we’ll cover the actual mechanics of how to set and stick with a good price.

Why Product Focused Owners End Up on the Treadmill.

Last week we tried to give perspective to the idea that being the classic Systems Focused owners are great business builders but aren’t such great business starters. This week we want to see why Product Focused owners start the most businesses, but are the most likely to end up on the treadmill.

There are three basic business owner profiles:

  1. The Market Focused owner
  2. The Systems Focused owner
  3. The Product Focused owner

We’re all a mix of all three, but we all lean heavily on a primary profile for the way we manage and make decisions.

Business owners whose primary profile is Product Focused are passionate about the product or service they provide, but usually not about business itself. They are experts, professionals, craftspeople, and artisans; implementers, producers, doers, and finishers. They like being tactical, on the ground, getting things done, and they take great pride in the product or service they offer.

Passion for their “craft”; their chosen service or product, is what drives them to build their business. Product Focused owners have difficulty giving production over to employees (or even having employees), who, in the craftperson’s opinion, might lower the quality. And customers can get in the way because they want to modify the product or service – “I make a great chair, you ought to buy it.” (as is)

The Product Focused owner can’t see the need to waste time thinking about the future or the past. They act on what needs to be done today. They don’t expend much energy on “strategic” planning or action, which is also as a waste of time that could have gone into today’s production. This is a great asset in getting things done on a day-to-day basis, but doesn’t help set them up for future success.

Selling a Great Product by Random Hope is their default business strategy. The product or service itself is so great that customers will simply flock to my door. This product focus keeps them from taking on board good feedback from customers about how to make it more sellable – this feels like compromise to the Product Focused owner.

Their greatest assets are passion for their product/service, the ability to act quickly, creativity in developing and perfecting their product, finishing each task, and a great focus on tactical day-to-day production. Their challenges include focusing more on their product then their customer, doing too much themselves, seeing employees as lowering quality, “rugged individualism” (not getting input or working as a team), and implementing without thinking.

Most new businesses in the U.S. are started by business owners with a strong Product Focused primary profile. However, that same focus on production keeps them from improving the business or planning for the future, leading to stagnation of the business when it reaches the capacity of the Product Focused owner to produce from their own 168 hours per week.

Their biggest issue is actually ironic – They are so busy making money that they never think about building a business that will make money while they’re on vacation. Until they get tired of being the producer, they will be on the treadmill. The Product Focused owner is most likely to spend 30 years producing and end up with a business that can’t be sold because it never grew up.

If you’re a Product Focused owner, and most of us are, get serious about growing a business that will make money while you’re on vacation. Get the influence of the Market Focus in your business to keep you planning for the future, and the Systems Focus to help you build processes and systems that will help you grow a real business. Just because most small businesses are on the treadmill doesn’t mean they should be.

The only reason we don’t grow a mature business is real simple – we don’t intend to.

Be intentional – grow a business that makes money when you’re not around. You’ll enjoy life a lot more.

How we got on the business treadmill and why we can’t get off.

Our business trains us to focus on the wrong thing. And we buy into the lie.

There are Seven Stages in the Maturity of a business. Today we’ll focus on the first four, because they tell us what happened that screwed up our understanding of how to grow a business and why we can’t get off the treadmill.

In Stage 1 (Concept and Startup), we need money. To get money, we need clients. So a Stage 1 business teaches us that it’s all about making money via Sales.

In Stage 2 (Survival), we’ve been mucking along for a while and the outside funding is beginning to dry up. We need money even worse. To get money, we need clients. So a Stage 2 business confirms to us that it’s even more important to focus on making money via Sales.

In Stage 3 (Subsistence) we finally have done enough sales to get enough clients to break even. But we have to produce for these clients, because if we don’t produce, we don’t get paid, and we need money. So a Stage 3 business teaches us that we have to focus on making money via production, or our Craft.

