Pricing products

Pricing of new products is both art and science – but mainly it’s business. So often new businesses set prices too low to sustain any modicum of profitability, or too high which takes them out of competition. Home-based businesses are especially vulnerable to setting prices too low.

There are several methods commonly used in setting a price. The easiest (and generallymost flawed) is to charge what the closest competitor charges. Such pricing does not take into account competitive advantages, differences in features and benefits, and the actual cost of production. A second method is to arbitrarily set a price and see if the market will accept it.

The smart business owner carefully analyzes the total cost of production – the cost of materials, subcontractors, and labor – and adds a reasonable percentage to cover sales and marketing, other overhead, and profit to arrive at a proposed selling price. Then, comparing benefits with those of competitors, adjusts the price to the point of assuring that it reflects the perceived value of the product (while still being profitable).

A mistake frequently made by new businesses, particularly home-based, is to base selling price on production cost alone without considering other overhead costs. Even though overhead might be low when working from home, costs will increase if expanding to an office or warehouse, and it might be difficult to at that time raise prices. When setting prices a rule of thumb (but will vary by industry) is to assume that the cost of production represents between 40 and 60% of the sales price. There is now ample room for paying for marketing and other overhead costs and still providing the owner some profit.

Will Limkemann
www.siqualtd.com

Customer Service

Ingersoll Hardware is a chain of two locally owned hardware stores in the western suburbs of Cleveland. For twenty-five years or more the Westlake store has been satisfying my needs for hardware, paint,window glass, tools, lawn fertilizer and more. I am a very loyal customer and I keep buying from this store even though a competing hardware store has opened five minutes closer to my home. My best estimate is that I spend over $1,000 a year at Ingersoll.

Now, yesterday I needed a new gasoline can in order to feed my lawn mower. I buzzed over to Ingersoll, selected a plastic gas container above a label showing a price of $5.95 and proceeded to the checkout, where the computer rang up a price of $14.95. Returning to the shelf and carefully examining the label I saw that $5.95 was for planting soil. The cans had ended up on the wrong shelf. I paid and left for the gas station.

Imagine my dismay when I got home with a full gas can to discover gasoline all over my trunk. The container had a pin-hole leak in the bottom. Furious, I set the container on edge in the driveway to prevent more spill and returned to the hardware store. A friendly young clerk asked how he could help. I explained my predicament – that I needed to replace a defective gas can for a new one but could not return the old one until I replaced the gas from it to the new container. The fellow suggested that I just pick up a new can, leave my name and address with the checkout clerk, and come back with the defective can. Problem nicely solved.

The checkout clerk, however, asked the shift manager how to handle the transaction. The manager said I would need to pay for the new can and then get a refund upon return of the defective one. When I mentioned the solution proposed by the clerk he said, “He is just part time. I’ve been here twenty-five years and I know that the owenrs want.” I offered to provide information from my drivers license for security, but was not going to change the manager’s mind. I was highly upset. It wasn’t about the money. It was about principle and treatment of a long-time customer. It wasn’t as though I were a stranger – all three people have seen me in the store many times.

Further infuriating me was the answer to the question as to how to get rid of the gasoline and odor in my trunk. The manager said he could provide the name of the manucturer and I could go after them for the cost of clean-up!

The young clerk had it right. Help the customer and offer a reasonable solution.

I’m going to have to rethink my loyalty, as well as have a few words with the owner when I return the defective can today.

Will Limkemann
www.siqualtd.com

E-mail/Internet Business Scam

A week ago I received the following e-mail: “I am interested in purchasing some of your products. I will like to know if you can ship directly to Australia, I also want you to know my mode of payment for this order is via credit card. Get back to me if you can ship to that destination and also if you accept the payment type I indicated.” There was an e-mail signature with a name, an address in Australia, and phone number.

While the language reminded me of the Nigerian scams we all have received, the signature did give a modicum of legitimacy to the request.

As we have several products spread across more than one web site, I wrote back inquiring as to what product he wanted to purchase. He responded with the stock numbers of two lamps and asked for a price quote including shipping charges. My quote was for a total of $300 plus a UPS shipping charge of$250 – so I thought that would be the end of it. Not so. He was just beginning to pay out the fishing line, as his next e-mail asked for a quote for 10 lamps plus shipping. Total quote: $2,000. I knew in my heart this was a scam but just did not know where it was going so I continued to play along.

The baited hook was dropped in his next e-mail. In a lengthy paragraph he explained he would use his own shipping agent, so he proposed paying $1500 for the lamps, paying us $650 for shipping charges, and paying us $100 for handling payment to his shipping agent. Upon agreement he would provide credit card information, I would immediately charge the entire amount on the credit card (even though he knew that completing the order would take four weeks), and send $650 via Western Union to the not-yet-named shipping agent. Aha!

