Marketing - the 2nd of the 4P's

PRICE is the second P of the 4 P’s of marketing

This is one of the most important elements, as it is the only element that generates turnover. The other 3 P’s are costs – costs to produce, cost to distribute and costs to promote. Your price (or prices) must support all these other elements. It is difficult to get right, as it must reflect the supply and demand relationship. Pricing too high or too low can lead to a loss of sales. But – you can’t just price low to make sure you get every sale, if you can’t fulfil them properly. Pricing too low is a common mistake of the small business! I’ve lost count of the number of times I’ve told a business they need to put their process up.

Pricing needs to take account of:

Fixed and variable costs

Competition

Your objectives

Proposed strategies for positioning your products

Target customers and their willingness to pay

There are various pricing strategies that can be adopted:

Penetration pricing – low price to increase market share. Then increase the price later.

Skimming pricing – initial high price, the slowly lowers it to make the product more widely available.

Competition pricing – price matching or lower than competitors to gain market share.

Price by product line – different products have different price points. Similar products with different features enables a business to maximise turnover and profits

Bundle pricing – groups of products are priced at less than the sum of the individuals.

Psychological pricing – charging 99p instead of £1, for example.

Premium pricing – to show the exclusiveness of the product or service

Optional pricing – the business sells optional extras to maximise turnover and profits.

Cost based pricing – this is cost plus mark-up, which can work, especially where costs change often, but it’s a dangerous policy, as most businesses underestimate their costs.

The 3rd and 4th P's are Place and Promotion, and will be ehre soon. Then the extra 3P's of marketing services.

Marketing - the 4 P’s

Little understood by small businesses, mainly avoided if possible (that’s selling isn’t it? Ugh! I can’t sell..), but badly needed if you want to stay in business, and easier than you think!

Let’s start with your customers. There’s nothing like asking existing or potential customers what they want, then giving it to them. It’s a lot more certain than assuming you know better than your customers, who will tell you differently (and expensively). Customers want to be asked – they want to be involved, cared about, and listened to.

So a short introduction to some basic marketing ideas, starting with the 4 P’s. You may know all this, in which case, it’s short refresher, or maybe you can show it your colleagues, who may not know it. Everyone in a small business is involved in some way or other in marketing, so they all need to buy in to this.

What are the 4 P’s? A series of tools to help you achieve the marketing mix you want and achieve your objectives. It ALL starts with the market – customers. No customers = no business, so all your planning should start here.

Each P is a separate blog. The 4 P’s deal with products – for services you need another 3 P’s. Later! Although it should be apparent you need them all, as to some extent you are providing a service with the product.

Here’s the first P

PRODUCT

Who is the product aimed at?

What benefits will the customer expect?

How do you plan to position the product within the market?

What advantage will the product offer over its competitors?

Remember – marketing is about providing changing benefits to the changing needs of the customer – not just providing products or services.

Your decision about your product will include:

Design – will the design be the selling point, like the iPad?

Quality – this has to be consistent with other parts of the marketing mix. A premium price needs to have a premium product. But a cheap product needs a quality and cost that fits with the price.

Features – what will you add to increase the benefit to your market? Will you use a different pricing policy to match these additional features?

Branding – the value of a brand is huge, as they have the power of instant sales, and they convey a message of confidence and reliability.

“If things seem under control, you’re just not going fast enough” – Mario Andretti

Well, he was a racing driver. And it’s an interesting idea, when applied to success and failure. I recently attended a seminar on Valuing Failure, which is part of the RSA’s Failure initiative. This seeks to find what we can learn from failure – such an emotive word – and how we can use failure as a driver for success.

If we just play it safe, we will stay in our comfort zone, and succeed at what we know. Will that enable us, as business people (or just people) to survive long term? I suggest not, as change, being inevitable, will impact on our cosy existence. Competitors will nibble away at our market share, economic factors will change, and if we stay doing what we know, our businesses will gradually wither and die.