And finally, a Stage 4 business (Stability by Hands-On, focused on the producing the “Craft”)) allows us to buy a hot tub and go on vacation a couple weeks a year, confirming to us that the owner’s purpose is to make money.

But what our business taught us in these first four stages is exactly what keeps us on the treadmill for 30 years and never lets us off. Our business taught us that we should make money, and it is that misconception that keeps us from building a business that makes money when we’re on vacation. We’re on the treadmill of making money.

Unfortunately our bias toward the treadmill of making money is confirmed as we look around and see most other businesses stuck in Stage 4 as well. So quiet desperation sets in – this must be all there is. And to add insult to injury, at some point we realize that if we had stayed at IBM, we could still have bought a hot tub and gone on vacation a couple times a year, except in that case we would not have lost money while on vacation or had to wake up nights wondering how we’ll pay off the debt we incurred in Stages 1 and 2.

Why did we do this? How was it worth the trouble and the responsibility we’ve taken on? Why did we decide to buy a job and become employees of ourselves?

We did it because 1) our business taught us to make money, and 2) we see that most other small businesses have gotten stuck on Stage 3 or 4, confirming that this is actually normal.

Stage 3 and 4 are not normal at all, they are merely average. Most businesses have stalled there, but the normal business will break through to Stages 5-7 and make money for the owner when the owner is not there.

Stop being an employee of yourself, get off the treadmill, and get back to the passionate that brought you into business in the first place. Next week we’ll talk about the clear simple actions that will allow us to do just that.

You’re almost certainly a hostage of your business and don’t know it.

During the Iranian hostage crisis in 1980, I listened to an expert describe why being a hostage for a short period of time was exponentially worse then being sentenced to prison for many years.

A hostage lives without clear rules, never knowing what each day might bring – anything from death to freedom, from promises for release to wondering if they will ever be free. The most damaging thing is the lack of a definitive ending date – it could go on forever. A prisoner on the other hand, knows very clearly what the rules are for daily living, and most importantly, there is a clear end date leading to freedom.

When you know the daily rules and there is a clock leading to freedom, it’s immeasurably easier to stay encouraged and work toward that end date.

If you don’t have a clear Strategic Plan, or a Business Maturity Date for when you’re business will make money without you being around, you are a hostage of your business; no clear rules, no end in site. Thoreau said “Most men lead lives of quiet desperation.” Is it any wonder why we feel we’re on a “quiet desperation” treadmill? We’re so busy making money that it never dawns on us to do the things that will help us build a business that makes money.

I’m no longer a hostage to my business. I have clear daily rules (my 12-month rolling Strategic Plan) and a clear end in site (My Business Maturity Date: Friday, February 18, 2011, 10:00am). It makes the journey itself a whole lot more exciting and meaningful. And as a result, quiet desperation has become quiet resolve.

Are you a hostage to your business, experiencing quiet desperation on the treadmill? Or do you have a Strategic Plan that runs your business, and a Business Maturity Date? Get off the treadmill and get back to the passion that brought you into business in the first place.

Get a clear Business Maturity Date (the day your business will start making money when you’renot around) and a clear Strategic Plan for getting there. You’ll make more money in less time.

Every Business Owner Needs Two Bosses. Do You Have Them?

Ever feel like you’ve got 11 ping pong balls to hold under the water and only 10 fingers? There is a solution.

Last week we talked about the overarching swing and a miss we make in our business strategy: We think that our purpose in business is to make money when our purpose in business is to BUILD A BUSINESS that makes money. These two things are worlds apart, and almost every business I work with is absolutely buried in making money, which will keep them from ever making a lot of it.

This week we we’ll talk about how to create the proper balance between the Tyranny of the Urgent – things we have to do today to make money; and the Priority of the Important – things we have to do to build a business that will make money for us.

It’s not as hard as we make it.

The wrong focus – A focus on making money makes us reactive, trying to keep 11 ping pong balls under the water in a washtub with only 10 fingers – we’re never done. Every time we get one under control another pops to the surface.

