CP Book - Part 1 of 2

Nine foundational business building principles which dictate the revenue and profitability progress of every successful company
Curt Clinkinbeard
CUSTOMER PILLARS Nine foundational business building principles which dictate the revenue and protability progress of every successful company Curt Clinkinbeard Strive Publishing www.customerpillars.com CUSTOMER PILLARS. Copyright 2008 by Curt Clinkinbeard. All rights reserved. Printed in the United States. No part of the book may be used or reproduced in any manner without written permission except in brief articles or reviews and with author citation. For more information, visit www.customerpillars.com, curt@strivecoaching.com, Strive Publishing, Topeka, Kansas. FIRST EDITION Library of Congress Control Number: 2008904394 Clinkinbeard, Curt Customer PillarsNine foundational business building principles which dictate the revenue and protability progress of every successful company / Curt Clinkinbeard.1st ed. ISBN 978-0-9769064-1-4 1. Entrepreneurship. 2. Small BusinessManagement. 3. Success in Business. 4. Marketing 10 9 8 7 6 5 4 3 2 Editor: Libby Koponen Cover/Illustrations: Curt Clinkinbeard & Carl Masters Author Photograph: Dan Mauer Page Layout: Digital Dragon Designery Proofreader: Kathy Foster The contents of this book should be considered management thoughts, suggestions, and insights, but do not abdicate the individual businessperson from making intelligent decisions for running their specic business in their specic industry. The goal of the book is to help the reader capitalize on opportunities, but does not reduce or eliminate the personal responsibility for decisions made in a business.
WHAT OTHER PEOPLE ARE SAYING ABOUT CUSTOMER PILLARS

Marketing isnt just an art. Its also a science. And in this book, Curt Clinkinbeard gives us a tour of the laboratory. By demystifying marketing, hes provided a huge service to free agents who will find his systematic guide timely, practical, and wise. Daniel Pink, Author, Free Agent Nation & A Whole New Mind The principles you present are not fads. They are the keys that everyone needs to understand how to succeed in business. To me, Grandpa Kenny and Grandson Curt show that you dont need a Harvard MBA or a lot of money to run a successful business. They show how ordinary people can achieve extraordinary results. Marcia Stevens, Ph.D. Regional Director, Wichita State University Small Business Development Center CUSTOMER PILLARS is exactly what is needed in todays global marketplace. Curt shows you to develop your business in a simple, easy to follow format. Suzanne Mulvehill, MBA; Author, Employee to Entrepreneur; Host, The Entrepreneur Hour Radio Show What makes CUSTOMER PILLARS such a valuable resource and joy for anyone in business, is Curts engaging and compelling writing style. Each chapter communicates warmth, sincerity, and clarity, in addition to being a comprehensive resource reflecting his professional expertise and wisdom. Elisabeth Gortschacher, Founder and Director of E.E.G. Coaching Pty Ltd and Legacy Creators Worldwide CUSTOMER PILLARS shines a bright light on the logic path and gives a specific system for business success. No question, a very large number of companies can benefit from that illumination. Frank Hoffman, President, Hall, Decker & McKibben Advertising
CUSTOMER PILLARS is well thought out and will benefit readers in building their business. We are really impressed with the content really hands-on, practical stuff that should be priceless to businesses. You will touch many people. Winston and Barb Conner, Professional Business Coaches, Coaching Dynamics The Clinkinbeards small grocery store is very different from an Internet company of today, but the nine pillars continue to apply. We have all witnessed numerous failures of new economy companies who believed these principles no longer pertained to them. CUSTOMER PILLARS provides a perfect way to describe the approach business owners should take to grow their businesses. Kevin Groenhagen, Publisher, Kaw Valley Small Business Monthly CUSTOMER PILLARS is a valuable collection of quick real life lessons for either the experienced executive or budding entrepreneur. Curt has taken a lifetime of learning in the wonderful world entrepreneurship and put it into one of the most entertaining, educational, and personally profitable books I have ever seen. Douglas S. Kinsinger, CCE, Greater Topeka Chamber of Commerce, President / CEO Gusto in marketing! This is what Curt Clinkinbeard can help your small business achieve. He is especially gifted at helping clarify and define the processes to implement to grow a business. Dr. Les Streit, Washburn University Small Business Development Center, Regional Director The case studies and Curts personal reflections on his grandfathers business gives you the tools and ideas you need to be successful. I have reread several of the chapters and each time garner more insight into how to CUSTOMER PILLARS my business. Kathy Domnanish, President, Simply Wireless
DEDICATION
This book is dedicated to Kenny and Jean Clinkinbeardgrandparents who welcomed their grandson into their small business and showed him more than they would have ever imagined. CUSTOMER PILLARS is written for every small business person who operates their business with the same heart and compassion as the Nortonville IGA. Your spirit inspires me!
ACKNOWLEDGEMENTS
Writing a book requires support from many people. I am deeply grateful to Mike & Pat Snell, Gerry Sindell, Wally Kearns, Maggie Bornholdt, Ed Carpenter, Tom Schwartz, Mark Penn, Todd Manning, Tony Estes, Keith Hertling, James Hill, Mark Griffith, Joyce Claterbos, Cheryl Siewald, Chris Deman, Terry Tyler, Bob Featherston, Carl Kurt, John Ross, Derek Osborn, as well as my fantastically supportive family (Clinkinbeards, Halls, Fredericksons, Sloops, and Hasketts), my wonderful colleagues in the Kansas SBDC network, every enthusiastic client I have ever had the pleasure to work with, and everyone who participated on the CUSTOMER PILLARS review team. Mostly, I want to thank my wonderful wife Summer, who has patiently and unquestioningly supported my pursuit of this project.
TABLE OF CONTENTS
Introduction Pillar One Pillar Two Pillar Three Pillar Four Pillar Five Pillar Six Pillar Seven Pillar Eight Pillar Nine Introducing the CUSTOMER PILLARS Focus on Growth Customers Maximize Value Incrementally Refine to Perfect Pricing Form Productive Linking Relationships Sharpen Your Competitive Edge Connect Powerfully with Customers Manage Expectations Brilliantly Learn from the Market Practice Coordinated Growth Planning 1 20 45 64 91 123 140 179 216 244
AN OPEN LETTER TO READERS

Thank you for reading CUSTOMER PILLARS! I wish you much success in learning and taking the principles found within and putting them into action in your business. They will help you evolve! Look for ways the material impacts your company, not just at the surface level, but at a deeper level as well. Avoid the temptation to say Im already doing that, or That doesnt apply to me, but rather look for ways to tap into the very powerful potential of the principles and improve your approach in a continuous manner. Getting really good at what is found in this book (at those deeper levels) has many handsome rewards. To the extent your business will make your dreams come true, it will do so within the context of these principles. I want your business to reach the goals you have for it. The basic analogies and the Nortonville IGA anecdotes found throughout show the back to basics nature of the material. They are provided as an overlay and introduction to the pillars, the real lessons. So dont knock yourself out trying to memorize how analogies relate to expanding your business. Just remember the concepts in this book are as foundational to growing your business as oxygen, food, and water are to the human body. Additionally, the book commonly refers to products, services, and ideaswhat your company is attempting to sell to customers. Often I will use only the word products, but please know this applies equally to products, services, or ideas. If there are distinctions between products, services, or ideas, they will be specifically highlighted. Also, please realize the concepts are scalable, meaning they apply
in companies of many different sizes. In the book, examples are often shared with the concepts in very small companies. The principles apply in companies of many different sizes. If you are uncomfortable with any of the numbers provided, simply add or subtract a few zeros. The CUSTOMER PILLARS apply to very small companies, and large ones as well. Please feel free to contact the author at curt@strivecoaching.com to make comments, suggestions, or observationsincluding complaints! Additionally, the CUSTOMER PILLARS website features many free downloadable tools relating to the book, as well as other products and services to assist you with your development efforts. If you like the book and it helps you, please tell a friend. Even better, send me a testimonial or write a positive review on any review websites. Positive reader feedback is extremely helpful! The greatest compliment you can provide me about the book is to encourage others to read it. The book is written to help you and your business reach your potential. Go do it! Please visit our website at:
WWW.CUSTOMERPILLARS.COM
INTRODUCTION
INTRODUCING THE CUSTOMER PILLARS

Crash! The jar of pickles hit the grocery store floor glass flew, pickles scattered, and a smelly green juice ran out onto the aisle. I was only four working in my grandparents IGA grocery store in Nortonville Kansas, but I knew breaking something in a store was bad and that the elderly lady who had done it was in big trouble. And so did she. She panicked, mumbled apologies, and started to pay my grandmother right in the middle of the aisle. With a little laugh and a reassuring smile, Grandma patted the older woman on the hand and said, Dont worry. Theres no need to pay. Gosh, accidents happen. Its no big deal. Oh thank you! the older woman smiledand relaxed. She felt appreciated. Grandma started to sweep up the mess, and the woman thanked her again for being so kind. The pickles incident and others like it were my first introduction to the ideas that became the CUSTOMER PILLARS system. Just as a person needs sleep, nutrition, and friendships, the only way to develop a lasting and successful business is to form, preserve, and develop excellent customer relationships. Growing your company the goal of this book and its systematic rulesdepends on these relationships. I did not create the pillars the book discusses. I observed and recorded them; they occur naturally and govern the success of any business. They are like the laws of gravity, evaporation, or oxygen. If you use their power to your advantage, your revenues, profits, and overall success will multiply.
CUSTOMER PILLARS
GROW OR DIE
Vince, the owner of PlaceWorks Interiors, enters my office with a determined look. We have to find a way to increase this business, he says. A mentor once told my partner and me that a business is either growing or shrinking. So, the only option is to expand. Each year, I speak with hundreds of small business owners & managers, and whether their company is starting from scratch, riding a wave of positive momentum, or pulling itself up from a major setback, their motives are the same. They want their businesses to grow, but dont know what steps to take. As Vinces partner Samantha puts it: Were confused. We actually have too many ideas. For instance, were considering expanding our product offering, but arent sure which lines to add. Plus, we cant decide whether to increase our yellow pages ad, use direct mail, or increase our personal selling approaches. Then theres our debate on pricing and discounting. We seem to be going in too many directions. What should we do? Instead of answering those questions directly, lets take a step back, I begin, and look at the bigger picture. When you answer the big questions, I find the smaller issues almost solve themselves. Vincent and Samantha, like many business owners, approach building their company as a series of individual, random, tactical issuesquestions, opportunities, and challenges posed on an almost daily basis. They think these topics are unrelated to other, bigger matters. Rarely do they consider the interconnected nature of expansion efforts or approach them strategically or completely. I discovered the CUSTOMER PILLARS when I noticed myself asking questions about key strategic issues in response to client queries about small picture issues. Clients didnt typically have good answers to the important, big picture questionsthe key things necessary to properly answer the smaller, tactical questions. It was as if they were asking me which highway they needed to take, but didnt know their destination. So I started to record the questions I was asking these clients to refocus their concerns away from tactical actions towards an integrated, strategic approach. Over time, nine key areas emerged and the CUSTOMER PILLARS began to take shape. Over the next few hours I will work with Vince and Samantha and teach them nine naturally occurring fundamentals that form the
Introducing the CUSTOMER PILLARS
PERSONAL USE ONLY NOT FOR RESALE

PILLARS system. Together the pillars form an organized roadmap that shows how to develop any business, increase its revenues, and maximize its profits. The system will help you do this as well.
LETS TALK GROWTH

Increasing profitable revenues is an important part of keeping a company alive and prospering. Have you ever been in a company that was getting smaller? Not fun. Cost cutting, layoffs, politicking, and negative self esteem are hallmarks of shrinking firms. In addition to being necessary for the company, growth is also fun! So, do you want to double, triple, or quadruple your business? There are strategies to make almost any business as large as you are willing to increase it. Nearly every business is limited only by the growth mindset of the people who own, manage, or work in it. Developing this growth mindset is the purpose of this book. (Note: the pillars also work if your goals are more conservativeall revenue growth is impacted by the principles discussed here.) While there are several ways to expand, this text only discusses internal, organic growth. It does not go into acquiring other companies, another expansion strategy. There are other books for that. This one talks about taking what you have and making it more successful. Lets look at some fun numbers. Assume you want to double or triple your revenues; here are annual growth rate percentages necessary to double or triple a business over a certain number of years.
Years To Grow the Business 1 2 3 4 5 6 7 8 9 10 Annual Growth Rate Required to Double Biz 100% 42% 26% 19% 15% 13% 11% 9% 8% 7% Annual Growth Rate Required to Triple Biz 200% 73% 44% 32% 25% 20% 17% 15% 13% 12%
CUSTOMER PILLARS
The CUSTOMER PILLARS are time-tested and govern both the expansion in your business and the rewards you receive from it. Can you grow if you already have all the revenues you want? Yes! Just improve the quality of revenues, increase the margins, and work only with people you enjoy and pay their bills on time. The rewards of the CUSTOMER PILLARS are personal as well as professional.
INTRODUCING THE 9 CUSTOMER PILLARS

