9 posts from June 2009

Pricing: Early Stage New Product

Last week an entrepreneur discussed pricing a new product to be sold initially on the Internet. We talked about product costs and his guess what he thought the retail price should be. My comment after listening was his estimate or retail was far below numbers that would support a 45% Gross Margin.

He was surprised by the answer, so decided to share my thoughts here. Take landed component costs and multiply by 6. This gives realistic expected retail during earliest stage development sessions.

Fifty percent 50% is the retailer margin, the balance manufacturer costs, overhead and available for spending and profit. Specifically, product cost is 33% of revenue, SG&A 67%. Further ball park figures I use are sales costs 12% net revenue, G&A 40% and Available for Profit 15%. Clearly the multiple can be changed to reflect competitive realities or a higher internal rate of return on cash that is in the detailed example.

The second recommendation is to price anticipating retail distribution down the road. Various Internet promotions such as free shipping and other option features could be bundled into the initial offering prices to lower the effective price during the test launch period. It is far easier to reduce prices once in the market than increase them.


Compass

Compasses are critical navigation tools and powerful metaphors. We use them at MacDuff to remind us to work hard at getting our life values straight, prioritized and reflected in our personal as well as business decisions.

We identity a person's single most important value as "true north". During our life and business journeys we can fully explore possibilities, take risks, wander and always find our way home. The benefit of true north thinking is it keeps things simple, direct and focused on what is important.

My true north is ethics-based behavior. (Sometimes my compass points to magnetic north and I go off course just in case there's a question.) From a business standpoint, for me, ethics driven decisions keep decisions less cluttered with extraneous nonsense, simplify clear communication in high stress environments and help create self-directed teams whose members respect each other. In other words, this sets a leadership tone that builds and reinforces camaraderie, builds a strong company and a strong brand.

Ironically, this behavior based "north" plays a role in strategic planning, or more specifically in the flaws inherent in strategic planning. In a very thoughtful article written in 2003 by Charles Roxburgh for McKinsey Quartlerly http://tinyurl.com/npvgov Roxburgh looks at why so many terrific executives and owners implement non-workable strategies. The answer is the wiring of the human brain:

  • Overconfidence - intuitively obvious what this is
  • Mental accounting - we value the sources of money differently (ours, theirs, government's banks') thus discount or put a premium value on risks
  • Status Quo bias - doing what we are doing because it is comfortable
  • Anchoring - the tendency to judge future outcomes based on most resent results
  • Sunk cost thinking - the belief that if we keep doing what we have been doing unsuccessfully longer we will eventually get the results we want.

Down the road I will talk about ways to defeat these biases. In the meantime, read the reference article. If your time permits, please share how you define your true north.

Thinking Like a Dandelion: Change and Innovation

Now is a time of change. President Obama has said so and it evident in everyday news.

It is also a seminal time when the recent historic momentum was toward big companies and big governments is cresting and the impetus to devolution is emerging. The question is two fold: 1) Is this observation true and 2) What does this have to do with realizing sustainable wealth from a family business as its cornerstone?

I think so and the fact that Washington is still amassing power and centralizing the apogee of this era. But as of September 2008 the era of huge corporations with power to enjoy economic autonomy from national governments began falling apart. GM, Chrysler, Citi and other institutions began breaking apart in order to survive We are discovering the diseconomies of scale and the evolution of greater opportunities for innovative, fast moving smaller companies.

That's where the Dandelion effect comes in.  In a highly provocative article in WIRED, "Waste is Good", Chris Anderson talked about the power of waste:" When scarce resources become abundant, smart people treat them differently, exploiting them rather than conserving them. It feels wrong, but done right it can change the world".

In our blog "Innovation Basics for Presidents" we talked about quantity leads to quality (of new ideas) and looking to nature as a catalyst to innovation. The dandelion effect - named by writer Cory Doctrow - reprises the basic notion that nature is wasteful in search of better life. It is wasteful because scattershot strategies are the best way to explore uncharted territory. The dandelion tries to fill every crack in every rock with dandelions and does not try to get a perfect copy of itself. That way it finds the best growth environment. So too with business ideas.

For business owners the time is now to instill a culture of innovation and pursue new opportunities during these watershed years. Just as cost control is a key discipline or supply chain management, so is innovation in terms of wealth creation.

Returning to centralization of power in Washington, in a  compelling essay by Paul Starobin in WSJ "Divided We Stand" http://online.wsj.com/article /SB10001424052970204482304574219813708759806.html forcefully argues that the devolution of USA is an incipient trend: "Devolved America is a vision faithful both to certain postindustrial realities as well as to the pluralistic heart of the American political tradition...a tradition betrayed by  creeping centralization of power in Washington...".

He asks us to "...Picture an America that is run not, as now, by a top-heavy Washington autocracy, but in freewheeling style, by an asemblage of largely autonomous regional replublcs reflecting the eclectic economic and cultural character of the society."

