Ohhhh…You Can Get Capital. Just Read the Fine Print

I had a client for years that ran a successful business. He financed his business largely with credit card debt. He was able to accomplish this by being “viciously” organized in his cash flow. By vicious, I mean the owner had a laser focus on each card’s balance, payment due date, interest rate and terms. In fact, he’s the only business owner I’ve ever worked with who was able to transfer balances between cards to take advantage of 0% “teaser” interest rates.
Most owners go to credit cards for financing when traditional sources (bank loans, investors, issuing debt) are not available. The businessperson takes out credit cards out of desperation. The more risky the venture, the less likely financing can be obtained. This was particularly true during the tech boom of the late 1990s.
Most companies are not well organized and do not take the time to understand the terms of their credit card agreements. As a result, they make payments late or go over their credit limits. They end up paying far more in interest and penalties than they would in a traditional bank loan.
The Lesson: Unless a business owner is well disciplined, financing a business using credit cards is far more expensive than traditional loans.
Your Homework: What has been your experience with financing? Have you been disciplined in your use of credit?
(Source: “Small Firms Use Credit Cards for Capital”, Wall Street Journal, 7/24/07)

Beware the Deposit

I understand that many legitimate companies need a deposit before providing a completed product or service. There are several valid reasons. The company needs a deposit for cash flow. The deposit allows them to cover some costs to begin making the product or providing the service. A deposit also implies a commitment from the client. If a customer pays a deposit, they’re more likely to pay in full. A friend of mine describes it as having “skin in the game”…the customer has something to lose (the deposit).
Unfortunately, asking for deposits is a common method of fraud. One example is using credit cards. “Beginning in 1999…members of a ring called between 900,000 and 1.8 million people and netted more than $10 million from 37,000 victims using several credit card scams…A Bank in Metropolis, IL that was processing some of the charges lost $1.9 million”. These allegations were listed in federal court documents.
What happened? “Telemarketers called people with poor credit and pretended they were responding to credit card requests from the victims. In exchange for a fee of $149 to $249, consumers were promised a credit card with a limit of $2,500 to $3,000….If customers were reluctant telemarketers would sometimes threaten that refusal would further harm their credit and result in it being ‘red-flagged’, documents show.”
This scam is along the lines of the email lottery scam. A person gets an email explaining they’ve won a lottery, and all they need to do is send money so that the winnings can be wired/ sent by courier, etc. The “winner” sends funds- then never hears from the emailer. Both of these scams focus on something the consumer wants or needs, then gets them to pay a deposit for it.
The Lesson: Do your homework when a vendor asks for a deposit. Verify that the company is legitimate. You can ask for references, or check with Better Business Bureau.
Your Homework: Have you been taken advantage of in some sort of deposit scam? What steps could you take from preventing it from happening in the future?
(Source: “Woman pleads guilty in telemarketing scam”, St. Louis Post Dispatch, 7/28/07)

Reimbursement- But For What?

Many professionals work on a flat fee, plus reimbursement of expenses basis. If you’re a fan of Jim Rockford from the 70’s “Rockford Files” TV show, he always charged $200 a day plus expenses. But what are those expenses?
Recently, a political consultant was accused of stealing more than $220,000 from a campaign fund in St. Louis. How? “According to the criminal complaint, he falsely charged the (campaign) committee on four separate occasions. In one instance, he charged the committee for $218,715 for postage…bank accounts and other records show he only paid $116,200 for postage.” The same type of activity is alleged with printing and canvassing staff. His “contract said he would be paid a fee of $30,000 plus reimbursement of expenses”. The prosecutor explains, “He wasn’t supposed to get any mark-up for his printing or mailing”.
How could this have been prevented? Many agreements I have seen require the company to provide receipts to support the reimbursement of expenses.
The Lesson: Require any expense reimbursement to be supported by receipts.
Your Homework: Do you make it a practice of asking for receipts before paying people you hire? If you don’t, because you feel it’s too time-consuming, would this situation spur you to change you procedure?
(Source: “Consultant held in case that turns on misuse of moeny”, St. Louis Post Dispatch, 7/25/07)

Everybody is Impatient…How can I use that in my Business?