All you need to get your business on the CUSTOMER PILLARS path is to follow these nine basic rules.
THE 9 CUSTOMER PILLARS

Pillar 1 Pillar 2 Pillar 3 Pillar 4 Pillar 5 Pillar 6 Pillar 7 Pillar 8 Pillar 9 Focus on Growth Customers Maximize Value Incrementally Refine Toward Perfect Pricing Form Productive Linking Relationships Sharpen Your Competitive Edge Connect Powerfully with Customers Manage Expectations Brilliantly Learn from the Market Practice Coordinated Growth Planning
When you master these pillars, you will know how to successfully build your company and your career. Understanding the system is fairly easy, but learning its intricacies, how it applies to you, and how to best implement it is a bit more involved.
THE 9 CUSTOMER PILLARS AT WORK

Lets take a quick look at The 9 CUSTOMER PILLARS alive in another company: Jim Anderson is the managing partner in a law firm, Anderson, Phillips and Conway (APC). And while the focus of his daily work is providing legal services, he knows the CUSTOMER PILLARS are critical to developing his business: I may sign the paychecks, but our clients are the ones who really provide the money for our expenses and profits. Without them, we wouldnt be anything. Pillar 1: Focus on Growth Customers has fueled the progression of APC over the past few years, both by adding new clients and growing existing clients. The company focuses on businesses in a regional area, though it does have several clients who have operations across the nation. To further define their target clients, the firm has an emphasis on four primary types of industries, which allows them to further specialize. They have identified their most desirable growth targets and have programs to introduce prospective clients to their services. Pillar 2: Maximize Value Incrementally means structuring the product or service around growth clients. APC offers traditional legal services to business clients, concentrating on their clients profitability. The firm constantly reinvents itself and the services it offers, emphasizing contract, employment, franchise, and intellectual property lawthe services most requested by their best markets. The company closely monitors client demand and shifts and changes correspondingly. Pillar 3: Refine Toward Perfect Pricing describes the companys approach to charging its clients. The company bills services on an hourly basis dependent on two things: the level of expertise/experience of the associate performing the services and a competitive analysis. The company performs a pricing review every six months and makes adjustments as necessary. The firm also has strict billing procedures designed to maximize revenues and provide the greatest value to clients. The firm attempts to get the most service to a client for the most reasonable price, even
CUSTOMER PILLARS
if that means assigning multiple lawyers at different rates to handle various tasks. Pillar 4: Form Productive Linking Relationships. The firm has several cross-referring relationships with other providers of business services including accountants, banks, and insurance professionals. These important intermediaries help link clients to the business and are essential to the firms evolution. In most cases, the firm distributes its services directly to its clients, though it occasionally handles more sophisticated services for smaller firms. APC bills the smaller firm at a slightly discounted rate (for bringing them the business) and the smaller firm marks the services up to their clients. APC views these linking partners as an untapped opportunity. Pillar 5: Sharpen Your Competitive Edge. APC conducts business in a very competitive environment, and as a successful firm, is constantly fending off other firms attempting to lure their clients away. APC has a four-pronged approach to being their clients preferred choice: First, they have a more client friendly billing procedure than other law firms. The firm takes extra care explaining this policy to its clients. Second, their firm puts a strong emphasis on developing personal relationships with their clients. Their motto is to treat clients like theyre our friends. Associates are encouraged to take clients to lunches, dinners, golf outings, and social occasions. Third, the firm invests heavily in continuing education and certifications, well above industry requirements. To highlight this, the firm publishes a quarterly newsletter for clients featuring new certifications obtained and expertise learned. Fourth, follow up is completed to ensure client satisfaction. The firm has a formal policy which checks in with clients after work is completed to make sure theyre happy. This increased dialog sends a powerful message to clients that APC is a cut above the rest. Pillar 6: Connect Powerfully with Customers looks at strategies used to communicate with clients. The business uses a multitude of
methods to share the firms vision with current clients as well as with companies who may become clients, such as client newsletters (they have several which focus specifically on different types of clients), follow up surveys, and the explanation of billing procedures. Other communication strategies include sponsorship of local golf events, yellow pages advertising, networking through the Chamber of Commerce, speaking to business clubs on legal matters, press releases, and sales training to all employees. Pillar 7: Manage Expectations Brilliantly. APC takes steps to guarantee client satisfaction is foremost in all its associates minds, all day, every day. The firms mission statement strongly emphasizes value and service to the client, with partners demonstrating their commitment by actively reviewing client feedback forms and by managing the response to client issues, both internally and externally. The issue of client satisfaction has very high visibility within the firm and is continually measured with several different systems. For example, Jim recently got on an airplane to visit a client who had a small misunderstanding with one of the associates. While the issue could have been dealt with over the telephone, Jim wanted his client to feel valued and decided to go to the additional effort of an inperson meeting. The client was so impressed she asked Jim to handle the work a subsidiary company had previously planned on awarding to a local firm. The resulting additional six figures in billings from the client provided a huge return on investment for Jims trip. Pillar 8: Learn from the Market. Jim learned early in business that expansion activities dont always work out as planned. So the firm tests new concepts on a small scale and measures client reactions. When clients respond favorably to a new initiative, the company rolls out the program while continuing to monitor its progress. Programs are finalized only through trial and error. The ones that work are repeated and increased; those that fail are eliminated or revised. This testing and research is an ongoing process of refinement. Pillar 9: Practice Coordinated Growth Planning closes the loop back to the business plan and ensures everyday actions support
CUSTOMER PILLARS
the companys overall, driving goals. Jim Anderson makes sure his company is responsive to the shifts and changes in the market. Every year, he has an extensive planning retreat. He always starts by reviewing growth objectives and activities from the previous year, then sets goals for the next year. For Jim, using the CUSTOMER PILLARS is a critical part of his firms success and he counts this discipline as one of the stronger weapons in his firms arsenal. As you can see even from this brief summary, the CUSTOMER PILLARS cover significant ground in Jims company. As you read about the nine pillars in more detail, youll learn how to use them to develop your business.
WARNING: PLAIN ENGLISH AHEAD

Some people are surprised by how straightforward and even simple the pillars seem at first. While the books style is clear and down-toearth, the concepts are not simplistic. The book explains powerful concepts in clear language. If you think you and your company are too sophisticated for this, consider getting over it and checking the ego at the door. This book doesnt try to impress people with fancy language and confusing buzzwordsits goal is to guide readers towards lasting, real, and highly profitable results. Many business books take basic principles and dress them up with sophisticated language, overcomplicating the concepts and intimidating readers who could have benefitted from them. The writing approach in this book is just the opposite. The CUSTOMER PILLARS succeed with excellent execution of the basics.
FRANK TOTALLY GETS IT

Frank Hamilton sits by himself in his living room almost in a daze, staring down at the largest check hes ever seen: just over seven million dollars. He is surprised his hands arent trembling. It was a great accomplishment. He remembers starting his commercial janitorial services business over twenty years agothe ups, the downs, and everything in between. He chuckles remembering
how much the business has evolved since then. Today was the culmination: selling the business and reaping the rewards of all the hard work. Thinking back, Frank recalls times when things werent so great. Like many entrepreneurs, he started Hamilton Commercial Services without any significant business background. One day he was an employee in another firm; the next he was a business owner. The transition wasnt an easy one, particularly during the first six years. Then something happened. Frank remembers the situation vividly. Sales had been down for three straight quarters after the loss of a major client and cash flow was getting tight. He had tried bringing in expensive consultants and high dollar management employees to provide direction, but the results were usually fleeting. It was like I snapped and everything came into place, Frank recalled. For years I did everything to say that sales and marketing was not my thing. Then I realized developing profitable customers was the business. I was compromising myself and my company by denying full responsibility for our success. He remembers desperately wanting to flourish as an entrepreneur. Profits needed to rise and he had already cut costs down to the bone. The only way to reach his profit goal was to increase revenues. Frank knew they needed to sell more to a larger number of customers. And he knew this meant he personally needed to develop better business management and marketing skills. It was this moment of truth when Frank went from being an average business owner to being on a CUSTOMER PILLARS path to success. Today, many years later, was the grand finale of that moment. There are approximately 25 million businesses in the United States today and between 500,000 and one million new companies start each year. The success and longevity of each one of these companies will be determined by the CUSTOMER PILLARS. Building good revenues must become part of any successful companys essential corepart of who they are as a company. This makes it especially difficult to pass on the responsibility for success with customers to others. Many entrepreneurs, in response to their perceived lack of sales and marketing skills, seek answers outside themselves. They bring in consultants, buy tape programs, and hire
E ONLY AL US ERSON P ESALE FOR R NOT
10
CUSTOMER PILLARS
save the day employees. Too often, however, theyre disappointed in the results. CUSTOMER PILLARS recognizes that the unique, driving, revenue force in a company comes from within; it is part of the fundamental leadership required to make a business successful. Outsiders just cant develop and sustain your true essence for you. This may cause some to fret. And yes, it would be easier to just hire someone to do it, but taking ownership for this important part of your business is within your grasp. Giving you this capability is why I wrote this book!
IT ISNT A YES OR NO QUESTION

Those pillars are interesting, Samantha says with a devils advocate tone in her voice, but were already doing many of the things you mentioned. Im not really sure these nine pillars are going to be that helpful in our expansion efforts. She raises an interesting question regarding CUSTOMER PILLARS. Sometimes when people are initially introduced to the principles, they recognize some of the activities as things they are already doing in their business. Thats great! It is rewarding to hear people excited they are already doing some things very well. But succeeding isnt an all or nothing proposition. Think of CUSTOMER PILLARS success as ranging from 1 to 100. In fact, each of the nine pillars measures its success on a continuum, so its really nine different continuums from 1 to 100. Clearly, strength in one of the nine pillars will synergistically improve the other pillars, as they are very connected. However, no company is achieving perfection in each of the nine pillars and every company needs continued improvement, because things are changing. Always.
11
Shifts in the markets, the economy, competitors, and in your customer base mean your success in CUSTOMER PILLARS is an evolving and flowing activity. Its a moving target! You can be on top of the world today and in the gutter tomorrow. Similarly, you can be down and out, shift your approach, and become extremely successful. It happens all the time! Because of this, the Japanese principle of kaizen, which encourages continuous and never ending improvement, applies to CUSTOMER PILLARS. A business should always be working on progress in the areas discussed in these principles and never consider their efforts finished. Its bigger than that.
DO WE OWN THE MARKET ON GROWTH?

Some may say there are more ways to grow a business than developing customer relationships or increasing and improving customer revenues. For example, some businesses grow by creating innovative technologies, others find the best employees, others raise capital. But all of these are valuable only in relation to their impact on the CUSTOMER PILLARS. New technologies only create value if they provide a CUSTOMER PILLARS opportunity. Does the technology itself generate prospects for increased profits or enhance the companys ability to reach and serve customers? Essentially, if technology does not improve the companys approach to customers, either directly or indirectly, its value is limited. Similarly, strong employees can be an excellent growth strategy if they improve the companys revenue and profit streams and relationships with customers. When strong employees complement the CUSTOMER PILLARS approach, its a great strategy. Finally, financing is often necessary to capitalize on expansion opportunities. Solid financial reserves produce great value when those dollars are used to improve the profitability, strength, and development of customer relationships. Take the case of Steve Wilson and his IT consulting firm. Through his career as a well paid employee, Steve had been storing acorns to start his own business. He estimated he would need $30,000 for startup funds. But because he had done a great job saving, he had $50,000 to invest. Steve was extremely well capitalized for his startup. Upon starting his company, Steve rented a beautiful office, hired an administrative assistant, and spent aggressively on advertising.
12
CUSTOMER PILLARS
And though Steve was regarded as an excellent technical consultant, he was a little uneasy in one-to-one selling situations. His approach was to advertise, let his expertise speak for itself, and let the business come to him. Unfortunately, eight months into the project, Steves revenues were about 25% of what he had anticipated. For whatever reason, he was not connecting with the market. As he was closing down his business and polishing his resume, he exclaimed, Im shocked. They say most businesses fail because theyre undercapitalized. I was actually overcapitalized and one of the best trained professionals in my area. It just doesnt make any sense that this did not work. Contrast this to Sheryl Hoffman. She also wanted to start an IT consulting firm. Like Steve, she hoped for $30,000 in startup funds. But she only had $10,000, so she decided to move forward, but to start very small. Sheryl kept her corporate job to pay the bills, but took on consulting work in the evening and on weekends. This made life a little frantic; however, she was able to start her business. After three months, Sheryl was bringing on more work than she could complete in her limited time. To keep accepting consulting work, which was much more profitable than her day job, she decided to work a part-time job until revenues allowed her to put her full-time effort into the consulting firm. This took another nine months. Today, Sheryl has a very successful consulting firm which employs ten other people. She earns about four times as much as her last full time salary. She is a great success! In starting her business, financing was a weakness, but her mastery of the CUSTOMER PILLARS was a strength. Dont get me wronggiven the choice of starting out with sufficient capital or not, I would definitely choose being fully capitalized. Ultimately though, the success of the business will not be based on its financing. It will be based on how quickly a company can connect with the market and generate real profits which can be used to finance its ongoing operation and additional growth. Being well capitalized will never compensate for being weak in the areas discussed in the CUSTOMER PILLARS.
13
IDEAS ARE EVERYWHERE