Realizing it was a scam, it took a bit of thought to understand how the scam works and how the “Australian” would benefit. Then it dawned on me that he would be using a stolen credit card and if I went along with the scam he would be richer by $650 from money laundered from the stolen card. I wonder how many other company waters he trolled and how many fish he caught!

The Internet is a marvelous tool for commerce – and fraud.

Will Limkemann
www.siqualtd.com

Computers – the anti-productivity tools

I was speaking recently to a person whose only computer access is at work. She was actually apologizing to me for not replying to a personal request sooner, as she is limited to three hours a day of personal use of her computer! I was stunned. The organization has 30 employees. If each employee spends three hours a day using his or her computer for personal matters, 22,500 hours per year are being wasted – that’s equivalent to 11 full-time employees! So this organization of 30 employees could actually get by with just 19, saving the business over $500 thousand per year!

While this organization has an unusually policy, I suppose it is just accepting the reality that most employees in most businesses spend a great deal of time e-mailing, social networking, and Internet surfing on company time. Some businesses have personal-use policies and some monitor computer usage. Yet the temptation to take “just a minute” to check the movie schedule, the sales at Kohls, or send out tweets is so great and these activities are so addicting that policies become difficult to enforce.

How is it that the very tool that improves productivity in so many ways is the very same tool that is anti-productivity?

Will Limkemann
www.siqualtd.com

The shift toward self-employment

The July issue of Money Magazine features an article titled: The Rise of Freeelance Nation. The authors claim that 30% of the entire workforce is comprised of freelancers, self-employed, temporary staffers, and independent contractors. This job segment is expected to reach 40% of the job market by the end of the recession. They suggest that no matter where you are in your career you should start thinking entrepreneurially and consider ways in which to earn an income when the corporate world no longer has a place for you. Read the entire article.

Will Limkemann
www.siqualtd.com

Buying locally

A program called I Buy NEO was started by Cleveland’s Council of Smaller Enterprises (COSE) some time ago and is gaining traction in helping and encouraging consumers to buy from locally owned and operated businesses. In fact, COSE has designated July 4 – 11 as buy local week.

John Hughes, a deterimined young Detroit entrepreneur, is starting a for-profit business to provide incentives to Detroit citizens to buy from local merchants. He is hoping his plan will have at least a small role in turning around a decaying city. Read and hear an NPR review called The Entrepreneurial Spirit Burns Bright in Detroit.

Will Limkemann
www.siqualtd.com

Good law can have bad consequences for small business

Some times a good and needed law can have unintended and even bad consequences. Consider the Consumer Product Safety Improvement Act. While the act was needed, and in response to lead-ridden toys imported from China, the law has created a tremendous and needless burden on hundreds, if not thousands, of small businesses. See this article by Keith Gerard.

Will Limkemann
www.siqualtd.com

Protecting your business

How often I have seen businesses struggle or fail because they either lost their main customer of a partner left taking customers with him or her. While these situations spell the end to some, others see opportunities to reinvent the businesses and implement new ideas that may have been lingering. They invent new goods or services, discover new markets, improve processes, or create better ways to serve their customers. These owners do not give in or give up. Rather, they reignite the passion that originally drew them to entrepreneurship.

But there are lessons to be learned from business owners who find themselves in these precarious situations:

1. Never rely on one customer for more than 20 – 30% of your business.

2. Avoid relying 100% on one narrow market segment.

3. If going into a partnership, have an attorney help you create a partnership agreement that provides reasonable buy-out provisions and protects the interests of a surviving partner. These provisions should be negotiated and in place before the partnership is finalized.

4. Have all employees sign a non-disclosure/non-compete agreement.

5. Maintain at all times a positive cash-flow and create reserves that can be used to exploit new opportunities.

Will Limkemann
www.siqualtd.com

Customized products and services

I often wonder how much business is lost by companies  not interested or willing to modify standard products or services to meet the desires and needs of their customers. During a time in which many manufacturers are embracing lean techniques and just in time inventory, is it really a stretch to manufacture customized products?

Recently I was in a restaurant with a limited number of specials on the menu, below which in large type was the phrase “No substitutions”. Is it really an imposition on the kitchen to substitute apple sauce for cole slaw? If it is, would not the customer and restaurant be better served by allowing the change at a slight up-charge?

My friend Brooks Hull has a successful company, Bay Corporation, which manufactures medical gas fittings and hoses. Not only can each assembly be custom made, but customers can go onto the web site and configure and price each custom assembly.

Businesses that are going to survive and prosper are going to have to be more and more customer-centric. To a great extent this means delivering the goods and services that the customer wants when the customer wants them.

Will Limkemann
www.siqualtd.com

Logos

Logos can be cute, contrived, reflect a company’s image, or contain a message. Take a look at these 25 message-bearing logos.

Will Limkemann
www.siqualtd.com