Last week, I had to find live crickets for a tarantula my son is watching for his science teacher this summer- don’t ask. Petsmart had run out, so I headed for Wal-Mart. I couldn’t get anyone from the store on the phone, so I walked in to look for myself. It was about 8:30PM on a weeknight. 4-5 registers were open, and each had a line of 4-5 people. I left- the tarantula would have to go hungry. As I get older and crankier, I’ve come to loathe shopping- period.
A recent article explained that the “average shopper at a Wal-Mart supercenter spends 21 minutes in the store but finds only 7 of the 10 items on his or her shopping list”. Sounds like lost sales to me. To increase sales per visit, Wal-Mart “is attempting to make its stores easier to navigate. Among the changes: better signs…more convenient placement of hot-selling items ans staffing changes to speed up checkout times.”
“We don’t decide how long the people are in the store”, says their Marketing Chief, “What we decide is how easy it is for you within the 21 minutes you’ve allocated to get what you want”.
The Lesson: The more convenient shopping is for your customer, the more likely your sales will increase.
Your Homework: Is there something about your customer experience that frustrates you? Maybe your store layout, website, order firm? How can it be improved?
(Source: “Big Boxes Aim To Speed Up Shopping”, Wall Street Jounral, 6/27/07)

Do They Owe Me the Money or Not?

Basic accounting rules teach us to recognize revenue when the product or service is delivered to the customer. OK- what does that mean? Well, that can have many meanings: when you physically deliver the goods, the tax return or the oil painting is one example. Another possibility is by contract. Maybe the document says you’re paid 30% of the final price once the building is 30% complete. There are many possible definitions for revenue recognition.
It’s critical that all parties understand when work is considered “completed” and when payment is made. Recently is St. Louis, a jury “awarded $550,234 to a former sales executive for HBE Corp. on his claim that the company cheated him out of commissions by firing him before he collected them.” The company “contended that he (was) fired because his worked slacked off.” The company claimed they didn’t owe the salesperson the money because he wasn’t working there when the company was paid.
The salesperson said he used “common sense” to understand what “earned commissions” meant. Each commission was based on projects that “went to fruition” after he left. In this case, there were multiple decision-makers who were involved in the sales process. It was not clear who was the final decision-maker, or if the decision was made buy a group of people.
The Lesson: The larger the individual order or project, the more important it is to get written clarification on when payment will be made. If a large payment is in dispute, the payment delay can disrupt your company’s cash flow.
Your Homework: Have you had a recent dispute over a payment? Could it have been avoided with a written contract? Was the dispute with a new customer, or a long-time client?
(Source: “Former HBE salesman is awarded $550,000”, St. Louis Post Dispatch, 7/21/07)
Key Word: revenue recognition, cash flow

Running the Burger Place is easier, but the Profit Margins are the same

I’ve worked with many franchise owners and I’ve found them to be a passionate group. Most have left Corporate America and are very focused on succeeding. That includes putting in whatever number of hours it takes to succeed.
Improved technology allows these owners to manage their businesses remotely. They can reduce the number of hours in the physical location. A franchise owner can “know precisely when workers clock in and out, who each of his daily customers are and which employees are selling what products, at regular price, or discount.” All this can be accomplished through software, laptops and Treos. At fact, this new method of managing business allows one owner to manage multiple locations more efficiently.
Remote management comes with a risk: less time in the store means the owner can’t deal with problems as quickly, particularly when those problems involve staffing (hiring/ firing/ managing). Finally, the profit margins on franchises may not increase, simply due to the use of better technology.
The Lesson: Technology can help any owner operate more efficiently, but business risks and profitability may remain the same.
Your Homework: What was your last technology purchase? Has it made you more productive?
(Source: “Why Running a Franchise is Getting Easier”, Wall Street Journal, 6/25/07)

