The most frequent question I am asked is how does a business determine a price for its product(s) that is fair to the customer, makes a profit and allows for future expansion. The first question I ask is, "What is fair in a free market society?" I know that may sound like I am avoiding their question, but it really is the beginning of how we will determine the pricing for their product.The typical response to the question is a price that can be afforded by as many people as possible and allows the company to remain competitive. That makes sense, but how do you determine what that price  is?

A customer in need of a pair of shoes can go to Payless and pay $59 or they can go to Bob Ellis and pay $599. Which would you consider the more reasonable price? Initially you would assume the lower price shoes have the greatest appeal, but what if I told you the $599 shoes were 50% off of their normal price, does that change your perspective?

The point I am trying to make is you can’t be everything to every buyer; having a pricing structure that reaches a broad spectrum of buyers works well in a business with high salesvolume, but may drive a small company out of business.  WalMart’s average profit margin is 3%, but when you put that in the context of $256 billion dollars in sales, you can see how having a broad based, low price structure can work.

For a smaller company, you must determine who your target market is and get to know all there is to know about them.  What are their spending habits? Where do they live?  How much are they paying for similar products now? This is the first stage in determining a "fair" price for your customer.

Profitability

We all know that a profit is a achieved when the revenue received for a product exceeds the cost of delivering the product, but what is its affect on pricing? For as long as I can remember, businesses have been running on the model of buy for $1 and sell for $2, but does that take into consideration all of the anxillary costs associated with the finished product reaching the consumer?

Strict process analysis is the key to increasing a business’s profitability. Identifying all of the segments that are involved with obtaining the finished product and their associated costs, give the business principle a clear idea of the true costs of goods sold and thereby the percentage of increase necessary over said costs to obtain the desired profit. 

Future Expansion

With a well defined target market and a clear costs of goods sold, a business now has to turn its attention to the amount of growth it plans to achieve in the coming months and years. I know you are wondering how this has anything to do with determining a price for a product, but I would ask you to consider the relationship of profitability and expansion.

When a business achieves it’s financial goals, expansion is fueled by greater retained earnings, increased sales revenue and savings from enhanced purchasing power. Each of these factors should be considered when determining the initial price of products and projected pricing over the expansion period.

Simplified Version

1. Know your customer (What are they willing to pay)
2. Analyze all processes (All cost related to delivering your product)
3. Determine profitability (Percentage over break-even)
4. Plan for expansion (Additional percentage over profit)

Using this model may change the traditional pricing scheme from buy for $1 and sell for $2; to buy for $1 and sell for $4, but it will increase the likelihood of long-term success or quickly show your product’s inability to reach your company’s goals.

Business Development | No Comments »

As I tour the Internet, I have read many blogs regarding subjects ranging from real estate to how to make money with blogs and it has led me to this question -

Why do people put up blogs?

Most of the information I find fall into one of three categories:

No One Else Will Listen to Me 

These blogs are started by people who seem to have a small voice in life so they turn to a venue where they can ramble on and on without having to substantiate a single point. Their blog allows them unfettered access to hundreds if not thousands of readers that may or may not agree with or even understand their point and if someone posts a comment to the contrary of their views it is quickly dismissed. 

I’m Smarter Than You

I have the most fun with these type of blogs, even though the never respond to my comments. This type of blog is filled with people who get a thrill out of sounding smart. They use hyperbole and rhetoric to create the illusion of substance and throw in a few $0.25 words to prove their point. The unfortunate part is these blogs hardly ever contribute anything useful; they can populate their sites with data from the world wide web, NYSE,  or other blogs, but fail to give the reader any motivation to ask questions or return to their website.

Informative and/or Fun!!

In my opinion these are the majority of blogs on the web. They cover subjects from symptoms of Diabetes to what we had for dinner last night. Readers are able to read funny stories of first dates and share similar experiences or post warnings for Internet scams and viruses. Where the difference occurs between this type and the others is the thought processes of the author. Many times this type of blog is frequented by many people and can be found in the big referral sites like Reddit.com and del.icio.us.com. It really doesn’t matter what the subject matter is, just as long as the reader is getting what they need from it.

So when you find yourself trying to decide whether to set up a blog or not, ask yourself which type of blogger you are, then ask someone else to read one of your posts, compare it to this blog, and see what they think (if your not scared).

And if you stumble across a blog you find interesting, fun, or informative, please leave a comment, it lets the authors know they are on the right track!   

Thought of the Day | 2 Comments »

In the United States, more than 90% of all start up businesses fail within the first two years. One of the largest reasons for this is undercapitalization. When developing a business plan, most owners include three to five year projections, unfortunately, few times do the actual business occurences match the amount of funds allocated. Unforseen circumstances have a way of intruding on the best laid plans and if a financial boost is not procured, can cause the demise of your business. Undercapitalization can be the result of not planning for failures or successes; I have met just as many people who had to close their business because they could not keep up with demand for their product, as those who failed due to improper marketing.

Recently I was made aware of a website where individuals can seek financial help from peers for reasons ranging from debt reduction to expansion of your business. Prosper.com is one of the most creative and easy to use finance concepts I have ever seen. The process is very simple, you join Prosper,  place a listing for the amount of money you need ($1,000 - $25,000), the amount of interest you are willing to pay (up to 29%) and ordinary individuals bid to loan you funds. During the process, you are assigned a letter designation for your credit score ( no one sees your actual score) and a percentage for your Debt to Income (DTI)  ratio. This allows potential lenders to view your listing and assess the amount of risk they are willing to take and the reward (interest) that is being offered by the borrower.