I believe these are mega trends business owners need to think about. I think we need to be prepared to ride the wave of change by fostering innovative, highly adaptable customer focused companies. This is the platform to create and sustain wealth during the 21st Century.

Building Wealth within New Social Policy Regulations – 2009 to 2012

Too small to be saved is in a perverse way is a building block for future personal wealth. To achieve prosperity, now more than ever and in the New Jersey more than other places, taxes and political considerations are more significant in the business decision mix than it has been since the 1950’s.

We do not know specifically where Congress is going, but it is generally moving into more regulations and penalties for company owners that violate these regs.. An essential exercise for all business owners is to pay more in depth attention than ever before to political developments.


On the other hand, government is creating new markets through massive spending increases. Taking advantage of opportunities opened by current (June 2009) political decisions is imperative. Owners must be sensitive to political – market risks of emerging regulation and oversight. These factors significantly rebalance weighing competitive market variables versus political ones in decision making.

From an operations standpoint, product and innovation remain key to customer satisfaction and top line revenue growth as before. However, legal tax - minimization efforts weigh more heavily in the decision process that a year ago in terms of long term wealth creation. We will explain later.

Pricing is always both a strategic and practical issue, of course. We ask clients not to change price structures that reflect their brand value proposition. Rather, we recommend adjusting to near term economic turmoil by structuring trade, distribution channel and end user pricing with short term promotions. Longer term value perception will be based on how company sets its product line valuations now. Seek and get professional counsel on these strategies.

We also characterize all customers in categories such as triers, loyal buyers and heavy users. As budgets allow, we recommend rotating promotional activity through each customer cohort or category based on an understanding of the business cycle. What this means is grasping customer behavior and develop programs specific to their needs.

In terms of debt, my bias is to use short term working capital loans to help liquidity and long term debt only for well positioned asset purchases that have demonstrable payout. Revenue volatility and inflation will be issues forefront on our radars; negative leverage can be catastrophic.

Back to the wealth creation strategy –we suggest investment spending in relationship building, even in terms of lost revenue now which means both trade and end user brand equity. Spend to achieve deep employee relationships and strong teams. Taxes on profits do not increase brand value.  Investment spending on brand, inside and out, does. In future years capitalism will return, as will a premium value on strongly branded companies based on a committed team, strong trade and end user brand.


Customers

When asked, most business owners I have talked to define customers by geography, household size, SIC code, or simple demographics like age and income or heritage.

Those metrics are important but miss the point about understanding customers’ behaviors. Those data further miss the critical top of mind awareness that businesses relate to families of customers. Namely, there are distributors – regardless the industry – influencers and end users. Whether a service distributed entirely over the Internet or toys sold primarily through big box retailers, the triad of customers exist.

My view is all businesses start and end with satisfied customers. So to know what satisfaction means, owners need to know, really know who their customers are what aspects of the service or product is valuable. Said another way, all strategic plans and business efforts begin and end with the customer.

To develop a powerful brand, I believe the brand message needs to be integrated across the entire customer base. If this view is accepted, management will proactively lead the entire company team to deliver the relevant experience. Interestingly, once grasped, this concept frames strategic planning and annual budgeting, topics which will be addressed in the future.

By way of simple example, a toy company must sell kids on how cool and fun it is to have and play with friends. The same messages must be delivered to parents with added compelling support that the play value inherently reinforces appropriate family values. In turn, Sales uses those concepts to convince retailers that the toy line will increase profitability, increase the market, enjoy high sell through and extend the experience to being a company easy to deal with after the selling season.

When I discuss behavior, for small businesses I mean is qualitative terms, not more esoteric psychodynamics large ones study. For example, when had a physician or accountant or lawyer asked you at the end of an appointment about the best / worst aspects of dealing with the practice was? How often do restaurant owners ask you how they could make the experience better rather than how was the food? When was the last time you called your customers – think entire channel – and asked why they buy from you or how you are doing, the good, the bad the ugly?

These impressions need sharing with the entire company team from finance through administration and of course sales and marketing. Then any action to correct course is clearly identified. In this way the concept of brand is brought to life, taken off a written text and created into a physical experience both for customers and employees.

Innovation Basics for Presidents

Most entrepreneurs seem to build businesses based on sheer determination not to fail doing something they love doing or pure need to survive. Business owners become tenacious experts in closed end problem solving which are those problems that lend themselves to empirical solutions, such as maximizing machine production throughput or lowering cost of service.

There is a whole class of problems that I know as open ended ones. Those find solutions through creative thinking, or brainstorming. But how can we effectively brainstorm if all we know is closed end problem solving processes?

Simply, we retrain our brains and behaviors in those situations to work differently. A number of years ago I was put in charge of new product development at a major consumer products company. Quickly I realized, despite a number of graduate business degrees and an Ivy League undergraduate education, I had no idea how to think creatively.

A now long out of print book “Lateral Thinking” by Edward de Bono introduced me to the discipline of lateral thinking as a catalyst to innovation which is the engine for sustainable wealth creation.