Let’s Sell 3 Items Faster, Rather Than 30 Item More Slowly

It’s tough to be all things to all people. I’ve found that successful companies don’t try to be this way. They try to do a few things well, rather than a bunch of things poorly. Each new product or service requires more inventory, more people, more space, more advertising- more everything.
Most of us know Burberry as the long-time maker of raincoats. In recent years, they expanded into a wide variety of products, including dog bowls! The new CEO asked for an analysis of “what each product contributed to the business. Its findings: 80% of Burberry’s sales came from 20% of its wares”. ‘Sounds like the old 80/20 rule- those percentages seem to hold up!
As a result, Burberry cut their product offerings by almost a third. “What we needed at this time was focus” said the CEO. “We needed to simplify on the inside to compete in the complex environment on the outside.” Why? “It’s back office system didn’t keep up with its expansion, and the company often delivered goods to stores after its ad campaigns had run.” In short, the systems needed to run the business became too complex.
The Lesson: If you can’t deliver your product or service in an efficient, profitable manner, consider simplifying- offer fewer products.
Your Homework: What products make up 80% of your sales? Do you really need the other 20% of the products or services? What costs could you save by eliminating them?
(Source: “Burberry CEO Retrenches: Fewer Items, Faster Delivery”, Wall Street Journal, 5/24/07)

I Don’t See the Parachute Pants in Inventory

I love to watch the VH-1 Classic Rock channel with my son. I particularly like the 80's videos with the big hair, suspenders and parachute pants- on the guys. The demand for parachute pants must have gone away, because I don’t see my local department store stocking them in inventory.
The two biggest costs to a retailer are inventory and receivables. Put another way, these two areas are largest uses of cash. If the gift shop owner wants to know where her cash is, look at the checks you wrote to stock the shelves and the money you’re owed on purchases!
“Stacks of unsold clothing are clogging store aisles and pressuring profits” at Wal-Mart. Their first designer line has been pulled “from several hundred of the more than 3,000 stores that carried it”. The reason? Wal-Mart’s CFO “says clearing out stocks of unsold clothing is going to be a chore and could pressure (profit) margins all summer…It’s about getting the stores cleaned up right now.”
The Lesson: If inventory isn’t selling, don’t order more. Get rid of what inventory you have, even if it requires selling it at a loss. Selling the inventory allows you to recover the cash you've spent and reinvest it more productively.
Your Homework: What do you have in inventory that isn’t selling? What percentage does that product line make up of your total inventory? How much cash could you free up by selling it at a loss- 10% for example. How could you use that cash?
(Source: “Fashion Faux Pas Hurts Wal-Mart”, Wall Street Journal, 5/21/07)

How Much to Trust?

Critical Moment Ethics (criticalmomentethics.com) exists to educate small business owners about employee theft. One point we make on the website is that no business can grow without delegating work to employees. Work can only be delegated if employees can be trusted- to some extent. The tough question is: how much to trust?
Say for example that you own a Tree Service company. A storm 20 miles away has created an business opportunity. Thousands of trees need to be cleared. How does the owner take advantage of the opportunity and not neglect business referrals in his “normal” area of operation? Does the owner manage the work himself, or does he trust his foreman to take crews to the storm area?
There are two facets to this issue. First, what is the owner’s opinion in the character of the foreman? Has he taken on more responsibility before? How did he handle it? Second, are procedures in place to prevent theft. If the foreman takes a crew out of town, are there procedures in place to allow the owner to control billing and payments? Can the owner track where the crew is and document each job? If procedures are in place, a dishonest employee is less likely to steal from the business.
The Lesson: The employee’s character and proper procedures can help the owner determine how much responsibility to delegate to workers.
Your Homework: Have you delegated work to an employee that ended badly? Did you judge the person’s character poorly? Were there procedures in place to prevent damage to your business?
(Source: “Inside Job: Small-business owners need to trust their employees. Up to a point”, Wall Street Journal, 4/30/07)