What makes Prosper so unique is the fact there are thousands of lenders and no matter how challenged your credit is or how high your DTI may be, you stand a better than average chance of being funded. Thus giving a small business owner the opportunity to expand services, increase inventory to meet demand, refocus marketing efforts to attract business or even hire a business consultant to improve overall business health (hint, hint). Since finding out about Prosper, I have done business with them and recommended two others who have begun the process. If you are interested in learning more, click the link below and feel free to ask me questions about my experience. 

Finance and Investing | No Comments »

I doubt there is a single entrepreneur that has not watched one of the real estate shows showing people like you and me purchasing properties, renovating them and selling them for huge profits. Unfortunately, more of that is true on TV than in real life. I have run into countless people who get into the "flipping" game and now own property they can’t get rid of and the main reason is a lack of experience and sound advice. If they had received proper advice, they would know they are far more factors concerned in choosing a property than just comparables.

Next you want to align yourself with a General Contractor (GC). I know many of you can do much of the work yourself, but unless you are a builder or contractor, you invariably will run into somethng outside of your expertise and without prior GC skills you can be taken by a subcontractor who knows you are green. Once again this is an area your agent can help you with because they often do business with builders and contractors. The GC can also assemble the other people needed for the completion of your project in a timely, on budget, manner. Make sure your GC is a registered builder or contractor that is insured and bonded and in good standing with the local Chamber of Commerce and Better Business Bureau. Don’t be afraid to ask for references and tour properties they have completed in the past.

Finally, partner with a good financing source. Establishing a relationship with a bank or mortgage company can serve many purposes. They can not only take care of your financing needs, but those of a potential buyer; before you accept a contract, make sure they are prequalified through your lender, if they do not already have an approval letter. The mortgage company and the bank often have programs where they help prospective buyers learn about puchasing their first home, which can be a home you are renovating. Also, as you become successful, your relationship with your lender can lead to lines of credit and much more favorable interest rates.

I am a real estate investor and I can honestly say there is no better investment for me. However, I am very diligent in my analysis of properties and have assembled a team consisting of an extremely sharp realtor, a builder and an awesome finance source. You may have to look at fifty properties before you find the right one, but it is worth every minute of time and aggrevation when you are handed a check at closing instead of mailing a check to the mortgage company.

Word to the Wise | No Comments »

There have been many discussions on the pros and cons of outsourcing and there are as many for, as against. As a business consultant I understand how the need to reduce costs and increase revenue can be a factor in the decision to subcontract services to a vendor with lower fees, but do you have to be a large company to gain those benefits?

One of my clients was in the inital stages of opening a business. He had a product that was unique, affordable and in demand, but did not have a budget to produce marketing collateral and establish a new business. With a budget of less than $1,000 we were able to have a website built, incorporate the business, design a logo, print business cards, flyers, and  CDs. How was this possible? By using contractors found on the Internet, the business owner was able to work with small business people like himself from all around the world. The contractors were looking for an opportunity to build their client base and he was looking for a inexpensive way to let the world know he was opening for business. As a result of these relationships,  my client offers their services to his customers and now a document services company can offer print services, web design, logo building and business card printing.

Market Trends | 2 Comments »

While Baby Boomers still represent the largest portion of our spending demographic, the next generation of consumers are finishing college technology savvy and ready to claim the spoils of their years of sacrifice obtaining an education. These consumers are far more likely to make a purchase online than visit a specialty boutique and use online banking than establish a relationship with their neighborhood bank. 

No one can deny how technology and the Internet have affected the next generation or evolution of business worldwide. "Mom and Pop" stores now have the capablility of being international suppliers of goods and services; while larger companies can market to publics and demographics far beyond the traditional limitations of market expansion.  

Are you using technology to its fullest in your business?

As pressure from overseas suppliers increase, technology is a great solution to increasing productivity and quality while keeping your company competitive. Technology has provided software solutions that allow even the smallest companies the ability to analyze work flow, develop effective processes, manage back office functions and screen potential employees for compatibility. 

For companies already employing these functions, technology can be used to upgrade the company  website using streaming video for tutorials and product introductions,increasing customer satisfaction and profitability through enhanced inventory management systems, package tracking and customer support.

Where to begin?

My initial approach to upgrading your business with the latest technologies would begin by:

• Review your Profit and Loss statement to identify the areas your business is spending the greatest amount of money.

• List every process from order taking to inventory replenishment. The key here is to identify who does what, when and how you can make that process more efficient.
• Develop action plans and strategies to implement solutions to the deficiencies indentified in the preceeding analysis.
• Consult with a software specialist or business consultant to begin researching software solutions that will incorporate your company’s philosophies and goals, as well as raise productivity and profitability.

I’m sure you are wondering why I did not suggest using technology to accomplish the preceeding goals. By gathering and analyzing the information manually, you greatly reduce the chances of buying more software than you need and increase the likelihood of the return on investment being substantial and demonstrable.  

Thought of the Day, Technology | No Comments »