The simple problem –We’re so busy trying to capture 11 ping pong balls with our own 10 fingers that we can’t spend time figuring out how to hold down thousands. Capturing every dollar today keeps us from figuring out how to capture a lot more down the road.

The simple key – Be willing to let a few Urgent ping pong balls get away to build a business that later can hold thousands of ping pong balls under the water without using any of your own fingers.

The simple solution – One motivator and two bosses that keep us moving toward building a business that makes money.

The motivator – Lifetime Goals. We think making money is the goal of business. Wrong. Making money is not an empowering vision, and it won’t get you out of bed when money is hard to make. But having a powerful over-arching reason to build a business will carry you through the tough times. What are your Lifetime Goals that you can use your business to achieve? Get a bigger reason to be in business than make money, or you’re likely never going to make much of it.

The two bosses:

Boss #1 – A strategic plan. Not a business plan – those are for bank loans, then they sit on a shelf. I mean a 12-month rolling strategic plan by which you manage every strategic and tactical move in your business. Four simple components – 1) A business vision (the big why/values) , 2) mission (the big what – your marching orders – the RESULT you get your customers), 3) 1-3 year strategies (how you make money), 4) 12 month measurable objectives (how you measure success at making money).

Once you have the vision, mission, strategies and 12-month objectives, you can easily figure out what to do in the next 3 months to reach those 12-month objectives. This makes it simple to figure out what you need to do this month. At the end of 3 months, plan the next three and push your 9-month Objectives back out to 12-months. Rinse and repeat faithfully every quarter.

A Strategic Plan that runs your business automatically keeps us balanced between taking care of the Tyranny of the Urgent (making money today), and the Priority of the Important (building a business that makes money.) VISIT YOUR STRATEGIC PLAN WEEKLY TO KEEP FOCUS!

Boss # 2 – Outside eyes on you and your business. A strategic plan that runs your business is great, but you also need others from outside your business to help you keep clarity and direction. My business is my baby; I’m subjective about it. Others will have a much more objective view and be able to see things I would never see. Get a peer advisor or better yet a full peer advisory group and meet once a month. GET OTHERS SUPPORTING YOU AND YOUR PLAN!

In the daily Tyranny of the Urgent, you are unlikely to use your Strategic Plan to run your business unless you have peers and/or advisor(s) helping you do so. Don’t fool yourself – get others involved from outside your business or don’t expect to build a real business.

Use your Lifetime Goals, Strategic Plan and monthly peer advisory group to force you to spend time on the Important, on building a business that makes money. If you engage these two bosses to motivate you to build a business that makes money, you’re much more likely to build a business that makes a lot of it, and more likely to get to your lifetime goals.

Next week we’ll challenge each other to get a Business Maturity Date and why that is so important in my business and in yours.

Don’t Be a Mosquito in a Nudist Colony

Why Lifetime Goals are so important to what I do tomorrow, and why tomorrow is so important to my Lifetime Goals.

The mosquito in the nudist colony is thinking, “I know what to do, I just don’t know where to begin.” As business owners, we might have a similar experience, either not knowing where to begin, or not knowing what to do next to take our business to maturity. We have so little time – prioritizing what to do next is critical to our success.

How do we know what to do next? Frankly, there is no way to know unless we have the end game clearly in mind. Without it, we’re shooting a gun in the woods and calling it bear hunting. Or my favorite – “he who aims at nothing hits it every time.”

How do we understand the importance of tying each day to our future? If we focus on just today, we claim victories that are only imposters. If we focus too much on the future, we get fogged or discouraged by the lack of measurable progress today.

The key – always keep today’s action plans and our future Ideal Situation in clear view at the same time, and continuously make the connection between the two.

