Pricing is such an important element of sales. How much? It can make or a break a deal. It is used from branding (i.e. “prestige pricing”) to selling of soon-to-be discontinued product lines.
So how do you price your product/service? There’s cost pricing which just covers your costs and expenses and maybe leaves a little margin. Then there’s prestige pricing which sets the price very high so the customer can feel special for paying so much. There are many other strategies too.
For example if you want to sell a $25,000 car you sell it next to a $40,000 car. Suddenly $25k doesn’t seem as expensive. This is an example of Anchoring. Anchoring is the human tendency to rely too heavily on the first piece of information (i.e. the “anchor”) offered when making decision.
This great article from Blue Perks discussed the many more pricing strategies you should and shouldn’t use.
Sales is a lot about psychology. In the book The Art of the Sale, former foreign correspondent for London’s The Daily Telegraph and Harvard MBA Philip Delves Broughton discusses how a merchant in Tangier, Morocco has sold to the likes of Yves Saint Laurent.
Abdel Majid Rais El Fenni is a salesman of fine objects and furnishings deep in the heart of the Medina (old town) of Tangiers. His customers range from the suspicious and clumsy cruise passengers who sweep through the city on the lookout for the quick and the cheap, to interior designers and antique dealers from around the world looking for treasures for their clients, to the rich and famous themselves — Elizabeth Taylor was a customer — who trek to Majid’s store to shop.
One of the many reasons of his success is his ability to read the customer. He understands that sales opportunities develop quickly and that sales strategies must be readily tailored to meet the needs of his customers, and that he must quickly uncover his customers’ true desires. Not all customers just want a bargain. Some want a piece with a fascinating history. Some want to show off in front of their friend how good they are at finding the “best.”
This falls in line with what my international marketing professor always said, marketing isn’t about fact, it’s about perception.
Sales is an intricate art that takes a lifetime to master but is simply put, the most important aspect of business.
A couple weeks ago I sent my business partner in one of my projects a list of indirect competitors. He, a television producer without a business background, replied that they are not competitors. That made me realize that the many terms used in business are very confusing and their subtleties are unclear. So I put together a little glossary of some terms that are often misused/mistaken.
Direct competition vs. Indirect competition: Direct competition is pretty clear but what about indirect competition? For example Netflix’s direct competitor is Hulu. They’re both streaming video platforms. An indirect competitor can be the simple antenna TV or something that can be a technology that is still in R&D. Over the air TV broadcast isn’t necessarily a streaming on-demand platform but it is a substitute video entertainment/content delivery system. So a competitor can be something that is obvious or something that is not so conspicuous.
Industry vs. Market: Industry is what your company is in. It is your competitors, your supply chain, and related companies. They are essentially the parties that sell to the market. The market is your customers. They are the buyers of your product or service. When industry publications write “market size” they are talking about the amount of money that can be made from the customers.
Sector vs. Segment: Sector is a subsection of an industry. The “telecommunications industry” for example is made up of thousands of sectors; the router sector, the ground wire/cable sector, the GPS tech sector, etc. Industry term is only as broad as the scale of your analysis. If you are analyzing just the GPS sector, then you can say “GPS industry” and then breakdown the relevant sectors within that industry. Segment is a subsection of a market. A segment of the “millennial market” is tween girls, etc. (when a segment is referencing a group of people, then it can also be called demographic). A segment of the “restaurant market” is Mediterranean restaurants.
Revenue vs. Profit (income): Revenue is the money that is coming in before costs, expenses, taxes, depreciation, etc. are taken out. Once those pesky things are taken out you have profit. There is gross profit which is revenue – expenses, and and net profit which is revenue – expenses – taxes. Then there is retained earnings, which is another step!
There are many many more (branding, PR, etc.) so if you are unsure, please feel free to ask!
I was asked by a student for help on their franchise business plan assignment. One of the elements of the assignment was determining where on the product/service life cycle curve the franchise sits. It is always helpful in any Industry and Market Analysis to get a macro view of where the product/service is in its life cycle. What is the product/service life cycle? Glad you asked!
It is the birth, growth, progression and ultimate passing of any product/service. For example a CD came into the market around the early 90s. This is the birth/introduction stage. It gained popularity and was one of the most preferred method of data transfer until recently. So for the next 10 years it was in the growth and in the early 2010s entered the maturity phase. Now in the second half of the 2010s it is in the decline phase. Last week I purchased a new laptop and installed Microsoft Office via online. No more CDs.
Of course, not all products/services will die out. They may die out eventually, but will make one or two more resurgences. Take for example, baking soda (sodium bicarbonate). The earliest use of naturally forming sodium bicarbonate was used by ancient Egyptians as a component of the paints they used in hieroglyphics. Sodium bicarbonate was also used in the 1800s in commercial fishing to prevent freshly caught fish from spoiling. Baking soda continues its long life cycle in many many uses including cleaning, cooking, neutralization of acids and bases, not to mention the elementary school volcano science experiment, and more.
Maybe there’ll be a new use for CDs that will revive the CD but without major modification (which will essentially change the actual product and will actually create a new/different product) it will be unlikely. Wherever your product/service is in its life cycle, with enough investigation, a new spin could be created to find a niche demand (market segment).