To stop that we have to do something new – something we don’t know, or don’t know enough. This invites failure, which, if managed properly, should involve learning, adapting and ultimately succeeding in this new way.

Notice I said, “if managed properly”, which seems often not to be true. So often insufficient time and resource is put into discovering what boundaries should be put into place, what information needs to be assembled, and what plans need to be made before activity is started. And then failure often happens because that new activity was not managed to allow failure but avoid catastrophe – something which I try and build into any client strategy that we facilitate. The idea is that we can push through the failure, by learning, adapting and building – to a new bigger success zone. Danish physicist Neils Bohr defined as expert as “ a person who has made all the mistakes that can be made in a very narrow field”, and that has an insight into managing new things – make them very narrowly defined, so they cannot impact on the main business.

We may need to push hard and persistently, and sometimes we have to realise that there is no way through – or at least, not in that direction. “If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it!” WC Fields, this time. But if you do quit, just quit at that particular activity, don’t stop trying to innovate altogether. Just change direction.

However you think about it, surely there’s a learning point here that regularly exploring the boundaries of where you are, testing them hard, pushing through where you can, expands the capability of a firm to survive and grow (and the people running those firms too). It should produce a habit of Explore – Fail – Innovate – Consolidate – Explore – Fail – Innovate - etc. This produces an entrepreneurial mindset, and I think serial entrepreneurs exhibit these characteristics strongly. Innovation and entrepreneurship are ways of thinking that can be learnt just like any other. This is one insight into how that is done.

Innovators expect failure – it is natural and inevitable at some point in everyone’s life anyway. Innovators view failure as opportunity, learning and information. It is unhelpful for us as individuals and business people to stigmatise failure and ourselves as failures, if that prevents us from growing our businesses and ourselves. We simply need better strategies so we avoid catastrophes but allow failure – and its associated benefits.

How to get rich? Quietly!

Cast your mind back to when you were 25, earnings £250 a week, then on to 35 earning £500 a week. Maybe when you got to 45 you were earning £500 a day. Maybe not. But whatever it was, how much did you have left?

Probably about the same as now – not much. Because your expenses grew with your income. You needed that new car, better house, more clothes, holidays,..every rise in earnings came with a price tag. So that’s why lots of people with high earnings have no money. They aren’t rich – they just have high earnings. Which means that they have to earn at the level to stay still – stuck on the hamster wheel forever.

Let’s look at a couple, both working and earning well. Joint income of, let’s say, £90,000. If they were living off investments – 3% return? That’s capital of £3 million – invested, excluding the value of their house, which produces nothing. Hardly a lavish lifestyle, but to put £3m together needs a bit of luck and a following wind.

How to get rich then? Thanks to Bill Bonner and the Daily Reckoning (www.morefrombill.com) – he has the concept of financial escape velocity. This describes what has to happen to build up serious money. You might get lucky – you may live just where a developer needs to build and you get a ransom price or you might get some other lucky break, but it’s unlikely.

Or you might use compound interest. Sorry – it’s not an easy or quick solution, but it does work. Make a small investment, add to it, and keep doing it. Whatever it earns you reinvest in it. Compounding does the rest, over time. Later you may notice that your wealth has increased more than you thought – more than your expenses. Compounding is the first little trick.

Here’s the second. Don’t tell your family! Not because you don’t want to share it because you don’t trust them. Don’t tell them because you do trust them – to spend it. Don’t let a rise in your earnings attract a rise in their spending.

Compounding works in business too. I’m a firm believer in companies paying corporation tax. Not too much though! For two reasons – one is that then there will be some after tax reserves left in the company for the bad times, which stops the company going out of business, and secondly (you guessed) because of the benefits of compounding. If you take all the company’s earnings out, the company is at risk, and it won’t grow so fast. Let it grow and one day, you will find you’ve got to the point where your earnings are growing faster than your spending. Just don’t tell anybody.