Here’s the progession that clearly gives us that connection:

  1. Lifetime Goals – what are the things I want to do the rest of my life that I can never check off? This is why I’m alive and why I do business. I’m using my business to get me to my lifetime goals. If I don’t know my Lifetime Goals, I’ve got no clue why I’m in business. Get clarity on your Lifetime Goals – it is foundational to understanding how today matters.
  2. Ideal SituationFYI – Retirement is a bankrupt idea. Don’t retire, just get into an Ideal Situation for living out your Lifetime Goals – it’s a lot more fun, meaningful, and purposeful. And you don’t have to wait until your 63. You can arrive at your Ideal Situation at 40 or much earlier if you’re intentional about it.

    Critical to escaping the Mosquito/Nudist Colony problem – WHEN do I want to be at that Ideal Situation? Pick an exact date and work toward it (he who aims at nothing…)

  3. Business Maturity Date – usually the same as your Ideal Situation. Pick it – work toward it.
  4. At maturity, what revenue does my business need to generate so I can buy my Ideal Situation in which I can best live out my Lifetime Goals?
  5. How much time and money do I need in my Ideal Situation? What kind of house, car, boat, plane will I need? Do I have a non-profit or am I working in one? Is travel important? What revenue does my business need to generate over the next 5 years to get me to my Ideal Situation? Over the next 3 years? Over the next year? Knowing this is a huge step toward knowing how today fits into the rest of my life.
  6. One-Page Business Strategy – what do I need to do the next 12 months to get closer to a mature business?
    1. Vision, Mission – the big picture for why I’m in business and what my mission is as a business person.
    2. Strategies – the ways in which I make money (building websites, developing ISP software, etc.) THREE YEARS
    3. Objectives – The measurable waypoints for the next 12 months, next 3 months, next month – 12 MONTHS
    4. Action Plans – The actual actions I need to take each week/month/quarter to get to the one year waypoint, on my way to developing a mature business, that can support my Ideal Situation, so I can focus on my Lifetime Goals. It all comes together here.

If we know our Lifetime Goals, those goals we can never check off, and most importantly, WHEN we want to be in our Ideal Situation for living out those lifetime goals, we can then back into what we need to be doing tomorrow to get there. If you don’t know what the end game looks like, what in the world are you doing in business in the first place?

Continuously connecting your daily activity and your Lifetime Goals is the key to clarity and to knowing if each day is counting. Don’t be a mosquito in a nudist colony. Know what to do, where to begin, and what to do next. Connect your daily activity to your Lifetime Goals and watch the fireworks begin.

Don’t Be a Mosquito in a Nudist Colony

Why Lifetime Goals are so important to what I do tomorrow, and why tomorrowis so important to my Lifetime Goals.

The mosquito in the nudist colony is thinking, “I know what to do, I just don’t know where to begin.” As business owners, we might have a similar experience, either not knowing where to begin, or not knowing what to do next to take our business to maturity. We have so little time – prioritizing what to do next is critical to our success.

How do we know what to do next? Frankly, there is no way to know unless we have the end game clearly in mind. Without it, we’re shooting a gun in the woods and calling it bear hunting. Or my favorite – “he who aims at nothing hits it every time.”

How do we understand the importance of tying each day to our future? If we focus on just today, we claim victories that are only imposters. If we focus too much on the future, we get fogged or discouraged by the lack of measurable progress today.

The key – always keep today’s action plans and our future Ideal Situation in clear view at the same time, and continuously make the connection between the two.

Here’s the progession that clearly gives us that connection:

  1. Lifetime Goals – what are the things I want to do the rest of my life that I can never check off? This is why I’m alive and why I do business. I’m using my business to get me to my lifetime goals. If I don’t know my Lifetime Goals, I’ve got no clue why I’m in business. Get clarity on your Lifetime Goals – it is foundational to understanding how today matters.
  2. Ideal SituationFYI – Retirement is a bankrupt idea. Don’t retire, just get into an Ideal Situation for living out your Lifetime Goals – it’s a lot more fun, meaningful, and purposeful. And you don’t have to wait until your 63. You can arrive at your Ideal Situation at 40 or much earlier if you’re intentional about it.

