Transforming Your Business Through Value Pricing

Transforming Your Business Through Value Pricing

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It is easy to ruin your start-up, no special skill is required.  All you need to do is to make these mistakes highlighted in bold below. Alternatively, you could take a planned approach which will increase the likelihood of success.

1.     Giving ๐Ÿต๐Ÿฌ ๐—ฑ๐—ฎ๐˜†๐˜€ ๐—ฐ๐—ฟ๐—ฒ๐—ฑ๐—ถ๐˜ to your customers with the hope that they will buy more of your product.

Too often new businesses believe that they need to be generous to their customers to persuade them to buy their product not only for the first time but repeatedly. They can believe that by giving more credit to the customer, then they will be persuaded to buy more of the product and at higher levels.

Alternatively: However, it is important to understand that the customer will only buy your product if it will be to the customerโ€™s benefit. They don’t buy your product as a favour to you or because they feel sorry for you. The purchase decision is a hard-headed commercial decision, and you should treat the relationship with them in the same way as a hard headed business decision.

To quote Adam Smith in his book, The Wealth of Nations: It is not from the benevolence (kindness) of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” So, look to your own self-interest when giving credit.

2.    ๐—จ๐—ป๐—ฑ๐—ฒ๐—ฟ๐—ฝ๐—ฟ๐—ถ๐—ฐ๐—ถ๐—ป๐—ด your product and reducing your gross margin with the hope that your customers will buy more of your product.

It can be easy to persuade yourself that โ€œI can’t chargeโ€ whatever is the market price, or the value added price. If you convinced yourself that your customer will only buy your product if it is cheaper, it will be a hard road ahead. A consequence will be that your gross margin will be reduced, and you will need to sell more product before you reach break-even turnover. Consequently, it will take longer to reach break-even with additional amounts of money needed to finance the delay in reaching profitability. If you don’t have the extra money to finance this delay, then you will go broke before you reached breakeven.

 Alternatively: New businesses can’t survive from a lack of confidence about the pricing of their product. You must make it the obvious decision for your customer to buy your product rather than somebody elseโ€™s. Explore the various pricing options and look at the possibility of value pricing. What is the operational, commercial and financial benefit to your customer of using your product? Price accordingly.

3.    Not having ๐—น๐—ฒ๐—ฎ๐—ฑ ๐—ฐ๐˜‚๐˜€๐˜๐—ผ๐—บ๐—ฒ๐—ฟ๐˜€ so no sales until you find them.

Traditionally new businesses often only start looking for customers after they have developed their new product. This can be an advantage since the product is fully tested before seeking customers.  All the niggles will have been ironed out during the development process leading to customer queries being confidently answered. Thereby providing confidence in the new product to early adopting customers. However, a problem with this process is that it will need a longer in development time with their being an associated finance cost arising from the extended development process. Do you have enough capital to finance this process?

Alternatively: If potential customers are identified and engaged during the development phase of the new product. Then the new product will be market tested together with identifying a set of early adopting customers who are ready to buy when the product is launched.  The process will provide an improved understanding of the number of orders likely in the first 3 to 12 months after launch which will help with production planning. The lessons learned from the launch customers will contribute an improved product and to the sales and marketing process which will improve the rate of take up of the product by new customers.

4.     ๐—ง๐—ฟ๐—ฎ๐—ฑ๐—ถ๐—ป๐—ด ๐—ฎ๐˜ ๐—ฎ ๐—น๐—ผ๐˜€๐˜€ with low sales and high overheads.

Trading losses all common in the first few years of a new business since there are significant  costs in product development and scaling up the business overheads to meet the volumes necessary to trade at a level to make a profit. The risk is that this period of loss making goes on too long, consumes all the investment available and the company runs out of money.

Alternatively: It is important to ensure that the start-up overheads are kept as lean as possible. Thew the scaling of the first 12 months overheads needs to be sufficient to keep the company on track but keeping as much of the precious start-up capital available for unforeseen additional costs. This is a juggling act but necessary to successfully navigate the start-up phase of the business.

5.      Being ๐˜‚๐—ป๐—ฑ๐—ฒ๐—ฟ ๐—ฐ๐—ฎ๐—ฝ๐—ถ๐˜๐—ฎ๐—น๐—ถ๐˜€๐—ฒ๐—ฑ means that the business cannot survive any unforeseen financial shocks during the start-up phase of the business.

Many new businesses are set up on a shoestring. There is not enough money able to be raised from amongst friends and family. Angel investors give the business a miss but say that they will look at it when it is post revenue. There is a very strong belief that the new product is transformatory and confidence amongst the team that they will make it work. So, they set off with a wing and a prayer and risk running out of money since there is not enough of a capital cushion take account of foreseeable eventualities.

Alternatively: They calculate how much they need on both an optimistic and a pessimistic set of assumptions. Then they find away to raise the amount needed under the pessimistic model which will give them the best chance to be successful despite the unforeseen costs which will arise and need to be paid before arriving at profitability and cash positivity.

6.       ๐—”๐—ฏ๐˜€๐—ฒ๐—ป๐—ฐ๐—ฒ ๐—ผ๐—ณ ๐—ฎ ๐—ณ๐—ถ๐—ป๐—ฎ๐—ป๐—ฐ๐—ถ๐—ฎ๐—น ๐—บ๐—ผ๐—ฑ๐—ฒ๐—น for the business so that the business is being flown blind into the unknown.

Many businesses do not prepare a simple business model. They use a finger in the air approach to pricing of their product and an iterative approach to financial planning. This leads to a misallocation of the limited financial resources available.

Alternatively: It is to prepare a simple model to understand the financial implications of differing levels of turnover. This should not only include the trading account incorporation differing levels of sales and their associated costs of sales as well as the cashflow implications of these differing activity levels. This will ensure that changes in costs at differing turnover levels are clearly understood as well as the working capital implications. Following this is understanding the consequences of differing levels of overheads depending on the level of business that is expected.

7.        ๐—”๐—ฏ๐˜€๐—ฒ๐—ป๐—ฐ๐—ฒ ๐—ผ๐—ณ ๐—ฎ ๐—ฏ๐˜‚๐˜€๐—ถ๐—ป๐—ฒ๐˜€๐˜€ ๐—ฝ๐—น๐—ฎ๐—ป, so flying without a destination.

It is not uncommon for businesses to start without a coherent plan and undertake a โ€œhit and hope strategyโ€. They just get going find some clients and start selling their product in the hope that they will find customers who will buy the product. Sometime this works but often it does not.

Alternatively: A business plan is necessary if you intend to raise money from beyond the circle of friends and family. This process will force you to explain clearly to a third party what product you plan to sell, to whom you plan to sell it and how you will go about finding customers. There may need to be additional chapters on other critical matters depending on the nature of businesses you plan to create. An IT services based business may need a chapter on the technology rollout since you will need to convince you investors that the IT system will not only work but that the risks in its creation have been considered and systems are in place to ensure that it is safely delivered.

What is the biggest mistake you can make? Not taking the time or money to focus on planning the business financially from a profitability and cashflow perspective together with the critical  operational aspects of the business in significant detail.

Unfortunately, I see some business owners falling into the rather blinkered approach, highlighted in bold above instead of the preferable alternative approach.

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