One of the great things about the expansion approach described in this book is that it applies universally to companies across industries. Because of this, much can be learned studying the growth techniques used by others. Sharon Salisbury owns the Downwindin Ranch House Bed & Breakfast, a popular getaway spot for busy professionals. The business caters to a wide variety of peoplemany are executive couples in the city who are looking for a quick and relaxing weekend escape in the scenic country. One day, Sharon was booking an airline flight to Salt Lake City for a family function unrelated to her business. Though she is attracted to some of the special offers by other airlines, she is a member of a courtesy club on one of the major airlines and gets a great deal on bonus miles. So she sticks with her standard airline. As she was placing the order for her flight, she thought to herself, Wouldnt it be great to have a frequent flyer program for the bed and breakfast that kept people coming back time and time again? She started to brainstorm ideas. Since many of her customers come to the B&B from the city for a brief getaway and the focus is on a refreshing, stress-reducing weekend, the loyalty idea had great possibilities. Some of her clients are frequent repeaters and some are only one timers. Sharon thought about it. People need these getaways on a regular basis to keep things in balance, and her repeat customers were much more profitable due to the decreased incremental selling cost per repeat customer. She wanted to be sure they came back to her B&B instead of trying another one or something else entirely. Marketers would call Sharons idea a continuity-based, retention strategy. She considered the four seasons, and her instincts told her people would need this type of refresher every third month or so. So she opted for a campaign based around the seasons and thought about special activities to combine with each seasonal visit. Her goal was to keep the customers experience fresh and unique on each minivacation. Thinking back to the airlines courtesy club she realized people like to feel special and that giving some exclusivity and special
14
CUSTOMER PILLARS

perks to this program could really enhance its appeal. Through more brainstorming, she decided to name her program The Saddle-ridin, Troubles-behindin, Leisure-remindin Ranchhands Club. And though it was a long brand name, it was catchy and she could envision fun and appealing graphics to add to the program. After a few weeks of developing, refining, and testing the concept, one based on several of the CUSTOMER PILLARS, Sharon decided to implement the frequent flyer program. It was incredibly successful. Sharon believes this program, prompted by her experience as a consumer purchasing an airline ticket, will increase her profits and personal income over 25% next year. Now thats a CUSTOMER PILLARS specialist on the move!
YEAH, BUT IS IT SMART GROWTH?!!?

Any astute businessperson will say that mere growth is not enough. Expanding entails risk and can even be negative, so growth needs to be planned intelligently! Good business development ensures that profits and revenues increase simultaneously and positions the business for future progress. Never seek growth just for growths sake. Advance consciously, and in a way that increases your viability, longevity, profitability, and the enjoyment you get from your company. To assist with tracking the quality of growth, look at a couple of ratios. These numbers can be used to track the quality of growth over a period of time. As with many ratios, the important information is derived when comparing your own progress over multiple time periods. There are two ratios you can use to do this.
Growth Efficiency Ratio = % Change in Profits % Change in Revenues
To calculate a % change in profits, % Change in Profits = (Profit This PeriodProfit Last Period) Profit Last Period
15
The % change in revenues is calculated the same way, but with revenues. The periods of comparison can be monthly, quarterly, or annually. When you monitor the growth efficiency ratio, you are tracking the quality of the growth. Basically the ratio looks at whether an increase in sales revenue results in a corresponding (or greater) increase in profits. In this ratio, if profits and revenues increase by the same percentage, the ratio is 1. Theoretically, any increase in revenue should be exceeded by the increase in profitability. For instance, a 10% increase in revenues should result in a profit increase of more than 10%. If revenues increase by 10% and profits increase by 15%, the ratio is 1.5. But if revenues increase by 10% profits increase by 5%, the ratio is 0.5. Obviously, the bigger the ratio, the better. While its hard to argue with any increase in profits, if the ratio is less than one, you should still try to understand why the percentage change in profits was smaller than the percentage change in revenues. You have to apply this ratio with an understanding of what is going on inside the company and any extenuating circumstances. But, certainly, a goal should be to generate additional revenues which are efficient at producing even larger increases in profits. To make this mathematical concept more tangible, lets look at Luxury Pool Supplys last few years of revenues and profits.
Year Revenues % Change in Revenues
2001 $475,473
2002 $518,266 9%
2003 $575,275 11%
2004 $655,813 14%
Prots % Change in Prots
$33,283
$36,279 9%
$41,720 15%
$45,058 8%
Growth Efciency Ratio
1.0
1.4
0.6
16
CUSTOMER PILLARS
In 2002, revenues and profits both increased nine percent, yielding a growth efficiency ratio of one. In 2003, revenues increased 11 percent over 2002, but profits increased 15%. This gives us the more favorable ratio of 1.4. This means the new revenues were more efficient in generating profits. This is what you want. In 2004, revenues increased by 14%; however, profits increased only 8%, yielding an efficiency ratio of 0.6. While this is still progress, 2004s growth was not as profitable as the other years. If you have a year like this, attempt to figure out why. There can be good reasons for a ratio smaller than one: if, for example, dollars invested in one period reduce the periods profitability, but position the company for future profitability. Tracking the quality of your companys growth will help you understand the reasons for it. You can also compare your revenue growth to industry growth. Most industries have market research on overall industry growth. Try an industry market research report or your industry association to find this. Chapter Eight provides more details on these resources. The second ratio, called the Industry Growth Ratio, is calculated as follows: Industry Growth Ratio = Companys Annual Growth % Industry Growth % For example, if the industry grew at 6% and you grew at 9% last year, you have a ratio of 1.5. Again, the higher the ratio, the better. A ratio of 1 means you and the industry grew at exactly the same rate in other words, you kept up with the growth within the industry and maintained the exact same market share. If your ratio was above 1, you grew faster than the industry and grew your share of the market. If your ratio was below 1, you grew more slowly than the industry and lost market share. Tracking these ratios helps both to quantify the quality of the growth and increase your understanding of it, so you can set appropriate expansion goals. These ratios are valuable but dont always work perfectly in every situation. Negative numbers distort the calculations, so you may need to do some additional interpretation of the numbers if any of
17
the numbers you are using show negative growth. When growth is present, though, these ratios really help you understand its quality.
THE KEYS ARE IN THE IGNITION

So are you serious about building your business? Many people pay lip service to business growth; not so many actually do anything to achieve it. Youre holding an important system for evolution, but you need to look below the surface and really think about it to understand how it impacts you. Read this book actively: its more than theories and ideas for passive consumption. The real benefit comes from seeing how the ideas and suggestions relate to your business and taking actions based on your insights. I believe in the growth potential of your business. This book describes the systematic approach I would take if I were working directly with you and your company. It shows you how to use the same thought processes I would use, as if I was advising you about your business and what you should do to increase it. View the book as your personal CUSTOMER PILLARS coach! Imagine an open field with many visible stones, many covering gold nuggets. The books goal is to point out the stones, so you will be more likely to look in the right places, and turn over the right ones to find the best opportunities for your business. Read, absorb, then act.
18
CUSTOMER PILLARS
QUICK TIPS FROM THE PILLARS

The end of each chapter gives specific tips which can serve as a to do list from each chapter and help you act on the chapters information. For example, after reading this chapter, I suggest that you:
Define specific expansion targetsunderstand why you have selected these goals and what accomplishing them will mean to you and your business Study the nine pillars of growtheven memorize them and see how each principle impacts your business Take full responsibility for the development of your businessno consultant, employee, vendor, customer, or competitor will ever drive or determine your growth; you do Write down your ideasreading this book and thinking about expansion should generate more ideas than you can address in the immediate term; have a method to collect and record your brainstorms Use the growth efficiency ratio and the industry growth ratio to track and analyze your progression Commit to excellent execution of the basics and continuous improvementgrowth doesnt have to be sophisticated to be effective; fully master the basic fundamentals first Teach your employees the tenets found in CUSTOMER PILLARSif they understand and use the pillars, you will be better positioned to grow
19
Study other industries and uncover expansion opportunities in yoursideas are everywhere so keep your eyes open Develop a growth mindsetbusiness development requires a serious, focused concentration! A significant expansion effort requires stepping back, evaluating the business, and taking a broad-based strategic approach
FOR PERSONAL USE ONLY NOT FOR RESALE

This electronic document is distributed by The FAMEE Foundation under license from Strive Coaching, Inc, the publisher and holder of the copyrights associated with this publication. The file is intended for the individual use of the members of The FAMEE Foundation and may be printed and used within an individual organization including copying pages for employees of the individual company. It may not be reproduced for distribution outside of the members individual members organization. The contents of this book should be considered management thoughts, suggestions, and insights, but do not abdicate the individual businessperson from making intelligent decisions for running their specific business in their specific industry. The goal of the book is to help the reader capitalize on opportunities, but does not reduce or eliminate the personal responsibility for decisions made in a business Copyright 2008. All rights reserved.
PILLAR ONE
FOCUS ON GROWTH CUSTOMERS

Kenny, how are your steaks today? Theyre as tender as my heart, my grandfather said. And are your chickens fresh? Well yesI even had to slap one on the hand about ten minutes ago! The shoppers buying their groceries laughed, my grandfather chuckled, and I, the little boy watching everyone at the meat counter, giggled too. My grandfathers jolly demeanor made almost anyone smile. He looked straight out of the 1950sand he went out of his way to greet customers, answer their questions, and even flashed his dentures at children to make them laugh. Customers adored him. There was not an endless supply of new customers in Nortonville. My grandparents knew that they had to keep the customers they had, and that to survive and grow, they needed to get as much of their customers business as possible. Their approach was to make customers friends and their young grandson noticed.
20
Pillar One: Focus on Growth Customers
21
PILLAR 1: FOCUS ON GROWTH CUSTOMERS

To profitably increase revenues, the focus simply must be on the customers which contribute to that growth. (There just isnt any other way to do it!) To evolve, the mantra must be the customer, the customer, the customer. The dollars leading to increased financial performance in your company were once in the wallets, purses, and bank accounts of your customers. Increasing revenues means convincing clients that giving that money to your business versus keeping it or giving it to someone else will serve them best. The decision, nonetheless, is the customers and they vote with their dollars. Customers are the gasoline that fuels the engine, the blood pumping through the heart, and the foundations that begin and perpetuate the growth of your company. Brilliant products, endless financing, and incredible technological savvy are all completely worthless without solid customer relationships. So the question Who are we going to sell to? is crucial. Answer this question with specifics and never stop trying to discover more. The company that best understands their customers and prospective customers is in the best position to be the industry leader. So define, study, and learn to gain greater knowledge of and intimacy with your customers. You are probably already doing some of this; this chapter shows you how to take what youre doing to a deeper level. If you want to double revenues, your choices are to: 1. 2. 3. 4. Double the number of customers, Double the amount sold to each customer, Double the price of every item sold, or Some combination of the above
Usually, growth is influenced by all of these strategies. By definition, a growth customer is one who contributes to the expansion objectives of the company, specifically this includes: 1. Base/existing customers
22
CUSTOMER PILLARS
2. 3. 4. 5.
New customers Customers who, though their own progress, become larger customers of the company Highly profitable customers Influential customers who will bring other customers with them
THERE IS A DUMB ANSWER

People often say theres no such thing as a stupid question. But there is a stupid answer to the first crucial expansion question, Who are you going to sell to? If you say, Everyone, you are making a common mistake. In fact, the surest clue you dont have one, is to say that everyone will want to buy your product. No companynot McDonalds, not Microsoft, not Disney sells to everyone. Narrowing the scope, defining the customer, and developing intelligent strategies which cater to your customers specific, individual needs cant happen if your target is everyone. Thus, customer segmentationidentifying and learning about groups of customersis a vital part of the expansion process.
DIFFERENT STROKES FOR DIFFERENT FOLKS

