Don’t give away your profits

If your sales are off, you may feel that cutting your prices will bring your bottom line back where it should be.  For many managers, that’s the first “fix” that comes to mind.

The fact is, price-cutting often does not increase sales.

True, you may have to cut prices to meet competition, if what you sell is especially price-sensitive. But it’s a mistake to cut prices unless you have good reason to believe it’ll be a profitable move.  Don’t start cutting unless you have to. Competing on price is risky, because smaller profit margins can be dangerous to your financial health.

Instead, look for ways to persuade your customers that they get something extra when they buy from you – better service and better quality. Talk about the special value you provide, not price.

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Tough question: What business are you in?

During the 18 years I managed my advertising agency, I had many occasions to ask new clients what they expected advertising to accomplish for them. Inevitably, this led to a discussion of the company’s line of business. Just what business — precisely — were they in?

Such answers as “men’s clothing” are not adequate. “Marketing clothing for young adult men that responds quickly to changes in style; we want six percent of the Philadelphia market” is an appropriate answer. It says the company is in the business of selling trendy, youthful men’s clothes. It also says that the company must be super-sensitive to changes in the marketplace, and operate in a streamlined way to reach their target market with product while there is strong demand for their styles. And finally, the company is highly competitive and aggressive.

I discovered early on that if I asked five people in a company what business the company was in, I was likely to get five different answers. It often took serious meetings with the boss and his top people to hammer out a mission statement they could all agree to, and a set of objectives for us to reach, together. Even if it was a two-person company, there was often disagreement about where the company was going, and how it intended to get there.

It’s important that everyone in your company understand exactly what business you’re in, and what your goals are. How can they be expected to be effective if they don’t really know what the team is supposed to be doing, and why?

Your company should have a mission statement, and if you’re the boss, you should write it. And make sure everyone knows what it says. Lots of business decisions become simple and obvious, when everyone knows what business they’re in.

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Take good care of your best customers

The often-referred-to “20/80 rule” is especially important when you’re reviewing your customer list. If your business is like most others, 20 percent of your customers account for 80 percent of your business. And it’s likely that the 20 percent who spend more are more apt to pay their bills promptly, demand less service because they’re more business-savvy, and often less liable to make a fuss when you have to raise prices.

Keep that 20 percent happy. Don’t ever take their business for granted. To service the important 20 percent, you may find you have to get rid of some of your small customers. This may not be a bad thing, because it’s often the little guys who use up your service time. When you add up all the costs generated by a small customer, you may very well discover that sales to him don’t generate enough profit to cover those costs:  he’s not making money for you — he’s costing you money.

It’s a judgement call on your part. If a small customer shows no promise of growing into a profitable situation for you, it just may be time to let him drift away.

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