Why Spend? Because the Competition is Spending

Capital spending can be defined as spending on “long-lived assets”, such as equipment, vehicles, buildings and technology. Increasing capital spending is a tough decision for any business owner, particularly when sales and profits are uncertain.
Consider the airline industry. Fuel costs, possible labor disputes and terrorism make the industry’s profitability very uncertain. Yet, many airlines have started to increase their capital spending. “Middle-aged airplanes are getting interior makeovers. Some airlines…are planning to add tastier and heartier food to sell on flights. Carriers are sprucing up some airport terminals”.
Why make the investment now? The industry has been profitable in recent years, but still very uncertain. First, customers want it. “Travelers say in-flight enhancements are long overdue.” Second, discount carriers (such as Southwest Airlines) are making the investment. Other airlines need to spend to stay competitive. Third, spending on addtional staff, training and uniforms can boost employee morale. After Delta “put flight attendants in new uniforms last year…customer complaints about in-flight service dropped by half.” Better morale can lead to improved productivity and higher profit.
The Lesson: The decision to increase capital spending is more than just a cost. Consider the impact of your competitors, customers and staff when analyzing new spending.
Your Homework: Consider a recent purchase for your business. Has it been worth the cost? What benefits resulted from the investment? Is there a large purchase that has led to benefits for one of your competitors?
(Source: “What Airlines’ New Spending Means for Fliers”, Wall Street Journal, 5/12/07)

When Is That Stuff Gonna Get Here?

Where is your cash going? You’ve invested money in your business or borrowed funds- what are you spending it on? For most businesses, especially retailers, capital is tied up in two major categories: inventory and receivables. As a result, managing the cash flow related to inventory purchases is critical for business success.
If you order goods that never arrive, you have two problems. First, you can’t make delivery of a product or service to your client. Second, you’ve potentially lost funds paid for the goods that haven’t been received.
“A St. Louis man- which used nine aliases- sold digital cameras, computers, Playstation 2 game systems and Bose speakers to people on eBay. (He) didn’t have all of the merchandise that he had sold. (He) also defrauded FedEx and Western Union by using their services, then denying the charges or using fake accounts.”
What to do? First, check on the legitimacy of any supplier you use- ask for references. Second, avoid making any payments until goods are received. Finally, find good suppliers and negotiate contracts. You can use contracts to finalize goods to be delivered, pricing and payment terms.

The Lesson: Research your suppliers and negotiate contracts whenever possible.
Your Homework: Are you using multiple suppliers for your largest inventory purchases? How much do you know about your suppliers? If your big suppliers can’t meet your needs, do you have systems in place to find someone else?
(Source: “Cyber con man gets 27 months for scam selling items on eBay ”, St. Louis Post Dispatch, 5/12/07)

Too Cheap to Haggle Over, but also too Important to Ignore

I had a door handle break on my car the other day- what a hassle. I called my dealership and ordered a replacement handle, which they will install. When they told me the price, I didn’t haggle about it. The part was not very expensive, and I don’t know how much a car door handle costs! All I knew was that it needed to get replaced soon.
That same thought process happens to some customers of Linear Technology. They “have built one of the world’s strongest profit fortresses by staying strictly at the fringes, where competition is low and (profit) margins are high.” The “midsize company makes 7,500 arcane, unglamorous products that solve real world problems. Linear makes so-called analog chips that are too cheap for customers to haggle over, but perform chores too important to ignore”.
The result? Linear has increased control over the product pricing. With little competition, they can charge higher prices.
The Lesson: Business owners need a constant awareness their markets and the number of competitors. Whenever possible, consider areas with fewer competitors- which means less pressure to lower prices.
Your Homework: Is there a product niche you can enter that has less competition? Are you already in that type of product niche? If so, can you raise your prices without losing customers?
(Source: “In a Tech Backwater, A Profit Fortress Rises ”, Wall Street Journal, 7/10/07)

Fire Clients and Feel Better!