Companies succeed by knowing their specific customer base and its motives, then by designing products or services to meet those needs. Do this well and you will maximize the longevity, growth, and profitability of customer relationships. Studying the entire customer base and breaking it down into segments helps in several ways. When you are more specific about customer groups, you have more information about individual customers. You also reduce the number of potential customers in each group, so you understand the targeted customers better and can increase the effectiveness of how you approach them. This is how you advance.
23
Customer segmentation is different if you sell to businesses (B2B) than if you sell to consumers (B2C). Some common ways to segment both groups include:
B2B Segmentation Industry (SIC/NAICS code) Geography/Location SizeRevenue levels SizeEmployee count Length of time in business Business function or department Distribution Strategies Management Practices
B2C Segmentation Demographics Age Gender Race/Ethnicity Income Home Ownership Psychographics Personality Attitudes Lifestyle Social Tendencies Fashion/Music Tastes Shopping Preferences Hobbies Geography
Stanley Hernandez owns a medical distribution company and sells to approximately 12,000 different customers per year, all with differing desires, motivations, and needs. To deal with this, Stanley segments his customers and prospective customers by whether they are hospital or non-hospital customers: a small medical clinic with fewer than twenty employees and a large hospital require very different approaches. He then segments the two groups by specialty: physical therapy, oncology, gynecology, dental, and surgical; all use different supplies and have different needs. Stanley also segments customers by distance from his distribution center. Customers within a two hour drive are offered different delivery options than those further away. Both types of customers can be served, but the company takes a consciously
24
CUSTOMER PILLARS
different approach. Customer segmentation allows Stanley to look at customers and prospective customers in a more detailed way to consider their specific, individual needs. This is crucial to Stanleys strategy and success.
THREE CUSTOMERS EVERY COMPANY SELLS TO

An interesting way to segment customers is to divide them into (1) current customers, (2) previous customers and (3) new customers. Some think growth is primarily about attracting new customers. And while a steady stream of new customers is a great goal, it is only one way to expand. Activities designed to keep and expand existing customers are called retention strategies and are vital to development. The more you study revenue growth, the more you realize how costly it is to acquire new customers. Retention strategies maximize this investment by keeping those customers active and developing long-lasting streams of revenues. Good retention efforts focus on the retention ratehow many customers that bought last year, also bought this year? For example, if you sold to 1000 customers last year, added 200 new customers this year, and sold to a total of 1050, you would have an 85% retention rate: 1050 customers this year (year 2) - 200 new customers (new year 2) = 850 customers that bought this year and last year 1000 customers from last year (year 1) 85% of customers from year 1 also bought in year 2 This also means that 150 customers were lost. So for every four steps forward (the 200 gained), you took three steps back (the 150 lost). If you increase the retention rate to 95%, you would have sold to 100 more customers: 1000 customers last year (year 1) X 95% retention rate
25
950 retained customers + 200 new customers 1150 total customers (year 2) If the average customer revenue was $500 per year, the difference in the two retention scenarios would be $50,000, over nine percent of total revenues. Retention rate is important. It may help to imagine a river, with new customers flowing in and lost customers flowing out. Retention strategies act like a dam. Customer retention builds a lake of your customer base and revenues. To take this further, it makes no difference how fast the river flows into the lake if the outflow (lost customers) is equal to or greater than the inflow; if theyre equal, the lake never grows. However, if the dam is strong and the water stays in the lake, it will grow, no matter how slow the inflow is. So, I often ask clients, If you had to double your sales by selling only to your current customers, what would you do? The lifetime value of the customer (LVC) is an important related concept. It quantifies the amount of revenue generated from a customer over a lifetime. Consider the example of a can of soda pop. When the consumer picks one brand or the other, its a decision with an immediate 50 cent impact. But the choice of soda goes much further that that. If that person drinks two cans of pop per day, that fifty cent decision actually becomes a dollar decision per day. Thus, on an annual basis, the decision is actually $365. If the person drinks soda for over fifty years, its an $18,000 issue. Retaining customers and serving them over their lifetimes can make you rich. As the owner of a very successful coin operated laundry business proclaimed, You make a million dollars a quarter at a time! We see this potential with Bud Williams, who had owned a local automotive repair shop for about five years when we were first introduced. Im not sure what I need to do, he began. Ive been in business for a while now and really seem to struggle. When I worked for someone else, I made great money and was a really valuable part of that business. But with my own company, I really fight to keep afloat. We are just over our breakeven point and I
26
CUSTOMER PILLARS
make less money and work much harder now than I ever did when I was an employee. The answer was to evolve. So I started the process of helping Bud improve his companys results. He was working hard and was taking risks, so he deserved the rewards for the effort and investments made in his company. Lets start by looking at your existing customers, I suggested. How many customers did you sell to last year? After some research, Bud told me he had sold to 582 customers over the entire year. I then asked him what his revenues were for the same time period. After a quick review of his profit and loss statement, he told me his sales were $196,116. After doing some quick division with my calculator, I said, So the average revenue per customer is about $337. Does that sound about right? With the puzzled look Bud was giving me, I knew he was thinking about the number and he finally agreed it sounded about right. (Math = 196,116 582 = 337) Let me ask this: how much money does the average American spend on automotive maintenance and repairs in a year? The association tells us about $2,000 per year, Bud replied. Bud, then let me give you two important numbers for your business, I told him. 17% and $100,000. What do those numbers mean? Bud asked. First, the number $100,000 is an estimate of the Lifetime Value of a Customer for your business. This simply means how much the customer of your product or service will purchase during their lifetime. I assumed the average person drives for about 50 years. Its probably give or take a few years, but thats close. Take that multiplied by your $2,000 number from the trade association and you get $100,000. (Math = 2,000 x 50 = $100,000) Wow, Bud exclaimed. What youre saying is every customer we serve is potentially worth $100,000. That sheds new light on a $30 oil change. Yes, it certainly does. And if you include that you sold to 582 customers last year, this means the entire lifetime value of all the customers is over $58 million dollars! My word, Bud uttered. I knew I had his attention. So what does 17% mean? To use some more marketing jargon, Bud, 17% is your current
27
share of customer. Remember we calculated your average sale per customer was $337 and the average customer spends about $2000 per year on products and services like yours. Simply, the percentage is just shy of 17%. (Math = 337/2,000 = 17%) So we are only capturing 17% of the potential from our customers? Youre learning quickly, Bud. Now, based on what you sell, could you increase that share of customer percentage? I know I could, he replied. We then calculated the ramifications of increasing the share of customer percentage in Buds business:
% Share of Customer 16.85% 18% 20% 22% 25% 33%
Average Customer $ 337 360 400 440 500 660
Revenue with 582 Customers $196,134 $209,520 $232,800 $256,080 $291,000 $384,120
% Change in Revenues 0 7% 19% 31% 48% 96%
Buds eyes grew wider we studied the numbers. So if I increase share of customer from the current 16.85% to just 20%, I can increase my revenues by 19%. That is incredible. Bud can also double his business if he increases his average annual customer size to just over $670and he can do this by selling only to the same number of customers as he did last year. In most businesses, a significant amount of revenue can be added by increasing the share of customer (and thus, the average each customer spends with you) and by knowing the lifetime value of the customer.
28
CUSTOMER PILLARS
Specific actions around growth-based, customer retention strategies are to: look for ways to invest in the relationship and become a more important part of the customers life (or business) increase the trust between the company and the customer expand the product line to provide more products or services to customers use cross-selling (selling other parts of your line to the same customer) and up-selling (selling more per order) to increase the average customer size enter into marketing partnerships with other firms to bring more products or services to your existing customers develop ways to foster customer loyalty build up barriers to prevent customers from switching to competitors improve the communications between your company and its customer base
Studying existing customers also allows you to identify trends, laws, challenges, or any pertinent timing issues that create opportunities to better serve and retain them. This helps capitalize on these important customer relationships. Keeping customers for the long-term has huge financial ramifications. Implementing retention strategies to keep and build your existing customers makes perfect sense. One of the next steps is to carefully study your current customers and put strategies in place to maintain communication ties.
29
COMMUNICATING WITH EXISTING CUSTOMERS

Keeping and growing existing customers is a powerful strategy, so what does a company do to make this happen? In addition to providing great products and hoping customers come back, I suggest a more proactive approach. Usually, this means designing specific communication approaches with focused objectives aimed at existing customers. We used to direct all of our advertising to getting new customers, Stanley Hernandez said of his medical distribution company. Then we realized that most of our business comes from repeat customers. So we sat down and designed an organized approach to staying in touch with them. We wanted to make sure that when a customer comes into our business, they stay with us for many years to comeand we werent going to leave this to chance. Their communications approach included:
E ONLY US follow up telephone AL calls after orders were delivered N ERSOflyer mailing SALE P a monthly sales RE ORdiscounts of the day periodic emails with special NOT F
a quarterly catalog mailing
a follow up telephone call at the anticipated reorder time
Finding great customers is a huge investment. Evolving means both maintaining and cultivating your existing customer base. A significant part of making this work is helping your customers succeed. Growing companies use strategies which are best for both the company and the customer: their strategies make customers win. People talk about win-win all the time, but act on it less frequently. I was once in a clients planning meeting when I sensed that certain members of the team did not want their customers to become too successful. They thought that if their customers grew too much, they wouldnt need their services. Do you think the customers sensed this? I sure did, and my guess is their customers did as well. I suggested that the company find ways to add value not only until, but especially when, their customers grew.
30
CUSTOMER PILLARS

This brought the companys goals into alignment with their customers goals and created several outstanding new revenue opportunities for the company. Similarly, growing companies appreciate their customers and show it, not just by sending holiday fruit baskets or cards, but all year, every year. Too often companies find their customers a hassle or take them for granted. A growth mindset deeply appreciates the customer and keeps this in the forefront of both managements and employees minds. When you truly appreciate anything in life, it shows. So does the opposite.
RECAP: RETENTION ACTIVITIES

Understand important factors to keep customers Calculate the Lifetime Value of Customer Increase the Share of Customer Develop a good customer database Implement communication strategies specifically based on customer retention Develop a win / win mindset with customers and deeply appreciate them Develop and implement a focused approach to retain and grow current customers
WE WANT YOU BACK

Stanley Hernandez was deep in thought during a strategic planning session for HernMedCo. Every year, he takes his top four managers, himself, and an outside consultant to a remote ski resort in New England. There they get away from telephones, employees, and any other distractions to refine their business plan. What can we do to better penetrate the dental market? Stanley asked his team.
31
Serving dentists was once the primary segment in Stanleys business; initial growth in this market allowed expansions into other areas. But success in other segments had pulled the company away from its initial market, and the results were starting to show. We used to dominate that industry. We were a top player and I want to get it back. How many dentists do we have in our database, Stanley? Lois Richardson, the customer service director, asked. Good question. Dave, what are those statistics? Stanley asked his sales manager David Johansen. We have about 11,000 total dental customers in the database. How many did we sell to last year? About 3,500. So, the company had 7,500 customers who had not purchased from them in the last year. This represented a significant opportunity. David was asked to investigate reactivating those previous dental customers. After three months of research, David presented the following report to Stanley and the other managers.
REACTIVATION REPORT FOR HERNMEDCO

11,000 customers in the database 3,500 purchased last year Dental revenues during that time = $1,673,000 Average revenue per customer = $478 (Math = 1,673,000 3,500) 7,500 dental customers in database who did not purchase in the last year (previous customers) (Math = 11,000 minus 3,500)
After surveying 100 of these previous customers at random, David found: 8 stopped buying because the customer was not happy with the company or the product 12 were no longer in practice (retired, changed professions, or deceased)
32
CUSTOMER PILLARS
80 were still in practice, remembered the company, and did not have a specific reason for not purchasing recently If 80% of the previous customers are prospects (based on the survey), the company would have 6,000 prospective customers. (Math = 7500 x 80%) If the company was able to get 25% of these prospective previous customers back, theyd have 1500 reactivated customers. (Math = 6,000 x 25%) If the company could retain last years 3,500 customers and reactivate 1,500, they would have 5,000 current customers. If the reactivated customers all purchased at the average customer level ($478), then the reactivated customers represented $717,000 in incremental revenues. (Math = 1,500 x 478) If captured, this would represent a 43% increase in revenues. (Math = 717,000 1,673,000)
Reactivating previous customers is typically much easier (and less costly) than getting new customers. As the managers at HernMedCo found out, most customers dont stop buying because the company has failed to service the account. (If you are losing business based on poor performance, you need to proceed immediately to pillar seven!) They just get caught up in their own lives and forget. These customers are great prospects, because they have already proven (1) they are interested in buying the things you sell, (2) they are willing to purchase from your company, and (3) they probably remember you. If you have not maintained a good customer database, they might be more difficult to identify. But you can find them (review old checks and credit card records, etc.) and put processes in place to reactivate them. Sharon Salisbury at the Downwindin Ranch Bed and Breakfast describes how she re-contacted this group of customers: I always knew I had a set of regular customers who came back year after year, but there was a larger group who came to the B&B only once. So I decided to quantify the number of one timers by going
33
back through my registration logs. When I had the list compiled, I saw a significant opportunity. I developed an approach to invite those customers back to the Downwindin Ranch. First, I called. I was surprised by how many people were actually excited to hear from meI was worried I would be bothering them. But I guess my follow up made them feel important, as if the company really valued them. The vast majority had really enjoyed staying with us. I figured they hadnt come back was because they werent overwhelmingly happy with their stay. That wasnt the case; they just had other things going on in their lives and forgot. People also seemed excited to be prompted to book a getaway. They love taking a break and were thrilled to place reservations. They reacted like I was reminding them to relax. Booking a reservation gave them something to look forward to. After her initial success re-contacting customers, Sharon developed a communications strategy incorporating phone call follow ups and a series of postcards. Now after customers stay with her, she has a method for keeping track of them and keeping in touch. Many businesses spend a disproportionate amount of time, money and resources on developing new customers instead of retaining existing customers and reactivating previous customers. This overemphasis on new customers is almost always a mistake. The combination of reactivating previous customers and retaining existing customers usually adds significant growth.
RECAP: REACTIVATION STRATEGIES