Here is a snapshot of a process I have lead teams successfully to create now familiar industries and over eight hundred products:

    1.  Definition: Work hard at understanding the problem, not the symptom.
    2.  New: New doesn’t mean never before existing. New is original as applied to the present problem. Seek metaphors from daily life.
    3.  Fun: We were all creative as kids because life was new. As adults we "know what works". Become a kid again.
    4.  Break the rules: Nothing is sacred, not rituals, taboos or social conventions.
    5.  Ask: If I could do anything, what would I do? Remove all practical constraints.
    6.  Quantity: Quantity leads to quality of ideas. Some researchers say the first twenty five thoughts are top of mind commonplace ones and that we actually begin innovating when we reach ninety or so alternative solutions.
    7. Nature: Look to how life evolved and at natural solutions to use as similes.
    8. Size: Oversize or micro size the issue. See its texture in detail, reduce it to microscopic size. If small enough the problem may solve itself.
    9.  Optimize: After identifying one hundred variations of solutions, begin the vertical thinking process of choosing feasible options ad narrow those to the one or two that will be tested or introduced. This is appropriate application of closed ended problem solving.            

A good read on innovation is “The Seeds of innovation” by Elaine Dundon. I also found inspiration in the book “How the Universe Got Its Spots” by Janna Levin.

 

Idea Mapping: A Tool for Managing Highly Profitable Businesses

In working on complex projects several clients introduced me to the concept of idea mapping as a means of collaborating on and presenting the inter-relationship of ideas. Most company owners and entrepreneurs learn and gain understanding visually rather than by listening, so we found this is a preferred way to examine and vet decision options. Net, idea mapping is a preferred way to collaborate, clarify and agree on and achieve greater effective productivity.Simply, these maps visually connect thoughts.

The software I use to present complex projects is MindJet®http://www.mindjet.com/. If you look at some of the engagement samples shown on the MacDuff site you will get a sense of our approach from developing and launching new businesses, to annual budgeting processes and executing sales campaigns.

The engagements are shown in PDF versions. View the map from 1 pm clockwise to see the sequence of events as they occur, with branches that indicate action and decision pathways. You may need to expand the file to see individual elements. One advantage of the software is that it allows users to imbed comments as well as source files (not available on the PDF versions). Net, project organization is dramatically improved over linear methods.

If you are curious about this concept, I suggest you read “Idea Mapping” by Jamie Nast.

What is a brand? What does it have to do with wealth creation?

If you talk to one hundred marketing executives you’ll get one hundred and ten definitions of brand. Those definitions range from logos and graphic design to page long definitions about consumer insight and essence.

To me a brand is the bundle of benefits, both emotional and physical, that customers buy from a company every day, profitably.  In the section “resources” you will find some approaches to how this process is created and managed.

At the end of the day, it is the sum of the experience every customer has with a company or even an individual entertainment personality. So company leaders either work hard at defining how they want to be perceived by customers, vendors and employees or they will define their experiences. All together, it is those impressions that form product’s or company’s brand. The pillar of this belief is my consistent experience that 90% of purchasing is emotional, 10% rational, even for hardened engineers.

 At one end of the brand spectrum company automated answering systems describe how a call is important to them, provide ten key options, keep the caller on hold forever and then have a semi – fluent person try to address issues. Net, net, my opinion is those specific companies do not get branding because they are not customer focused.

On the other hand, I visited a company one of my friends led. After checking into the building, one of the administrators was taking me to Jack’s office and said; “I love my job. This is the best company in the world to work for.”  Wow.  They go it and lived it. The company was all about good health, good health for consumers, good health for employees, good financial health.

From my perspective, a company owner’s wealth is derived from establishing a strong brand. If nurtured over time that strength translates to sustainable profitability through economic cycles. It also enables that experience to be translated into the financial community or to executives in companies that are potential buyers of the business when the time comes to transition away from the business.

Thus, strongly branded companies are the platform for sustainable wealth creation.

MacDuff Partners: Reason for Being

MacDuff Partners was created to help entrepreneurs and small business owners build highly branded, highly profitable companies that are ultimately more salable. Whether or not those companies are sold to a third party or not, we guide clients to use their businesses as platforms for sustainable wealth.

MacDuff itself is a result of our family’s inability to make the transition from a highly successful and profitable company into durable wealth.  We decided to share our stories with clients in a way that helps bring to life innovation to improve the odds of our clients’ ultimate success.

So what is wealth? To me it is freedom and independence. To our clients it is whatever they think it is.

We dig deeply into basic beliefs, behaviors, rituals or taboos that either accelerate or inhibit performance. We help to develop leadership behaviors that perpetuate high performance and adapt to changes in market and competitive actions. Finally, we bring a stable of proven business practices, developed at Fortune level companies but smartened up to be practical and affordable to small and mid – market ones.

The last point is we believe in healthy conflict. It is a source of creative tension that enables true leadership, real innovation and commitment to goals.

We hope others join this discussion, in agreement or not with our positions, so we  share stories of our journeys, learn anew and do something every day that moves us to our business and life goals.