As business owners, we have finite resources. We only have a certain amount of time, staff, advertising and inventory to invest in developing sales. To be profitable, we have to direct those resources toward “good” customers. What’s “good”? Maybe you define a good customer as someone who has reasonable requests, makes multiple purchases, refers others and pays on a timely basis. We all have dealt with people who don’t fit that model. In order to grow the business and be more profitabable, we have to consider “firing” those clients who don’t fit the good customer model.
Sprint recently took a dramatic step in this direction. “Sprint…which recently launched an advertising campaign to attract new customers, is disconnecting more than 1,000 subscribers for calling its customer service lines too often and making what the company called unreasonable requests… Sprint said the cancellations involved 1,000 to 1,200 customers who had called the company about 40,000 times a month in total.” A spokesperson explained that some people were calling customer service hundreds of times a month on issues that Sprint felt were already resolved- far in excess of a normal calling rate.
Obviously, firing clients needs to be done carefully. “Sprint waived final balances on canceled accounts and gave customers 30 days to transfer their phone numbers to other wireless providers…” Finally, you and the customer will be happier. You’ll invest your time and energy in a better client. They will find someone who will meet their needs- or figure out that their needs are unreasonable!
The Lesson: No business can growth and improve without getting rid of unprofitable clients. While the process needs to be implemented carefully, it must be put in place for the business to succeed.
Your Homework: What was the last client that left on their own- “firing themselves”? What caused them to leave? What was your reaction- concern or relief?
(Source: “Sprint Fire Customers Over Unreasonable Requests”, Reuters, 7/9/07)

Co-Opting the Co-Payments

Employee theft is one thing. Employees destroying company records related to the theft is another thing altogether. A recent example took place at a physician’s group in St. Louis.
Think about a typical trip to the doctor: we show the office person our insurance card, they update the patient file for changes in your coverage- including the co-payment you’re required to pay. The office takes the co-payment and you wait to see the doctor.
Mistake #1: The office manager was taking cash payments. As I’ve mentioned in prior blog postings, cash is the easiest thing to steal, since there’s no documentation trail: no credit card transaction, no cancelled check. The article indicates that “a former office manager (for a physician’s office)…admitted stealing about $47,000 in cash from patient co-payments between October 2003 and January 2005.”
Mistake #2: The same person who had physical custody of the assets (the office manager) also has access to the accounting records. How does she cover up the fact the co-payments were stolen? She “covered it by destroying company records, costing the (physician group) about $78,000 more in insurance payments.” Let’s say Joe comes in to get treatment on a strained knee. He pays the co-pay, sees a doctor, gets advice and a medication and leaves. Office manager steals the co-pay and destroys any record of Joe coming in. At some point, the doctor wonders why he hasn’t been paid by the insurance company for the work with Joe. He checks the files and has no evidence of seeing the patient. The doctor has now lost that income, unless he can somehow recreate the records.
The Lesson: Segregate duties: the person who has physical access to assets (cash, equipment, vehicles, checks) should be separate from the individual who records the transactions in the accounting records.
Your Homework: If you take cash in your business, how is the cash processed? Is the customer given a receipt that is filed? Are the receipts numbered so they can be tracked by you? How often do you reconcile cash received in your accounting records with your bank deposits?
(Source: “Woman gets prison for theft of $47,000”, St. Louis Post Dispatch, 5/12/07)