Have a great list of previous customers Develop a communications strategy to re-contact them Tell them you want them back Understand why they stopped buying Make it right if it was wrong Remind them about your business
34
CUSTOMER PILLARS
SEARCHING FOR NEW CUSTOMERS

Once youve built a reasonable dam (good customer retention) and have redirected the spillway back into the lake (reactivated previous customers), then by all means, focus on increasing the flow of new customers into your lake. So whats the best way to get new customers? This approach may seem absurdly obvious, but it works: ask yourself how you got the customers you have. Then do more of that and learn to do it better. What worked in the past to bring customers into your business has already been tested and you know it works. So I routinely ask: What are you not doing now that used to generate new customers? Usually I find companies have either (a) stopped doing some important things that worked in the past, or (b) are doing some things well, but are not fully capitalizing on them. This may not sound exciting, but it is infinitely more likely to succeed than something completely new. Do not allow your own boredom or desire for something new get in the way of maximizing what works. The hard fact is that new customer strategies are risky. Even top marketing pros will tell you that for every one idea that works extremely well, they have tried four or five (or even more) that did not. Basically, until youve seen a strategy work in your business, with your offering, with your prospective customers, then its just a test. And you need to approach it that way. Many people get so excited about making a conscious decision to build their companies that they cast aside the old methods and start brainstorming elaborate, complex, and highly exciting new ways to get new customers. Until an idea is proven in your company, its only an experiment. Frank Hamilton loves telling the story about how he built his business. At 32 with a wife and two small children, he decided he was going to start a commercial cleaning business. He worked in a large office building and saw that the cleaning company did a terrible job. When Frank asked management why they did not get another firm, the answer was the current provider was pretty bad, but they were better than the previous janitorial service. Frank knew he could do better and saw an entrepreneurial opportunity.
35
After doing some research, Frank started the business. He and a few friends who wanted to make some extra money cleaned in the evenings. During the day, Frank was out hustling business. He knocked on doors, attended networking meetings, and wined and dined prospective customers. He even prepared proposals for prospective clients at home after putting his children to bed. In the early days he was desperate for revenues and would do anything to bring customers in the door. Over the years, Franks business grew dramatically. The number of employees in his firm grew to 20, then to 100, then to over 500. The number of locations also grew each year. So did the organizational structurelayers of management, a sales and marketing department, and a human resources department. Frank was getting busier and busier, and his interactions with customers and prospects were fewer and fewer. One year, after a significant expansion of overheads, Frank noticed Hamilton Commercial Services was not building new sales as quickly as it should. When he looked at why, he found he was failing to do the basic things, and so was his sales and marketing department. Recently the firm had moved into doing more direct mail and Web-based marketing. While it made sense to him as a supplemental strategy, it wasnt what built the company. Frank started by reviewing his own time. Over the years, he had become very comfortable selling himself and his company. So he decided to go back to the streets himself and to bring his sales and marketing people with him. He budgeted time for face-to-face customer development activities and leading by example. The results were predictable. Sales grew and Frank discovered the important lesson of sticking with what works!
ADDING PRODUCTIVE BUSINESS TO THE MIX

Another strategy for finding new customers is to develop a more detailed profile of the types of customers you would like to pursue. Saying you want some new customers is not nearly specific enough. The work you have already done in customer segmentation will help you develop a profile of the ideal customer. Doing this will help you quantify the target market and find those customers.
36
CUSTOMER PILLARS
Then you can develop a customer hit listthe 20 to 200 (or whatever appropriate number for your business) specific customers you want to sell to. Then you can progressively determine the best ways to approach them. Finding new customers usually means either stealing them from competitors or creating new customers for the category. If you are taking customers from a competitor, analyze why they should switch. Common reasons include convenience or a better product, service, price, image, or guarantee. If you are creating new customers, teach them why it is important to purchase the type of product or service youre selling, which can be a communications or educational challenge. At the same time, refer to customers lifetime value. Use it to estimate how much you can spend to acquire a customer. Typically, finding new customers is quite expensivein fact, in many instances, its a break even or losing proposition for the first order. But with repeat orders and ongoing business, it becomes profitable. Knowing the lifetime value of the customer assists with understanding how much you should spend (advertising, sales, sampling, etc.) to gain that new customer. Another method is to study how others have acquired new customers, both from inside your industry and outside of it. First, look for best practices. Identify companies doing a great job building their revenues, even if they are competitors. You can learn from these people and use their approaches as a test. Begin by covertly studying their practicesact like a prospective customer. Watch where they are advertising and how they are soliciting new customers. In particular, pay attention when they repeat these tactics. The strategies they use over and over are probably more successful than those they abandoned. If the business is not a direct competitor, simply pick up the phone and talk to them or offer to buy them lunch. Many successful companies conduct seminars or have products available that share their industry specific marketing tips. These are worth studying. The mastermind group approach organizes a group of businesses within an industry to compare best practices and assist each individual member. This allows companies to compare notes on generating new customers. (Visit www.customerpillars.com for how to start a new group under our direction.)
37
The key to acquiring new customers is keeping old customers satisfied. You want to ensure that once new customers are acquired, you retain and profit from them for many years. Have strategies in place to make this happen!
RECAP: NEW CUSTOMER ACQUISITION STRATEGIES

Study what was successful for you in the past Develop a detailed, ideal customer profile Test new strategies as an experiment Develop a specific customer target list Compare customer acquisition costs to the Lifetime Value of the Customer Look for best practices regarding new customer acquisition Investigate industry specific marketing programs Join a mastermind group with others in your industry
Nearly every company sells to and targets current, previous, and new customers. The important challenge is to identify the ideal mix between the three categories and the energies the company puts into developing each. Ideally, a company invests time, energy and money into growing all three. Customer retention and reactivation strategies tend to cost less and produce better results than new customer acquisition. So if youre already in business, focus first on developing strong approaches to retention and reactivation, then build in ways to approach new customers. A startup with no customers will put all its energy into developing new customers. The key is to make progress in all three areas to produce the greatest overall increase at the least incremental cost. The right mix of the three components will vary from company to company and industry to industry, as well as on your companys
38
CUSTOMER PILLARS
development stage. However, for an existing company, the mix of time, energy and investment might look something like this:
TYPICAL MIX Current Customers Reactivation New Customers 20% 5% 75% IDEAL MIX 50% 25% 25%
READING THE MINDS OF CUSTOMERS

Segmenting customers and defining their similarities improves your ability to focus on growth customers and see their motivating factors at a deeper level. The next strategies discuss understanding the key driving factors influencing your customers, which improves your ability to approach the market. One of the most powerful questions you can ask is Exactly why do our customers purchase from us? Answering this question specifically and knowing your customers more intimately is a powerful contributor to the expansion efforts. A good friend of mine, the owner of an advertising agency and a brilliant marketing consultant, has one question he asks in every consulting session What is the customers unmet need? Often in his client conversations, he comes back to the same question. So what is the customers unmet need? My friends insistence is a good one. The question highlights a significant insightcustomers only purchase to fill a certain need or want. The more the customer acknowledges the gap or void in their lives (or business) and sees that it can be filled by your product, the greater their desire to purchase from you. If you are selling water, sell to those who are thirsty! Identifying unmet needs starts with a clear comprehension of customers and what they hope to accomplish with the purchase. At that point, the company can track back to the gap and better define it. The greater you comprehend unmet customer needs, the more you can fill these gaps and communicate that you understand this need (their
39
problem or pain) and can help with it. You should also consider root emotional drivers. People often make decisions based on emotion rather than logicthey follow their hearts instead of their minds. (Interestingly, we usually sell based on logic, even though this creates less impact!) Knowing the emotional factors surrounding the purchase of your products can contribute significantly to mastering the mind of the customer. Once, I asked a client who owned a music store, why customers purchased from him. Because parents want their kids to participate in music, he replied. Why is that important to them?, I asked. Because they want their kids to be active and involved. Why is that important to them? Studies show that active kids are more successful in school. Why is that important? They want their kids to achieve great things in life. Why is that important? Because they want to be viewed as good parents. Why is that important? They want to feel good about themselves. Again, why is that important? Well, I guess because they want to improve the quality of their lives. Exactly. All consumer purchases track back to one thingto improve the quality of life. In some way, shape, or form it always comes down to this. Hence, it is the common root driver when selling to consumers. Going through this why is that important exercise, you find a progression of motivating factors that eventually leads you to the root driving emotion. Through this process, you can see different levels, and how each one touches the customer. I usually find the most significant hot buttons are found at levels deeper than those we initially address. However, they are typically not at the very deepest level. (Buy from us because it will improve
40
CUSTOMER PILLARS
the quality of your life, is too trite and not specific enough. However, selling too close to the surface is not as significant to the customer.) The best drivers are often found in the middle of that spectrum. Is there a primary, deepest root motivator for business to business (B2B) purchases? Absolutely. When selling to businesses, the why is that important exercise always results in a final answer of because it improves the financial performance of the business. In every commercial purchase, the ultimate goal is to improve the profitability, return on investment, or financial stability of the company. If you sell to businesses, be prepared to converse about how your product or service ultimately contributes to the financial health of their business. Incorporating an ROI (return on investment) component to your B2B presentations will yield significant results.
THEORIES IN MOTIVATION
Inspirational speakers and psychologists talk about two different types of human motivation. The first is to move towards something you want. The second is to move away from something you dont want. Customers, individuals and companies alike, have towards and away motivations. Identifying how these factors impact them and their relationship with your company can lead to important discoveries. Sharon Salisbury shared how this impacts her bed and breakfast. When people come to the B&B, they want to be relaxed, pampered, and have a new experience. They are moving away from stress, ordinary life, and boredom. We look at both when we plan how we want our customers to encounter our company. Understand how towards and away motivations relate directly to your product or service. The more you understand about your customers motivations in their entirety, the more you can identify new ways to serve them and illuminate ways to assist them and improve the profitability of your company. One of the most telling questions you can ask about away from motivations is What do our customers fear? Knowledge about customer concerns and fears can significantly improve your ability to meet customer needs, specifically to help
41
calm those specific fears. Here are some examples of when fears could impact customers: A printing company is fearful of the impact of technology on their industry A teenager is fearful friends will not accept her appearance A middle aged woman is fearful for her financial future should anything happen to her husband A restaurant is fearful nutritional/dietary trends will impact their customers consumption patterns A pharmaceutical company is fearful that a competitive firm will beat them to market with a certain type of drug
If your company sold to one of the customers listed above, would these fears impact the way you approached them? They certainly should. Studying the fears of your customers helps you gain a clearer picture of the mind of your customer.
ONE FEAR EVERY CUSTOMER HAS

Jonathon sells most of his high end audio equipment through a catalog. His long-term customers are used to this, but new customers are sometimes leery of buying sight unseen. They are also afraid of ordering by credit card from an out-of-state company. They wonder: What if the company takes our credit card information? What if the item arrives and it is in poor condition? What if I have a problem with the shipment? What if I ordered the wrong thing? These issues highlight a fear present in nearly every transaction that the company wont deliver what it promised and will betray the customers trust. Customer skepticism is common. In fact, customers often believe the company is guilty, until proven innocent. It is the companys duty to incorporate specific strategies to reduce this very common fear and increase the chances of customers doing business with you.
42
CUSTOMER PILLARS
WAYS TO REDUCE CUSTOMER FEARS

Money back / satisfaction guarantees Favorable, convenient return policies Warranties Quality statements / standards Sampling programs / free trials Testimonials Customer forums Make contact information very visible
To propel the expansion effort, get inside the customers mind. See your business through the customers eyes, which is difficult to do, but gives you ideas for winning in the market. Studying the customer drivers discussed in this section is a good way to predict and influence the behavior of the customer base and illuminate opportunities for growth.
RECAP: CUSTOMER DRIVERS

Identify unmet needs Root emotionsunderstand the progression of drivers If you sell to consumers, understand how you improve their lives If you sell to businesses, relate your product to the financial improvement (ROI, revenues, profits, etc.) of that company Incorporate both away from and towards motivation Understand customers fears Reduce the one fear every customer hasthat the company will fail to fulfill the promises it has made to them as a customer
43