Don’t worry about me knowing – I will already know, because that’s what we do!

HMRC business record checks

On 17 December 2010 HMRC announced their intention to roll out a programme of Business Record Checks in the second half of 2011. At present they are consulting with professional organisations regarding the scope of their enquiries. This consultation will be completed and the results published by 31 March 2011.

If your business is selected HMRC staff will visit your premises and ask for access to all your business records. If they feel that there is a significant failure to keep proper records penalties may be charged and additional tax assessments raised.

HM Revenue & Customs are going to use existing legislation to check business records in up to 50,000 cases annually. Businesses targeted will have 250 employees or less and turnover below 50m Euros. (At present exchange rates just over £40m). Checks will begin in the second half of 2011 and HMRC will impose penalties for significant record keeping failures.

Once HMRC are aware that your record keeping is defective this will no doubt trigger visits from a number of their departments. You may get additional PAYE/NIC or VAT audit checks for instance.

Wwe’ve got a another free diagnostic tool on our website, just to check if your records are likely to be OK. It’s at www.hixsons.co.uk. It only takes a few minutes for a lot of peace of mind.

Clearly this is not an issue to ignore. Are your records in shape? Will they pass an inspection? Yet again we have a situation where smaller businesses are faced with additional pressures from the taxman. Unfortunately the threat of a visit is unlikely to go away. Be prepared!

… Different customers value things differently.

We all value things differently. We all have a different perception of the value of any product or service. So we all have a different maximum amount we are willing to pay for a particular product or service. It’s our personal judgement call – and it’s entirely subjective. “So what?” you might be thinking. Well, this seemingly tiny observation has a profound implication. You see, it means that whatever price you are currently charging, that price is WRONG!

Is that a big enough implication for you? Actually, I probably need to clarify that statement that your price is wrong. Let me be more precise. If you have a single price for your product, then that single price is WRONG… no matter what that single price actually is.

You see, having only a single price causes you to lose out in two different ways....
- For some customers that price is too high – so they don’t buy, and you lose them as a customer.
- And for other customers that price is too low – so you end up charging them less (and earning less profit) than they are willing to pay. Which means you lose again.

Economists call the amount by which you lose in this second scenario the “Consumer surplus”. So one of the keys to dramatically improving your profits is to claw back some of this consumer surplus by charging different customers different prices.

Let’s now look at the maths.

EXAMPLE

Imagine that you sell widgets that cost you £1 each and for which there are three potential customers: A, B and C.

- Customer A is willing to pay £4
- Customer B is willing to pay £3 and
- Customer C is willing to pay £2.

If you set a single price at £2, the all three customers will gladly pay you £2. So you’ll make total sales of £6 and profits of £3.

If you set a single price at £3, then Customer C won’t buy. But the other two will gladly pay you £3 each. So you’ll make total sales of £6 and total profits of £4.


If you set a single price at £4, then only Customer A will buy. So your total sales will be £4 and your total profits will be £3.


The MAGIC PRICE is the price at which you make the most profits. So in this example the MAGIC PRICE is £3 – since at that price you make £4 in profits – which is 33% higher than at any other price.

Now £3 is the MAGIC PRICE… because there is no other single price at which you can make higher profits. But we also know that: Customer A is willing to pay £4, Customer B is willing to pay £3 and Customer C is willing to pay £2.

So, if instead of charging those three customers all the SAME prices, we charge them the full price they are willing to pay, then our total profits will be £6. Customer A will pay £4, Customer B £3 and Customer C £2, so total sales are £9, with costs of £3. Which is half as much again as the £4 profits we made at the magic price.


Now it’s vital to recognise that there is nothing fishy or special about the numbers in our example. YES, I've kept the numbers as simple as possible. And YES, the real world is much more complicated.

But those complications do nothing to alter the fact that if you can find a way to charge different customers different prices – so that they each pay what they are willing to pay – then you will ALWAYS make more profits than you do by using any single price... even if that single price is your magic price.