Let’s Not Make the Problem Worse

Trendy ideas often don’t last. One of those ideas is that outsourcing will solve most employment problems over the long term. For example, let’s outsource our IT department to India. We can hire highly skilled, lower cost workers. With the time difference, the employees in India can work on projects during overnight hours in the US. ‘Sounds great!
In recent years, many US companies have relocated this type of work back to the US. One big reason: the cost of employees overseas has increased. A recent article listed Seven Myths About Outsourcing. The two best ideas. First, outsourcing requires tremendous effort and constant communication between the company and outsourcing vendor. Think about that IT Manager in India dealing with the VP of Technology in Houston, TX, for example. Second, you can’t have it all. Don’t expect lower costs, better employees, improved communication and zero complaints during the transition. It’s just not possible.
The Lesson: In order for outsourcing to succeed, companies must have realistic expectations and commit to constant communication.
Your Homework: Have you attempted to outsource work? Are you today? Consider what you’ve gained or lost as a result of this process. In the end, are you better off?
(Source: “Seven Myths About Outsourcing”, Wall Street Journal, 6/16/07)

Light at the End of the Tunnel- How Long is the Tunnel?

How long do you hang on to the belief that your once-successful product will make a comeback? It has to be one of the most difficult decisions in business. Crescent Ridge Dairy is an example of a company that hung on during a dip in the business cycle.
The dairy “processes and delivers its own brand of hormone-free milk in old-fashioned glass bottles” to customer homes. “Today, only about 1% of all milk sales are through home delivery”.
This company survived a long downturn in their business. Starting in the 1960s, consumers began shifting their milk purchases to mainstream grocery stores that sold milk with a longer shelf life. “Believing its core business was strong (Crescent Ridge) took advantage of the difficulties by purchasing the trucks, customer lists and assets of other small struggling dairies.”
Today, the “appetite for wholesome fare, coupled with raising gas prices” has increased demand for the company’s home delivery- a service that makes up 80% of their revenue.
The Lesson: If your core business- the product or service that generates most of your revenue- is declining, make every effort to determine if that core can survive the downturn. Is it a cyclical business that will come back, or a permanent change that cannot be reversed?
Your Homework: Consider how your business has performed over time. Have you survived downturns in the past? How did you overcome them? Are things any different today?
(Source: “Small Dairies Profit from a Resurgence of Home Deliveries”, Wall Street Journal, 5/25/07)

Are Things Getting More Expensive? How Much More?

As business owners, we’re all aware of cost increases. In order to price our product or service, we need to project our costs. If costs go up unexpectedly, our profit will decline. Business owners I know use many tools to educate themselves on the general state of the economy, conditions in their industry and the local economy. One piece of information is the Consumer Price Index (CPI), which measures inflation. We hear about CPI through the media, but the measurement can be deceiving.
I tend to remember good definitions. Someone defined inflation as the “general increase in prices over time”. Think about a basket of goods at the grocery store. Most of us buy the same type of goods each time we go to the store: milk, bread, lettuce, meat, etc. Imagine pricing that same basket of goods each month and measuring the price change of the items in the basket- that’s inflation.
Not all inflation measures are the same, however. “Core inflation excludes the cost of food and energy goods, the very items that are the most visible prices for most consumers.” Why? “The theory is that food and energy prices historically have been subject to wild swings”. Some argue that “ignoring these two categories could be understating the inflationary threat”. Some measurements include food and energy but exclude items such as airline tickets, televisions and clothing, which can also fluctuate a great deal.
The Lesson: When researching price and cost information, consider how the data is being compiled.
Your Homework: Do you have costs that are changing faster than the overall economy? Is it due to shortages, high demand? Understanding why these costs are changing can help an owner plan more effectively.
(Source: “Food, energy costs’ exclusion debated”, USA Today, 6/14/07)