Identify exactly who you are going to sell towhich customers will provide the revenue growth? Find multiple ways you can segment your customers into more specific groupsdo this so you can know much more about your customers and cater to their specific needs Segment your customer base in terms of existing, previous, and newuse strategies to target each group, especially existing and previous customers Get serious about customer retentionknow (1) your retention rate, (2) the lifetime value of the customer, (3) your share of customer, (4) the factors that impact retention, and (5) how to best stay in touch with existing customersFind strategies to significantly build revenues selling only to those you currently serve Develop a customer database, be consistent about putting data into it, and learn how to use it to your best advantagecapture valuable marketing data Reactivate previous customersdevelop a great target list and develop communication approaches to get them back into your businessthey have already proven they will buy from you Study the ways you have brought new customers into the business in the pastlook for opportunities to expand these already-proven approaches before trying completely new, untested techniques
44
CUSTOMER PILLARS
Clearly define your ideal customers so you can take more precise steps to attract them into your business Understand the minds of your customers (even if they are businesses) including root emotional drivers, towards motivations, fears, and unmet needs. Develop approaches to reduce the customers fear that the transaction will not live up to its promisesthings such as warranties and guarantees Make focusing on growth customers an organizational prioritythis is not just the job of the owner or the marketing department, it should be the emphasis of everyone in the company

PILLAR TWO
MAXIMIZE VALUE INCREMENTALLY

What are you doing, Grandpa? Making room for some new products, he said. The hardware store down the street is closing and theres no other store like it in town. So were going to offer some products people normally get at hardware stores here at the Nortonville IGA; that way, people wont have to drive to another city to get them. Also, if they come into the store for hardware items, they will probably buy some groceries too! In todays world, every grocery store has hardware products, as well as automotive, pharmacy, housewares, and nearly every service imaginable. But back in the early 1970s, the superstore concept had yet to be widely embraced. A grocery store only sold groceries. But Grandpa rarely missed an opportunity to help his customers. Additionally, the closest dry cleaning business was thirty miles away, so Grandpa asked them to pick up and deliver at the store. They said unless they significantly raised their prices, they couldnt afford to pay the store for its assistance. So Grandpa did it anywayfor free. It helped the community, gave his customers an important service, and attracted customers into the store. The Nortonville IGA grew its business by doing more things for more people.
PILLAR 2: MAXIMIZE VALUE INCREMENTALLY

Growth is based on an increasing sequence of transactions, and the foundation of every transaction is an exchange. In a way, its like a
45
46
CUSTOMER PILLARS
dancethe customer and the company come together in the center of the room. The company provides the customer something of value and the customer compensates the company. Sustainable growth only happens when both leave the dance happy. The second pillar urges evolving businesses to maximize value incrementally. Value is what the customer perceives they get out of a transaction in relation to what they feel they sacrifice for it. Value is the customers perception of the ratio between what they put into the transaction and what they get out of it. Make the customers perception is our reality your motto. The customers perception of value is more important than your own view of the products or services you offer, because the customer decides whether or not to buy from you. Value, then, looks at the product or service offering (what is sold) as the customer does. Improving products yields incremental benefit only if the enhancements increase the perceived value to customers. Customers judge what they get out of the transaction in relation to what they put in, or their sacrifice. Obviously, money is part of thatbut only part. For instance, if a gallon of gas costs ten cents less at a service station ninety miles away from the customers house, the perceived value probably wont justify the drive. Thus, customer convenience is part of the perceived value. Anything the customer gives up to participate in the transaction is also part of the perceived value. Value = What the customer gets out What the customer sacrifices For example, a gym is more than a building with fitness equipment; it is a place people go for numerous reasons. The value is related to how the gym improves customers fitness and physical appearance, helps them unwind and socialize, and provides information and guidance about fitness. Most importantly, it is a place they feel they are improving themselves, both in appearance and in overall health. The value of the facility is not what it is, but what customers think it does for them. A business builder closely studies the value of the transaction. This leads to a key question, What are we really selling? The answer is always value. The customer is not buying your product; they are buying the value they get out of it. This allows us to leverage further
Pillar Two: Maximize Value Incrementally
47

the customer understanding obtained in the first pillar to see what benefits they derive. Often it is different than what we think. Understanding the perceived value of your offering puts you in a better position to grow. Additionally, the market is an evolving and dynamic environment, so continuous and incremental improvement is an ongoing requirement. The principle of CANI, or constant and never ending improvement is relevant. A company on the expansion path will always look for ways to create more value for customers in the products or services they provide. Its a journey not a destination.
OUT OF ORDER?
A hand rises in the seminar Im presenting. Didnt you get those two pillars out of order? I mean, dont most people develop their product first and then figure out who they are going to sell to next? Your pillars should be switched. Usually people go into business with a product in mind, then go out to find a market. This chapter explains why its the value of the product that drives progress (not the product itself), and this starts with the customer. This may seem like a very subtle distinction, but its essential. When we first opened the store, we thought we were selling home furnishing items, Susan Miller, co-owner of Your Elegant Home, commented. But the more we got into it, the more we realized how passionate people are about their homes. Homes are their sanctuary from the outside world, and representations of their individuality. What people put into their home tells a story about who they are. When we realized this, it changed our approach. Now when customers come into the store we try to learn something about them and how they decorate their homes, instead of just talking about our products and the lines in the store. Ultimately, what our products mean to the individual customer is more important than what the product brochure touts about it. This approach not only helped us understand how our customers see our products, but helped us become better at selecting them. So you started with a product perspective first. Are you in trouble? No, just shift your viewpoint from a product focus to a value focus. Remember, what you think about your product isnt as important as
48
CUSTOMER PILLARS
what the customer does. Building and protecting a leadership position in the marketplace is dependent upon increasing perceived value. Creating value for customers can significantly build pride and confidence in a company. What you send out into the market is a reflection of who you are as a company and is where a commitment to integrity and honestly pays great dividends.
DODGING THE RISKS OF CREATION BIAS

Java Jeans had been my dream for some time, said Samantha Harrison, who had invested most of her savings and time in her small independent coffee shop. I was there day and night making it just rightand I was so proud of how it looked when it first opened. I was hurt when business was slow and angry that customers didnt come in as frequently as I had hoped they would. Those who did come in hardly seemed to appreciate all my hard work. I actually became bitter. Then I realized my attitude was not helping. I stopped thinking about how much I liked my business and tried to think about how I could make others like it more. Once I made that shift, I came up with some great ideas for attracting customers and making their visits more enjoyable. These things ultimately helped my business grow. When you are close to something and vested in it, you cant help loving it. This is as true of your products as it is of your children. Developing the right product or service can take years of passionate effort and vast amounts of money. This is normal and expected, but the closer you are to something, the more biased you are and the more clouded your vision is of how the market looks at your offering. You should love your productin fact, you must. But to make sure your baby realizes its potential, you must regularly put this creation bias aside and take a brutally honest look at how the market values your product and what you can do to enhance its value to customers. Entrepreneurs often say things like, I have the best product, and I just dont understand why the market hasnt taken to it. Are they stupid? Its okay to feel this way (we all have), but if you want to be successful, you have to realize you are biased and learn how to see things from the customers perspective.
49
THE ART OF ADDING VALUE

A strong growth strategy is to focus on value added. This challenges the company to improve the products benefit, and perceived value more than it adds to cost. Adding little things that mean a lot is a common way to do this. Bud, who owned an automotive repair shop, understood this concept, but wasnt that enthusiastic about it. Three weeks after we first discussed it, however, Bud called me. I think I understand that value-added stuff now. What happened? While I was fixing a ladys transmission, I noticed that her door was squeaking, so I fixed that, too. All it needed was a little spray lubrication. When she picked up her car, I told her Id fixed her transmission and showed her the bill. Then I told her Id also fixed the squeaky door. I was shocked by how happy she was. She thanked me over and over again. It was as if she hardly cared about the transmission, she was just thrilled that Id fixed the door for free. She wasnt expecting that, was she? I asked. No, it surprised her. And her reaction surprised me, Bud said. She told me she would tell her friends about the excellent service shes received from the shop. I bet Ive won a customer for life. How much do you think that lubricant cost? Oh heck, it couldnt be more than a few pennies. The cost was hardly worth noticing. And how much time did it take you to fix the door? Again, not much. Less than a minute. It was easy. I was just doing it as a courtesy, but it really turned out to be a much bigger deal. Bud had brilliantly executed a value added strategy. After this, I challenged him to develop a list of little extras he and his techs could do on a regular basis to add value for the client. Instead of just reacting to the customer situation, I wanted Bud to proactively look for ways to create this customer magic on an ongoing basis. The program we developed integrates this into their daily work. Nearly every company can provide extra value to customers in products, services, ideas, or just acts that make the customers life or business better or more convenient. What a company does may be easy or inexpensive, but can dramatically shift its perceived value.
50
CUSTOMER PILLARS
RECAP: VALUE STRATEGIES

Focus on value versus productwhat it does versus what it is Value is the customers perception of rewards in relation to sacrifices Customer perceptions of your product decide your success Be cautious of creation biasit reduces your ability to see things the way customers dodont just love your product, sell it! Always look for value-added approaches
THE RIGHT MIX OF PRODUCTS

Determining the products and services you sell has significant ramifications and touches marketing, management, and financial functions alike. The makeup of your product line significantly impacts the relationships you develop with customers. Product lines evolve over time. New products are added and old ones are removed. At the same time competitive products change, as do the needs of customers. The goal is to develop a line which maximizes the relationship with the customer base, both in terms of value created and in terms of profits generated. (Those concepts, by the way, are directly related to each other. Profits are the reward for creating meaningful value.) An earlier question asked how you could double revenues selling to only the existing customer base. One response is to expand the product or service line. Expanding your offering can be extremely positive for business evolution, but also comes with certain risks. Before discussing line extensions, lets cover those potential risks.
51
POSSIBLE PITFALLS OF LINE EXTENSION

A poorly devised line extension can diffuse your companys focus. Succeeding requires concentration, planning, and execution. A line extension with little synergy to the base product line can prove more of a distraction than a benefit. Consider how natural the line extension is. Do the new products fit in with the existing ones? Natural line extensions are directly related to either existing products, existing customers, or both. The more unrelated the extension is to either, the greater the risk of diffusion. You should also consider the effect on SKUs (stock keeping units). A SKU is an individual inventory item, something a customer could order out of your computer system. I learned the ramifications of SKU multiplication when I helped a company add a wrist support to its medical product line. There were five sizes (Small to XX-Large), all offered in: left or right beige, blue, or black with or without a thumb attachment long version and a short version
So this one wrist support model had 120 total SKUsthe customer had the option to order 120 different individual items. Giving multiple options is a great idea; however, too many SKUs makes communicating the products value difficult (too many options can be confusing) and costly to your inventory. A related problem is line extensions which require additional inventory or overhead investments. In the wrist support example, our minimum investment per SKU was about $200. This made the initial inventory investment $24,000. Not unmanageable, but a little SKU management and that investment could have been reduced dramatically. Additionally, the 80/20 rule can also be applied to products. Many of the SKUs in that group were not that popular. Thus, the large number of SKUs spread the inventory investment out into unpopular products, which tied up cash in unproductive inventory. Line extensions can have
52
CUSTOMER PILLARS
a diffusing effect in several other areas as well. Another possible diffusion is in the selling effort. Its easier to sell to new prospects when your product line is narrow and focused, because its easier for customers to understand exactly what your company does and why they should be interested. Line extensions can also diffuse competency. Say youre an accounting firm and you decide to start offering legal, financial planning, and mortgage banking services. Can your company do all of these things well? This can apply to products as well. Its better to be great at one thing than mediocre at three or four. A jack of all trades is a master of none. The greatest danger in line extension, though, is cannibalization: shifting sales from old products to new ones, without any net gain to the company. This is a frequent consequence of expansion, and one that nullifies all the hard work the company put into the line extension.
RECAP: LINE EXTENSION RISKS

Lack of focus SKUs out of control Diffusing inventory investments Diffusing the selling effort Jack of all trades, master of none Cannibalization
MAKING LINE EXTENSION WORK