    Critical to escaping the Mosquito/Nudist Colony problem – WHEN do I want to be at that Ideal Situation? Pick an exact date and work toward it (he who aims at nothing…)

  3. Business Maturity Date – usually the same as your Ideal Situation. Pick it – work toward it.
  4. At maturity, what revenue does my business need to generate so I can buy my Ideal Situation in which I can best live out my Lifetime Goals?
  5. How much time and money do I need in my Ideal Situation? What kind of house, car, boat, plane will I need? Do I have a non-profit or am I working in one? Is travel important? What revenue does my business need to generate over the next 5 years to get me to my Ideal Situation? Over the next 3 years? Over the next year? Knowing this is a huge step toward knowing how today fits into the rest of my life.
  6. One-Page Business Strategy – what do I need to do the next 12 months to get closer to a mature business?
    1. Vision, Mission – the big picture for why I’m in business and what my mission is as a business person.
    2. Strategies – the ways in which I make money (building websites, developingISP software, etc.) THREE YEARS
    3. Objectives – The measurable waypoints for the next 12 months, next 3 months, next month – 12 MONTHS
    4. Action Plans – The actual actions I need to take each week/month/quarter to get to the one year waypoint, on my way to developing a mature business, that can support my Ideal Situation, so I can focus on my Lifetime Goals. It all comes together here.

If we know our Lifetime Goals, those goals we can never check off, and most importantly, WHEN we want to be in our Ideal Situation for living out those lifetime goals, we can then back into what we need to be doing tomorrow to get there. If you don’t know what the end game looks like, what in the world are you doing in business in the first place?

Continuously connecting your daily activity and your Lifetime Goals is the key to clarity and to knowing if each day is counting. Don’t be a mosquito in a nudist colony. Know what to do, where to begin, and what to do next. Connect your daily activity to your Lifetime Goals and watch the fireworks begin.

Make more money – stop selling and let people buy.

Serve, don’t sell.

The stereotypical used car guy focuses quickly on what he could say or do to make the sale. What emotional string can he pull? What weakness can he exploit? Do they hate confrontation? Are they easy to confuse? Do they have big egos? Do they fear losing out on the car to somebody else? Most importantly, how are they perceiving me, the salesperson?

Problem – We all want to buy things, but nobody really wants to be sold anything. I might actually enjoy buying furniture if I didn’t have someone in my face as soon as I walk in trying to “answer my questions” (translated, figure out what they can start selling me).

Here’s a simple concept; serve, don’t sell. Don’t ever sell anybody anything. Ever. Just serve them where they are in what they need, even if their need has absolutely nothing to do with what you sell. If you were disciplined enough to stop selling your product or service and simply figure out how to serve the people you meet, your sales would increase exponentially.

Why? First, the old sales saw is true – people buy from people (not companies), and they buy the most from people they like the most. Do I get people to like me by being clever or reading body language? No, people like me because I do something that actually helps them move forward in whatever it is that is standing in their way.

Second, if we serve people in what THEY need, not in what advances our agenda, it builds trust, credibility, and motivation all at once. And the result is ironically indebtedness. You’ve helped me so much, if there is anything I can ever do for you… The used car salesman would die to get that kind of loyalty out of a customer. He just wouldn’t serve the customer to get there.

You’ll read this, but it’s not likely you’ll actually apply it. We all “believe” it, but because the benefit is many times delayed (no quick sale), we have trouble actually doing it. You may make a few less quick sales, but you’ll make a lot more long term ones.

Oh, and be prepared for this. “My friend said you took care of him in a way that didn’t even relate to your business. That’s why I’m here to buy from you.”

I dare you to not even bring up your business. Just serve them where they are, not where you want them to be. You’ll make more money in less time.