Merry-Go-Round Sales

Is the ultimate buyer of the product or service a separate company? ‘Sounds like a silly question. It’s a valid concern, however, for a company with multiple subsidiaries and poor financial performance. Making a sale to a related company isn’t a sale at all. Accountants describe it as an “intercompany transaction”.
Here’s an example. Suppose Anheuser-Busch has a division that manufactures beer cans. The Can Division sells cans to the Beer Division. What’s the financial impact to Anheuser-Busch was a whole? Well, nothing. Revenue for the Can Division goes up, expenses for the Beer Division go up by the same amount. Selling stuff between divisions or subsidiaries does not increase sales or profit for the parent company.
Fujitsu Ltd. “said a subsidiary had booked fictitious sales”. They described the transaction as “circular sales transactions…such transactions require at least three companies which consecutively book revenue from sales of items that are eventually sold back to where they started.” As a result, Fujitsu Ltd.- taken as a whole- did not increase sales. Fujitsu “had 393 subsidiaries and 161,000 employees as of the end of March.” “Some analysts questioned if current accounting oversight was sufficient” to track these sales.
The Lesson: If you’re reviewing financials for a competitor, supplier and potential acquisition, consider intercompany sales. Who is the ultimate customer buying their product or service?
Your Homework: If you’re in an industry that is consolidating, educate yourself on those companies that are now related. Is your biggest competitor now a subsidiary of another company? How does that change their business?
(Source: “Fujitsu Says Unit Booked Bogus Sale”, Wall Street Journal, 6/8/07)

The Risk of Concentration

Increasingly, companies that get themselves in trouble are those that don’t have a diverse product mix. Once the “goose that laid the golden eggs” stops laying eggs, the company is in trouble.
Circuit City is going through a turnaround process right now. They are “thinning management ranks and accelerating store growth to cope with growing competition and falling prices in electronics”. The problem is two-fold. First, the company is “squeezed by rival Best Buy’s bigger and brighter stores and the lower prices offered by Wal-Mart”. Second, they were “caught flat-footed by rapidly falling prices for big-screen televisions”. Circuit City “depends on TV sets for 32% of its sales, compared with 20% of sales at Best Buy”.
What to do? Part of the company’s strategy is to sell “add-ons, such as installation services, accessories, warranties and high definition feeds”. “There are only 10% of households that have true high-definition TV service today…this is a massive opportunity”, says the CEO. My 13-year old son told me yesterday that the TV we need to replace MUST be High-Def, so I guess the executive is right!
The Lesson: Keep in mind that even the most profitable product or service may not always stay that way. Since change is the only constant, consider how you would be impacted if your #1 product or service offering was less profitable.
Your Homework: Have you had success with a new product offering? If so, would you consider investing more capital, time and effort into the product?
(Source: “Circuit City Enters New Turnaround Stage”, Wall Street Journal, 5/31/07)

Making a Commodity into Something that Isn’t

I’ve mentioned before the two basic methods for pricing a product. One method I’ve described as a “Bottom Up” approach. You total your costs (labor, materials, etc.), add a profit margin and come up with a price. You increase profit by lowering cost, not by increasing the price. Businesses use this strategy if they sell a product that is viewed as a commodity. Take gas, for example. The product is the same everywhere, says the consumer. I’ll just go to where the price is the cheapest. No one’s giving me a reason to pay more. Don’t we all check the prices when there are two gas stations across the street from each other?
‘Sounds like a tough way to make a living. Why not come up with a strategy to remove the commodity label from your product, thereby justifying a higher price? Magnatag Visible Systems has “thrived making highly specialized versions of an item that couldn’t be less special- the erasable whiteboard.” They sell “whiteboard systems tailored for hundreds of applications, from athletic scheduling to hospitals and mortgage brokers.” The boards are printed with “customized grids and graphics and come with equally specific supplies such as magnets, lettering, symbols and card holders.”
The Lesson: Removing the commodity label from your product can lead to higher pricing and improved profits.
Your Homework: Is there something about your product that can be changed to remove the commodity label? Maybe a client comment or suggestion that revealed a unique need?
(Source: “Taking the ‘Common’ out of Commodity”, Wall Street Journal, 6/26/07)