With the risks out of the way, lets talk about how to do it the right way. With the evolving nature of the market and the competitive nature of business, things are always in flux. Evolving the product or service offering is a vital part of maximizing value incrementally. First, think about the risks. Expanding a line without knowledge of the potential pitfalls is like driving a car with a muddy windshield. Pay special attention to the cannibalization issue. You can counteract this
53
by being careful to preserve the integrity of and results from your base products. Its hard to do this when youre caught up in the excitement of creating new products, but if you understand the importance of the base and make a plan to keep it in focus, your new products will generate incremental revenues (not just replacement ones!). Monitor return on investment for each SKU. The investment made in new SKUs should have a targeted return (in sales or margin dollars produced). Monitoring the progress of the new products as well as the old ones will help keep the focus on producing incremental value. Moving towards a one stop shop theory is one way to expand with line extensions. Are you losing potential sales because you dont have a full product line? If the customer needs other products or services, why not offer them? This leverages customer relationships by increasing convenience. Bundling is another approach to extending the line and merely combines products or services together to create improved value for the customer, and increased revenues for the company. A gift basket is a great example of a bundled product. One bundling approach is to add a complementary service to a product or conversely, add a related service to a product. This bundling technique opens the revenue stream and extends greater value to the customer. For instance, when Tad Billings rents out a band instrument in his music store, he includes the necessary support items (valve grease, extra reeds, sheet music, etc.) and four free individual lessons with his staff of instructors. This bundling approach makes it easy for parents who often know little about what they are purchasing. His customers appreciate the convenience; he likes the extra revenue at the point of sale. But even more important, customers get in the habit of using the extra products and services offered with each musical instrument. This puts the company in a better position to capture additional revenues over the long-termoften called the back end in sales lingoby producing more value at the start. How customers understand the line is also key. Remember, customers know far less about your companys offerings than you do and can become confused when you add products and lines. Organize and present your line effectively. Some people use product grouping or rankings, such as good, better, and best categories. Make sure that new products are easy to understand by themselves and in relation
54
CUSTOMER PILLARS
to your other products. Make it easy for your customers to learn, comprehend, and choose. Some companies expand by starting with a lead product and following that with a series of related products that extend the customer relationship. This allows you to start with a focused approach (often using a less expensive introductory product), then grow from there, often with progressively more expensive products. Similarly, you can start with a basic service, then expand into more specific or supporting areas. When clients join the gym, we usually give them an option of two basic membership packages, Sam Taylor explains. The first is the least expensive and is designed to make the customer feel comfortable about the membership commitment theyre making and trust us. The second option is the basic package bundled with extra products and services. Regardless of which membership alternative they opt for, the objective is to get the customer into our program. From there and over time, customers are introduced to other services, such as membership upgrades, additional classes, or add on products, such as our fitness clothing and nutritional aids. As our clients get comfortable with us, they become eager to use these additional products. If we push too hard at first, clients get antsy. Many companies prune under-performing products as they add new ones. This expansion strategy keeps the number of products and use of promotional resources relatively constant and helps the company maintain focus.
RECAP: LINE EXTENSION STRATEGIES

One stop shop approach Bundling Monitor SKU return on investment Combine a product with a service or vice versa Make it easy to navigate the line Enter with one focused product, then extend to the rest Simultaneously add and prune
55
INNOVATE AND GROW

Innovating by developing unique, superior products is an age-old approach to adding value. Product development can be driven from multiple innovation areas:
Type of Innovation
Customer driven
Description
Listening to the market and reacting to customer requirements Prompted by improvements in the ease or pleasure associated with doing business with your company
Example
When a new law greatly impacts its clients, a law rm develops a program that meets customers new needs A coffee shop owner sees that people are bored while they wait, so she creates an interesting waiting area and a system to bring the coffees to customers there A medical rm partners with a university technology transfer department to commercialize products based on the schools research When one sports bar succeeds with a Monday night special, the competition executes a similar strategy A manufacturing rm has engineers with specialized skills that apply, not only to the current products they offer, but also to other areas; the company has the engineers explore these areas as well A manufacturing rm purchases a welding machine, then nds other rms in different industries and subcontracts welding work for them A manufacturing rm cuts large pieces from metal sheetsto use the wasted scrap metal, they design new products that can be cut from the scrap without additional cost
Service driven
Research driven
Using advances in technology/science to bring solutions to the marketplace
Competitive driven
Development in reaction to the actions of competitors
Competency driven
Based on the internal skills of the company
Overhead driven
Development that leverages into previous expenditures from the company, for instance, a piece of equipment Often the process of producing a product or service produces byproducts or waste that can be marketed and sold with a bit of creativity
By-products/waste driven
56
CUSTOMER PILLARS

Product development and innovation can expand the value to customers and often are the result of being firmly committed to ongoing improvement.
ITS ALL IN THE POSITIONING

To maximize value, you need to position your company and your products in relation to others. Where do you currently fit into the market and where do you want to be? Compare your products value to the competitions, not by examining your own perceptions, but by looking at your customers perceptions, and then improving them. Use branding, packaging, and intellectual property to position your product in the customers mind. Branding connects you to the market by giving your customers an easy way to identify your company and your specific value. The key to branding is to associate the value you create with something easy to spot and remember, such as a logo, trademark, or a slogan/tagline. Establishing a strong brand helps create your desired position in the market. Packaging is another positioning strategy. In products, this can be the actual packaging materials and graphics used to present the product. In services, it can be some of the support communications used to present the company. (For instance, the folder and presentation used by your accountant, the appearance of their offices and how they greet you when you enter.) Both branding and packaging add value to the product line, distinguish it from other products, and establish a position in the mind of the customer. Finally, intellectual property such as copyrights, patents, or trademarks can separate you from others. They provide proprietary acknowledgments of the value you are creating with customers and protection against imitation. The government has several informational websites to assist and can be accessed through links at www.customerpillars.com. Positioning strategies take the value you create, compare it the competition, and attempts to build and protect your position in the market, or mind space of the customer. They can add significant value
57
to your product or service line which would otherwise not be realized. Positioning work is an extra step and is often ignored; however, it can make the difference between minimal and outstanding success.
THE QUALITIES OF QUALITY

High quality products and services is a method to maximize value for customers, differentiate you from competitors, and keep customers happy. The first step is to recognize which quality parameters contribute most significantly to the customers perception of value. Often companies increase quality in ways that have little impact on customers. Quality should be increased in ways that motivate customers. Once you identify the most significant value producing quality parameters, develop a measuring system to quantify your actual performance in them. Key metrics allow you to track progress and measure enhancements. Jim Anderson, an attorney who manages his law firm very effectively, was in a planning session when someone mentioned qualitysomething thats harder to define at a law firm than in a factory, but is just as important. To track quality, the firm devised bi-annual follow up surveys which showed what clients valued most and provided feedback on key measures. The company has developed and implemented a scorecard they monitor to keep quality top of mind and improving. Your company should also monitor customer feedback relating to quality. Track complaints, defects, and customer suggestions. This systematically improves important quality measures and allows the company to learn possible product revisions or enhancements from customers. You can also use quality for team building. People take great pride in producing quality products or services which have a positive impact on customers. A focused quality program not only improves the companys relationships with customers, but can be a significant boost to company morale.
58
CUSTOMER PILLARS
RECAP: VALUE INCREASING APPROACHES

Methods of Innovation Positioning Packaging Branding Intellectual Propertypatents, trademarks, copyrights Qualityuse it to boost relationships with customers and inspire your team
EVEN MORE PRODUCT BASED REVENUE STRATEGIES

There are multiple strategies to enhance value and bring the correct product to the market. Several of these revenue enhancements are listed below. One strategy is to study your industrys entire market to find underserved markets and gaps in offerings. This hit em where they aint approach seeks untapped opportunities. Most industries contain limitless possibilities for product or service combinations, features, and value. Understanding underserved markets or value gaps, either based on customers or products, is an excellent way to establish a product-based market niche. The next revenue strategy is alternate use. A friend once told me about a technology he devised to absorb water in a variety of settings; his product line included a pad for horses. Customers used it to help keep their horses cool. Once my friend was following up on an especially large account and as a good salesperson, asked why they were selling so many of the equestrian pads. The business owner told him the pet store across the street had been purchasing them. Perplexed and very curious, my friend went to the pet store and picked up some of the equestrian pads. The young man at the counter said, Oh, you have some of the moisture pads. Those things are great!
59
My friend had never heard of a moisture pad, and asked the sales associate how they were using the product. We sell a lot of crickets here in the store. People buy them to feed to their pets. The problem, though, is crickets usually only live a few days after the customer takes them home and their pets wont eat them unless theyre alive. We have found if you put a moisture pad in with the crickets they live much longer. I guess the crickets were dying of dehydration and your product helps keep them alive a lot longer. Theyre great! My friend had to laugh. Hed never imagined that! But after surveying other prospective pet store customers, he found there actually was a market for this use and repackaged the product specifically for pet stores. Customers often use our products in ways we never planned. Through good customer feedback and follow up, you will learn about these alternate uses. Keep your eyes and ears open for these circumstances and be prepared to study them, learn about the new customers, and modify the offering, if necessary, to enter these new, alternate use markets. Acquiring new customers is just too expensive not to sell to them again and again, which provides the foundation of the next strategy. One goal of your product line should be to develop a series of repeat businessyou want to have the opportunity to sell to the customer over and over. The key is to look at the product line and develop value producing opportunities that enable you to do business with the customer on a repetitive basis. Sometimes marketers call this a residual stream of revenue or a continuity program. Your cable TV service is a perfect example: Once you sign up for it, you pay every month, month after month until you cancel. Other examples are wine (or book, fruit, or barbecue sauce!) of the month programs which send the same customer a different product at regular intervals. The goal is to ensure that your products provide an ongoing opportunity to develop deeper relationships with customers and to provide greater value to them on an ongoing basis. This maximizes customer relationships and ensures your investment in new customers is rewarded over the long-term. If your product line is a one time sale, consider adding supporting products or services to complement the purchase. An
60
CUSTOMER PILLARS
interesting application is computer printers. The printer is a one time sale, but the ink cartridges must be purchased on an ongoing basis. Look for opportunities to structure your product line to create repeat sales. Licensing is another value increasing strategy to consider. Licensing essentially grants you the right (for a fee) to use another companys product, technology, or trademark in your own businessor let them use yours. Both can be great strategies. Companies like Disney and Warner Brothers, along with countless inventors, have licensed their products and proprietary materials to other companies. A client recently came into my office with a clever product from a new, proprietary technology. There were dozens of applications for the technology, some in very large consumer markets that were too big for his company and required deeper pockets than his company had. Intelligently, he developed several smaller, niche markets the company could serve directly. The company could reach these markets with its existing human and capital infrastructure. The company then identified other possible firms to license the technology to and reach the other, larger markets. This approach allowed the company to fully capitalize on its technology in a wide variety of markets. Similarly, having worked in a college town, I had the opportunity to see many firms license the colleges mascot. Clients gained access to logos, images, and trademarks which had been in existence for many years and had been supported by millions of dollars (of other peoples money) to develop strong, positive brand associations. The small royalty fees were well worth access to these very powerful trademarks. Likewise, a successful product I had the opportunity to work on was based on a patent held by an outside firm. The royalty paid to the inventor was well worth the cost and was profitable for the company. Finally, focus on CANIconstant and never ending improvement. If you dedicate yourself to incremental value enhancements with your products and services, revenues and profits should grow.
61
RECAP: REVENUE STRATEGIES

Filling product line gaps Alternate use strategies Residual streams of product revenue Continuity programs Licensing CANIconstant and never ending improvement
62
CUSTOMER PILLARS

Emphasize the value customers receive from your product or service over how good you personally believe it to beyour success is found in increasing this on an ongoing basis Use value added strategieslook for little things you can add to the product or service that greatly enhance the perception of value Consider extending your product or service line to create growth opportunities, especially with items related to and demanded by the target marketexpand the line with an understanding of extension risks Understand the different methods of innovation and how these techniques contribute to improving your product or service offeringinnovate or die! Use bundling, packaging, positioning, and branding to distinguish your product or service within your industry Focus on back end sales and capitalize on a series of products or services to deliver over a period of timecreate a residual stream of income versus a one time event Understand quality parameters most important to your customers and develop strategies to improve those key areas Use licensing as an intelligent way to expandeither or both licensing things from others and licensing out your assets to others
63
Focus on incrementally and constantly improving the value customers receive from your product or servicedo not rest on your laurels Use your product or service and the value it creates to impact the teamwork, pride, and morale within your firm

PILLAR THREE
REFINE TO PERFECT PRICING

My grandmother read every magazine and newspaper with a pair of scissors in hand. When visiting as a little boy, I would get my scissors and help too. Nortonville was not a wealthy community, so coupons were valuable to customers of the IGA. Grandmas plan helped them save. After clipping every coupon she saw, she filed them in envelopes underneath her checkout counter. When a customer came through with an item she had a coupon for, Grandma offered it to them. Though probably not what the manufacturers had in mind, it did reduce the customers price and they were appreciative. The Nortonville IGA did something else unique for grocery purchases. They offered credit! Grandma and Grandpa would manage their accounts with pads of paper and send a monthly handwritten invoice. Helping the customer feel good about the price of a product and the way they pay is an important consideration for growing a company.
64
Pillar Three: Refine to Perfect Pricing
65
PILLAR 3: REFINE TO PERFECT PRICING

