BERKONOMICS – Business insights from Dave Berkus

Archive for July, 2011

Plan for your ‘every three million dollar crisis.’

by on Jul.30, 2011, under Growth!, Protecting the business

Here is a phenomenon I discovered over time when dealing with many small start-ups in their early revenue period.  A very predictable series of rotating crises seemed to befall most every one of these young companies.  These became so predictable that I could accurately label them as occurring about every $3 million in gross profit (or revenue for service companies).  By defining this in terms of gross profit, we can therefore include distributors with 15% gross margins as easily as software companies boasting nearly 100% gross margin.

There is a rotating series of predictable crises that most often reveal themselves like this:

At the $3 million revenue mark, the company often has grown from founders to about 20 employees, or $150 thousand in revenue (gross profit) per employee.  Of course, venture-funded startups with long product creation times do not fit this mold as easily, often funded for long periods of losses with many more employees at hand in development positions.  But at or around the 20 employee mark, the founders usually find that two things occur.  The original management span of control is exceeded and management must be delegated to one or more middle managers to maintain efficiency in the workplace.  Second, some of the original employees, occasionally one or two friends of the founders, are discovered to be falling behind as more professional employees show them up to be less competitive in their jobs.  So management reorganizes the structure of the organization to fit the new needs of the growing enterprise.

[Email readers continue here...]  At about the $6 million mark, revenues have ramped to the extent where the original product standards of quality are challenged, as is the speed and efficiency of customer service. Changes need to be made quickly to preserve the reputation of the company, adding a quality control function if not present, adding more QC steps in the process, addressing the number of customer service people on the line, creating longer hours to serve a larger customer base.  Failure to respond to this predictable crisis quickly labels a company as a provider of poor quality, which seems to travel unbelievably fast among the industry, helped by competitors anxious to point out the problems.  And once fixed, the perception of a fixed problem lags the reality by many months, making this a particularly tough crisis, common as it is.

At around the $9 million mark, the company suffers a most predictable cash crisis, one where the costs of growth in working capital and infrastructure creates the need for new sources of funds from investors, banks or asset-based lenders.  If the company is not profitable, these channels for capital are not as easily tapped, extending the crisis and challenging the health of the enterprise.

Surprise.  At around the $12 million mark, the company finds itself full circle, and in need of reorganization again along with a bit of house cleaning, pruning the poorer performers from the ranks.  That’s about at the 80 employee count, a time a little beyond when the company should have transitioned to a professional human resources manager to help solve this and future employee crises.

Do these sound familiar?  They should, even if the dollar amounts are out of alignment with your experience, since some companies are funded well enough to skip the first financial crisis and some so efficient as to skip the first organizational crisis.

With this insight, you should be equipped to spot early signs of each crisis and plan around them in time to avoid the full impact of each in turn.

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Pick your pricing niche carefully. Defend it.

by on Jul.23, 2011, under Positioning

There are five major classes or niches a company should examine and make its own in calculating positioning in the marketplace.  They are:

  • Price
  • Quality
  • Service
  • Innovation
  • Elegance

Companies that compete on price rarely compete against others who emphasize service or quality.  Internet resellers have a better chance to combine price and quality than those with much more fixed overhead occupying a bricks-and-mortar physical presence in the community.  But it is important for the image of the company to be known for one of the above attributes above others. 

Some examples:  Wal-Mart is known for lowest prices, often for identical merchandise found in other stores for more.  But few go to Wal-Mart for quality brands, understanding that they accept Wal-Mart as the low-priced leader.  Nordstrom’s competes on service above all, quality second and price a distant third.  We enter a Nordstrom’s store expecting superior service and know we will pay a price for this.  Apple charges a premium for innovative products, with quality second and service third.  Mercedes offers a premium automobile with its customers expecting luxury first, quality second, service third, and price a distant fourth.  If Apple released a $229 notebook computer, it would damage the brand and reduce the value of owning an Apple computer in the minds of existing customers.

The very image of a company is influenced by this decision, as is every decision following the price positioning.  In many markets, there are poorly defended niches, even markets with dominant players.  Asus found this in the notebook and netbook market and moved in quickly to overtake all other manufacturers with low prices.  It should be noted in passing however, that competing on price alone is the most dangerous strategy of all, since other well-capitalized players can easily join the competition merely by dropping prices upon existing products, of course at the expense of its previous positioning as described above.  Asus was able to grab the mantle of price king while maintaining reasonable quality and even provide a bit of innovation in the netbook arena, worthy of applause by those of us market-watchers looking for examples of good strategic price positioning.

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Where there’s mystery, there’s margin.

by on Jul.19, 2011, under Positioning

                 Here’s a phrase I created in the early 1980’s to describe what I clearly saw as the last chance to make high margins on the sale of computer hardware to businesses.  In the day of the mainframe and then the minicomputer, margins for manufacturers exceeded 35% and dealers were granted a 35% margin as well.  Even with the usual discount of 10%, the margins on hardware were high, especially when applied to prices that exceeded $30,000 per sale. 

                In the early eighties, IBM helped the PC become a tool of the office, and the product crossed over from use by early adopters to the mass market.  Many other PC vendors flooded the market, including an uncounted number of “white box” manufacturers who created systems out of components imported from Asia.  New retail channels popped up everywhere, competing for this lucrative, growing business segment.  New magazines were rushed to market, thick with advertisements for computer systems and components at bargain prices.  Many companies found internal employees able to install these computers and load software easily, without employing outside professional services.

                And those of us depending upon the high margins from more expensive minicomputers found ourselves competing with these same PC’s, now growing to be as powerful as the much more complex and expensive computers of just a few years ago.