In our example we made 50% more profits by switching from the magic price to charging each customer the full price they were willing to pay. In your business the impact could be more or less than 50%. But there WILL be an impact. Charging different customers different prices WILL increase your profits… and probably by a lot!

Economists call this “price discrimination” – but we prefer the Plain English description of charging different customers different prices, since that’s what it actually involves.

But how do you actually do it? Because it actually dies work, and it's not illegal, or immoral (maybe fattening)

Well, the key is being much more creative about pricing.

In future blogs) we’ll look at:

- exactly how you create different versions of your products and services,
- how you price those different versions,
- how you present (and explain) them to your customers, and vitally important,
- the order in which you present them to your customers.

New Year, old you?

“There’s no time!”

Well, you’ve got all there is. Yes, all of it. So if you haven’t got time, whose fault is it?

So often I’m at a client, trying to resolve some issue, and this is the reason it can’t be done. “There’s no time”. All these other things to do. No time to even stop to think if these things need to b done..so no one knows they they should be doing these things or not. No time to decide. Too busy doing exactly what they did yesterday, and the day before, and moaning they’ve no time!

Here’s a simple trick I use all the time. I wrote a small book a couple of years ago – Conversations for a Thoughtful Life – to my kids. It includes this little homily.

“Cut the crud

We live in an age of information overload. Added to that, we over think and worry, and find it difficult to sort out what is important from what is not. There are more and more demands upon our time and our thoughts. This is no doubt only going to increase.

What to do? My method is to be as lazy as possible, which will perhaps appeal to you. There’s no point in being a busy fool. You need to be effective rather than efficient. Also the only person's problems you want to deal with are yours. You don’t want half the world jumping on you, with all their issues, which they are sure (!) will be better dealt with by you. After all, you're only responsible for you, not everybody else you might come into contact with during the day.

So here's my simple little visualisation to tidy all this up in your mind. I simply imagine three big pigeonholes -- only three. In the first one are things that I have to do, of which there are only a few and there is quite a lot of space left. In the middle one are things that I want to do. This has a few more things in it, but there's still a lot of space left. And in the last pigeonhole is crud. This is full to overflowing -- it's impossible to cram another piece of paper in it. You know - you’ve been trying to cram more in all these years!

When something else is presented to me that apparently I have to do -- I simply measure it against the three pigeonholes. Do I have to do it? Do I want to do it? Or is it crud? And if it is crud -- which most of it is -- I simply don't do it. I've got enough crud to deal with already. Note the elegance of that last bit -- I'm not postponing dealing with this -- I'm not ever going to do it. If it's crud I don't need to do it. Don't confuse that with things that you will do at some point. You won't. It's crud. Remember? So why would you want to do it ever?

Liberating isn't it? And also quite a good filter for all the things which other people wish upon you. Things which are really their responsibility -- not yours. You've got enough of your own crud - remember?”

It works every time. It clears your mind so you’ve got the time to make small changes that make a big difference. Because those small changes get you even more time, so then you can think, really think, about what you want and need for your business to succeed. And then implement it. It’s what we do. Help clients get the time, do the plan, make the changes.

Here’s another small story to finish with, to help you with your personal time, and what other people may value about you.

Charles Francis Adams was Ambassador to Great Britain during the time of Abraham Lincoln’s presidency. He was something of a workaholic and rarely took the time to do anything with his son as a child.

However he did take time to write in his diary every day. It so happened that his son kept a diary too. After his father died, the son found the diary. The son recalled a day when, as a young boy, he had gone fishing with his father. So important and special was that day for the son that he wrote in his diary; “went fishing went with my father, the most glorious day of my life.”

The son was to refer to it repeatedly in his diary, but when he turned to the same date in his father’s diary, he found; “Went fishing with my son, a day wasted.”

Children spell many things differently to adults, and children spell love like this … TIME.