A few months ago, a client was looking to expand their company by bringing in more partners. However, his partners were unwilling to give up equity. This is fine, however in order to grow while maintain one’s shareholding amount within the company, the shareholders needed to put more money into the company. Either by hiring more workers/consultants or purchasing more assets. They did not want to expand through labor or capital expenditures. So they had to bring in new equity partners that were willing to invest money or sweat equity into the company. But, as mentioned earlier, they didn’t want to give up equity. The founder ended up leaving the company and starting anew. Sad but a necessary step when working with partners that could not agree on how to move forward.
In reality, founders almost always have their equity positions reduced over time. Pretty much every founding CEO you can think of will have a lower % than what they started with. I will explain why.
Typically, when Company A is formed there are a specified number of shares. Let’s say 100 shares (in reality it’s more like 1 million or more, but for simplicity). Founder 1 has 40%, Founder 2 has 35% and Founder 3 has 25%. So that means Founder 1 has 40 shares, Founder 2 has 35, and Founder 3 has 25 shares (assuming all shares are out and none are held as treasury stock). The founders decide to grow the company by seeking $50,000 (for hiring a consultant). They can take a loan and keep their respective positions or bring in someone that can invest or do the $50,000 worth of work.
So in the hypothetical above for Company A, the board of directors (the three founders in this case) can decide to either 1) issue more shares say 9 more to the new shareholder or 2) give some of their own shares (to keep it at 100 shares). Either way Founder 1-3 will have a reduction in their equity positions.
In option 1 (109 outstanding shares): Founder 1 will have 36.69% (40/109), Founder 2 will have 32.11% (35/109), Founder 3 will have 22.93%, and New Guy will have 8.25% (9/109).
In option 2: Say each founder gives up 3 shares; Founders 1-3 will have 37% (37/100), 32%, 22% respectively, and New Guy will have 9%.
Let’s say the Founders do not want to give up any position. They would have to divvy up the $50,000 proportionally so that their respective positions aren’t diluted. However, in the hypothetical they do not have an extra $50k to invest into the company. If outside money is not brought in through a loan, then the only way they can maintain their positions while giving up equity is to have a combined ownership of anything less than 100%. This is because mathematically it is impossible to give more if there is nothing else to give. So, let’s adjust the hypothetical to say Founder 1 has 39%, Founder 2 has 34%, and Founder 3 has 24% (a 1% reduction for all) for a combined total of 97% and 1,000,000 shares. That means there are 30k shares available (without having to issue new stock) for New Guy to claim. If new shares are issued, then New Guy can be given any number of shares as long as Founders 1-3 have 97% of the total amount of shares.
As the company continues to grow it will have to issue new shares (unless it takes on debt, which companies frequently do both). At some point, the Founders will not be able to or unwilling to keep pumping money into the company to maintain their position. Hopefully, at this point they won’t have to because the dividends that they may receive will be enough to satisfy their return on investment (ROI) needs.
This is why founding members rarely have the same percentage as the company grows.
For those that like pictures, check out this great infographic from FundersandFounders.com
As the saying goes. Today I went with a client to an SBA lender meeting and some take-aways that I wanted to share from that meeting are:
Be willing to invest 15-20% of your own money into the business. This means, if you are asking for $10k, then prepared to get $8,000. No lender will feel comfortable investing in something that the founder doesn’t have “skin in the game.” That means, if the founder doesn’t have whatever of their own money have to put into their project, then it implies that the founder isn’t convinced in the business’s success.
Have good credit. This is mostly a gauge for lenders to determine how responsible the entrepreneur is. For start-ups, there is no track record to base a lending decision on. So the next closest track record is that of the founder. Those with bad credit should consider having a co-signer.
Have collateral. This is so that the creditors have something to get if things go south.
That said, sometimes, it does not take hundreds of thousands of dollars to launch. This great infographic made by Anna Vital at FundersandFounders.com shows the starting capital a few well-known companies started with.
Yesterday I was watching the documentary Supermensch: The Legend of Shep Gordon. Shep Gordon is an ubermanager that managed Alice Cooper, Blondie, Groucho Marx, helped create the celebrity chef with his management company ‘Alive Culinary Resources’ (subsidiary of Alive Enterprises), and many others.
It reminded me how much entrepreneurs need a strong team around them to make their vision a reality. In Shep’s case, his entrepreneurs were the musicians. They were talented people that were passionate about what they were creating but in order to continue to create it and eventually profit from it, they needed a manager.
A lot of times an entrepreneur just has a vision. An idea and little more than the passion to make it come to reality. However, there are lots of technical skills that have to be utilized to make an entrepreneur’s vision come to life.
Lots of my clients have the same issue. They have a great product but don’t have a team to make it happen. I advise them to find all the areas in which they don’t have the knowledge/skills to make to launch their business. Then hire the necessary person or hire/outsource that task.
If you don’t have the funds to hire someone, then you will likely have to offer equity within the company. This is MUCH easier said than done. Most people cannot afford to go without a steady paycheck for long periods of time in the hopes of future revenues. That is why you gotta go through lots and lots and LOTS of candidates to find the right match; in skill sets, temperament, and even personalities (if you bring on the wrong person you will suffer, like one of my clients). You have to sell yourself and your business to this individual. You have to convince him/her to take this chance on your business. Being persistent and persuasive is once of the most important skills an entrepreneur can possess. You’ll need persistence and persuasiveness when finding partners, getting financing, negotiating rental terms, the list goes on and on. In business school, I took a negotiating course and one of the themes was “You don’t get what you deserve. You get what you negotiate.” How right it can be.
No one said starting a business will be easy. It is not for the timid. Nonetheless, for those that make it, the rewards are tremendous.