[Email readers, continue here...]  Yet, there was one segment of the PC market that was not only growing but maintaining its margins as well as providing more professional services work than any other segment of the industry.  Most of us could install a computer, but almost none of us could network that computer with others in the office or with other offices without equipment we did not understand, configuration tasks we could not perform, and training we could not offer.  So we called upon our local value-added reseller with networking experience, often blessed with an earned certification by Novell or Microsoft.  We paid high per-hour charges for professional services and unknowingly paid high prices for the networking equipment.  But we were, as a class, happy with the fact that the computer and software costs had fallen so much that the networking costs were not an overwhelming portion of the computer budget.

                Observing this, when in a planning session one day, I told my staff that we needed to find an area to defend our margins, one that still enjoyed the mantle of mystery to our customer base.  Because, I said, “Where there’s mystery, there’s margin.”  We did find that niche and used it successfully for several years, in charging to certify and configure a company’s self-purchased PC’s so that they would work efficiently with our software systems.  No employee of our customer company could do this because no employee knew our software and its requirements for database setup, multi-user security and more.  We were able to add $1,500 or more to each small installation, and much more for large installations even though we no longer sold the PC hardware.

                I told this story often in speeches to software and vertical reseller organizations, and the “mystery” expression stuck. Not only that, but I began to hear it restated back to me describing other industries in which similar progress had caused companies to search for a “secret sauce” they could defend. 

                It was only a small step to incorporate this into the strategic planning sessions for all companies that I later advised or served as a board member.  And it still is important today.

                I am an investor in a large home service company that specializes only in technology installations and repairs for the home and small business customer.  With a fleet of Mini Cooper cars all marked with the distinctive logo and colors of the company, this fleet serves a growing need for fixing computer crashes, infected computers, networking issues, audio-visual installations and even fiber-optic installation in-home for a major phone-bandwidth supplier.  They discovered the niche that many home owners and small businesses could not fill or understand.

                Can you find a pain point where the customer cannot apply a solution without your help?  One where the cost and value are both defensible in maintaining higher margins?

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Why buy IT? Why buy MINE? Why buy NOW?

by on Jul.09, 2011, under Positioning

What a powerful set of three questions.  These are so succinct, so well defined, so precise that everyone in sales and everyone involved in marketing must be able to answer these three questions without pause, and convincingly.   Turning these into statements instead of questions provides a framework for the sales presentation from the highest levels of collateral materials and marketing support, to the salesperson on the front line.  It would pay you to work over this set of questions in a special session with sales, marketing and senior management in the room at once.  It is that important.

Why buy IT?   Can you, your sales people and your marketing staff answer this succinctly?  Is your product or service one that responds to a customer need, real or perceived?  This question deals with the offering in general, not yet with your version of the product.  In general, there are three types of products or services: those a customer needs, those a customer wants, and those a customer believes he does not want or need.  Your marketing and sales effort must be focused entirely upon making your product solve an urgent customer need.  Sometimes, companies do this by creating demand where none existed before, such as for Listerine in the early days with a campaign to eliminate halitosis, the dreaded bad breath that consumers had no name for and did not think of as a need before that most successful advertising campaign.  FedEx did not respond to a need for overnight package and letter delivery; it created the need with its clever advertising campaign. Car manufacturers used to make expensive annual model changes just to create a need in the minds of consumers who then viewed their present cars as obsolete. “Why buy it?”

[Email readers continue here... ]   Why buy MINE?  Product differentiation is absolutely necessary to make a sale when there is visible competition, as there usually is in any sale.  Your marketing and sales people must know how to state clearly, with as few words as possible, the reason why your product best responds to the customer’s needs.  There is quite a difference between describing features, as many untrained sales people do and most engineering types almost always do, and describing benefits as a good sales person does.  What the product does is less important than why the product solves the customer’s problem, and how the product does so in ways obviously better than the competitor’s product.   This story should never be left to the sales person to make up, or each will make a different story for the purpose of a sale, not always aligned with the company’s market positioning and rarely as precise and compelling as that created by professional marketers.

Why buy NOW?  Without creating a sense of urgency, a sales person will have trouble closing the sale, allowing competitors another chance to make their case – often with the advantage of hearing the customer recount your benefits as he heard them.  It is not a good place to find yourself, and is one where the odds of finally closing the sale drop considerably.  Provide incentives for the sales person to use as needed to create the sense of urgency needed to push the customer over the line and commit now.  Give him or her latitude for a discount up to a maximum percentage, dunning commissions by at least that percentage to make sure the tool is not used until needed.  Provide a deadline after which the price will increase, the sale will end, the product will be re-allocated to another customer, or a tax credit will expire.  Make the urgency clear with the sales person, so that no customer who waivers will fail to be offered something to make the sale now.

Recently, a roofing insulation sales person had my attention as he described his company’s sale that would end the next Friday, and he made sure I understood that the Federal tax credit for such energy-saving home improvements would be applicable to this sale. He went on to state that the $4,500 cost would qualify for a tax credit (not merely a less-preferable tax deduction) of $3,000, or $1,500 for each of the two bundled services he offered.  Something seemed very wrong to me about this credit, which I had recalled to be 30% of the actual amount paid.  Because the sales person was not credible in this one area, I told him that I would check on the credit and call him a day later.  Of course it took all of a minute using my search engine to figure out that he was attempting to apply his credit offer to the retail price, not the sale price, and twice for two products instead of once for the installation as a whole.  I am sure other customers fell for this, but I was angry enough for this falsification of the facts that I called the sales person and not only declined, but read him the riot act in the process.  Why buy now?  Be sure there are no misrepresentations anywhere in the sales process.

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