Pricing has significant ramifications, not only on customer relationships, but also on the firms financial results. Often, what appear to be minor pricing decisions have major implications. This chapter analyzes the question, What is the optimal price to charge? with a systematic method to the delicate and often humbling task of establishing prices, something that often makes business owners uncomfortable. The goal is to provide a clear path to getting the ideal price point. So what is ideal? A pricing strategy is optimal when: Profits are maximized Customers believe theyre getting a good deal and are encouraged to buy Volumes are generated to meet the firms goals, including maximizing overall margin dollars
Every industry has an acceptable range of prices. Price your products too high and you frighten customers away. Price too low and you leave important revenue and profit dollars on the table. Pricing is a balancing act. Economic theories state that as price goes down, demand goes up. If this happens, volume risesbut this doesnt always occur. Many companies try to increase sales by lowering prices, only to find that volume stays nearly the same but revenues, margins, and profits all fall. For instance, Sharon Salisbury finds that price and volume are not particularly related in the bed and breakfast industry. People on a weekend escape seem willing to pay for the extras and are less price sensitive. Jonathan Squire notices the same thing with the high end, specialty items in his The Audio Files catalog. However, volume is more related to price on more everyday items, like MP3 players. There are distinct product differences in how people react to pricing. So, pricing is neither an exact science nor easy to master. Guidelines that work well in one industry will be completely wrong in another.
66
CUSTOMER PILLARS
Pricing befuddles many companies, but ultimately, the goal is to make intelligent decisions based on the factors we review in this chapter. Following these guidelines will move you closer to perfect pricing. Great pricing is a necessary ingredient for providing a return on the time, energy, and money invested in the company. Great pricing optimizes profitability so margin dollars are not left on the table and volumes are strong.
THE PROCESS IS REALLY SIX

Multiple factors impact pricing; thats why its stressful. When people consider the multiple factors involved, they often get confused. The CUSTOMER PILLARS system advises using six completely independent methods to determine pricing. Put on the blinders and consider each method individually, without distraction from the others. Then bring the results together and evaluate them.
SIX METHODS OF PRICING

1. 2. 3. 4. 5. 6. Margin Based Income Based Competitive Based Image Based Volume Based Testing Based
Looking at multiple pricing methods brings the appropriate information together, so you can put your company in the best position for success, then adapt and modify (and get closer to that perfect pricing level) as time goes by. Commit to an ongoing development and refinement of your pricing strategies.
67
PRICING METHOD 1: MARGIN BASED

In many companies, margins are king. The term margins actually refers to gross margin, or the sales price minus the cost of the product or service. Margins are referred to both in terms of dollars and as a percentage. For instance, imagine a product that costs $2 and sells for $5. The margin dollars per unit equals $3 and the margin percentage is 60%. (Math = 52 = 3; 3 5 = 60%). If you sell a service, the comparable analysis would be the selling price for the unit of services (perhaps hours) and the direct cost attributed to delivering that unit of service. In some businesses understanding costs is a simple process. For instance, if you buy a product for $3.00 and pay $0.25 per unit to ship that product in, your cost is $3.25. In other settings, finding the cost per unit sold is much more complicated. This is an instance where accounting and marketing must work together. When using the margin based method for pricing, it is assumed that the cost of a unit of sale is known. If you do not have a handle on costs, start by getting one. Managing costs and margins is an important part of multiplying the profitability of the company. You want to know the projected yield of crops before you plant! Tad Billings recently learned this lesson with his music store. In reviewing his financial statements one year, he noticed his bottom line profits were significantly lower than they had been the previous year, even though the revenue numbers were approximately the same. His first fear was that overhead or labor costs had jumped significantly, but they hadnt. Only when he looked at margins did he see what had changed. Gross margins, for whatever reason, were lower by about 7%. And while this does not seem that large, it lowered profits. Tad now has ways to more closely monitor margins and manage them proactively. When you understand costs, determine margin targets. Think of these in terms of margin percentage. One place to start is with industry averages. You can find out average gross margin percentages for your industry with: The RMA BookThe Risk Management Associates (formerly Robert Morris & Associates) book is an annual publication used
68
CUSTOMER PILLARS
extensively by banks. It surveys the financial statements of dozens of companies per industry to determine key averages. It provides margins or a cost of goods sold percentage. (Margin % = 1 - Cost of Goods Sold %) Your banker or local library probably have this common guide. Financial Ratios of the Small Business by Financial Research Associates (FRA). This book also provides statistics and ratios by industry, though it focuses specifically on small businesses. Larger libraries usually have it. The IRS publishes a book of industry ratios and provides average margin rates. Dunn and Bradstreet has an industry averages service and leases it to libraries. There are several other online sources for such information. Industry associations often publish average margin rates. Vendors also provide margin rates. Through their suggested list prices and costs, you can calculate the suggested margin rates vendors are providing. Finally, other firms in your industry who are not direct competitors (or who are particularly friendly) can be a great source of information on margin rates.
WHERE TO FIND MARGIN RATES

RMA FRA Financial Ratios of Small Business IRS Industry Ratios Dunn & Bradstreet Industry Association Vendors Other Companies in Your Industry
69
Understanding industry averages assists with understanding margin targets. You can make adjustments in margin goals based on how you want to perform in relation to the industry. If you have no idea, it is reasonable to start with the industry averages. Once you have this percentage and the cost numbers, you can calculate the selling price. Here is the math behind that calculation. Unit Selling Price = Unit Cost (1 - margin percentage) Lets assume a product costs $3.47 and you have a margin target of 52%. Here is how the math works 3.47 (1.00 - 52%) = Selling Price 3.47 .48 = 7.23 = Selling Price Thus a product with a cost of $3.47 and a margin target of 52% would have a selling price of 7.23. To confirm this: Selling Price - Cost = Margin $ Margin $ Selling Price = Margin % Margin $ = 7.23 - 3.47 = 3.76 Margin % = 3.76 7.23 = 52% If thats challenging, dont fret. It may take a little time to fully comprehend, but calculating margin percentages is an important part of building a successful business. Dont get frustrated, take your time with it, and you will get it. And you need to: this is a vital concept. To further your understanding of margins, there are some other guidelines to consider. Some products tend to be higher in margin, others tend to be lower. Here are those parameters:
Margins Tend to Be Higher Margins Tend to Be Lower
Proprietary/unique items Early in product life cycle Lower volume items Slower moving inventory Higher risk customers
Commodities/undifferentiated products Later in product life cycle Higher volume items Faster moving inventory Lower risk customers
70
CUSTOMER PILLARS
These are merely guidelinespricing frequently breaks rules. However these tendencies are worth noting when approaching margins management. Stephen Fortners technology company has multiple products at different phases of the product life cycle. As he explains, As a product moves through the product life cycle, the impact on margin is really quite predictable. In our business, as the product moves into the latter parts of the life cycle, margins decline dramatically. This makes it important to build in sufficient margin padding on the front end to sustain predictable price erosions. Using margins as a pricing method recognizes there should be a relationship between the cost of a product and what it is ultimately sold for. Additionally, using margins as a basis for pricing builds an awareness of the importance of margins, something vital for the ongoing financial management of a developing business.
PRICING METHOD 2: INCOME BASED

Pricing decisions have a significant impact on overall profitability. Another pricing approach is to start with the end profitability in mind, then work backwards into the necessary pricing. Assume Bill has a small widgets manufacturing company with fixed costs of $100,000 per year. Their widget has an average cost of $4.00 per unit. The company expects to sell 30,000 widgets per year and wants to generate a $50,000 profit. So how much should the company charge for widgets? Heres the math. Fixed Costs + Profit = Total amount needed after product costs to meet profit goal $100,000 + 50,000 = $150,000 Gross profit needed per product sold = $150,000 30,000 = $5.00 Selling Price = Gross Profit needed + Product Cost = $5.00 + $4.00 = $9.00 Do you see how we walked the math backwards? To hit their profitability targets, Bill must sell widgets for at least $9.00. Lets see
71
what their overall profitability is at different selling prices, assuming everything else stays equal.
Sell Price 7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50 12.00 Units Sold 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Revenues
$210,000 $225,000 $240,000 $255,000 $270,000 $285,000 $300,000 $315,000 $330,000 $345,000 $360,000
Product Cost
$120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000 $120,000
Fixed Costs
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Prot
$-10,000 $5,000 $20,000 $35,000 $50,000 $65,000 $80,000 $95,000 $110,000 $125,000 $140,000
This method shows profitability at different price levels. Putting together a model to anticipate the performance of the company can be as simple as that, or much more complicated. If your numbers are complicated, consider enlisting an accountant or consultant to run profitability scenarios. But whether you are a one-person company (where profits are your personal income!) or a large, publicly traded company with quarterly earnings per share goals, you must consider the profitability target when youre selecting prices.
PRICING METHOD 3: COMPETITIVE BASED

Every industry has low cost providers who establish the price floor and premium companies who establish the price ceiling. While the range is wider in some industries than others, all industries have a price scale. The goal of competitive pricing is to understand where the market (your competition) is and where you fit in to it.
72
CUSTOMER PILLARS
The process starts with an analysis that lists the competitors, the prices they charge, and any differences which should be considered in evaluating the pricing variances. Analyzing the competition and why customers should select you instead of them is the entire topic of pillar five; however, when establishing prices, understand where your competitors have priced their products. So how do you get information about what others are charging?
WAYS TO COLLECT COMPETITIVE INFORMATION

Shop them as if you were a customer Visit their websites Visit their booths at tradeshows Speak with supplier sales reps Have a customer do research for you Create a fake customer and contact your competitor by telephone Study competitive adsread industry publications Collect industry junk mail, magazines, and newsletters
When Sam Taylor was surveying the price structure of the local fitness market, he went to the other fitness centers and toured their facilities. Then, he set up a spreadsheet to record the company, its prices, and any differences he observed in offerings. This helped him understand the market. Once you have an understanding of the competitions prices, select the position you wish to obtain and why. If the market ranges from $15 to $40, where would you prefer to be and for what reasons? Finally, industry pricing is fluid and changes with time. As markets become more competitive, pricing pressure escalates and margins compress. Similarly, as time goes by, rising costs are passed on
73
to customers with annual price increases. Nonetheless, prices change. Monitor the movement in the market and, if necessary, adapt.
PRICING METHOD 4: IMAGE BASED

Consider the following items: A prime rib steak dinner for $4.95 A new car for $87,995 The cheapest investment advisor The most expensive wrist watch
Did you notice your thoughts when the item and its price were revealed? When dining, you might be concerned about the quality of a cheap steak dinner or wonder if there was some other obligation accompanying such a great offer. A car costing nearly ninety thousand dollars might bring to mind a sleek, shiny, smooth running car that would be the envy of the entire neighborhood. The cheapest investment advisor might give you poor advice. And the most expensive timepiece is a watch you would wear on special occasions where you might want to impress someone. This exercise illustrates that your price says something about you and your product, even before the customer has been exposed to it. By itself your price makes a statement about your company and the quality of your services. Consider what your pricing says about you. What image does your pricing policy convey to customers and prospective customers? First determine the impression you want to create, then the pricing level to create that desired image. Being on the expensive side of the market can be desirable if it creates the right impression. There are many instances where being the least expensive option might not be the best approach. Match your product or service offering with the pricing image aim for consistency. If you have a feature-rich, upscale product, an
74
CUSTOMER PILLARS
inexpensive price will make customers skeptical. Similarly, if you have stripped the product down to lower costs, you will probably not be able to charge a premium. Jenny Adams sees this with the different product lines she features in her bike and outdoor adventure shop. She monitors the market pricing closely; some lines stay at the upper end of the range, others stay near the low end. When you look closely at the individual bike lines, there are some differences in the quality and features, but not enough to justify the full difference in price. Companies obviously take different approaches to building how they want to be viewed in the market, and they use price to assist with this. Both strategies work, as both high and low end priced lines sellbut they have different goals. In our business, the price of the product is designed to make a statement. Image and quality are often inferred without any interaction on your part, so select your prices with the desired image in mind.
PRICING METHOD 5: VOLUME BASED

With changes in the price of a product, we assume the quantity sold (volume) will also vary. Based on this and the changing level of margins, it makes sense to estimate (OK, perhaps, guesstimate) the volume at different pricing levels. From this, you can approximate the price which produces the greatest overall profits. Start with the items possible range of prices. Then estimate how many units youll sell at each pricing level. Take the case of Stephen Fortner, who manufactures a telecommunications part used in modems. He estimates that market prices range from between $5.50 and $10.00the firms manufacturing cost is $4.00 per unit. The firm has estimated annual volumes at each price level. Based on this, here is the analysis:
Price $4.00 110,000 100,000 90,000 80,000 70,000 60,000 50,000 $4.00 $4.00 $4.00 $4.00 $4.00 $4.00 $4.00 40,000
$5.50
$5.75
$6.00
$6.25
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00 $4.00 30,000
$10.00 $4.00 30,000
Cost
$4.00
Volume
120,000
Margin Per Unit $1.75 30% 33% 36% 38% 43% 47% $2.00 $2.25 $2.50 $3.00 $3.50
$1.50
$4.00 50%
$4.50 53%
$5.00 56%
$6.00 60%
GM %
27%
Extended Sales $632,500 $600,000 $562,500 $520,000
$660,000
$490,000
$450,000
$400,000
$340,000
$270,000
$300,000
Extended GM $ $192,500 $200,000 $202,500 $200,000
$180,000
$210,000
$210,000
$200,000
$180,000
$150,000
$180,000
75
76
CUSTOMER PILLARS

Notice the largest extended gross margin is $210,000, which occurs both at the $7.00 level and at the $7.50 level. Everything else being equal, the ideal price would be $7.50. (Why not $7.00? Because you have to manufacture and sell 10,000 more units to make exactly the same amount of margin.) People understandably get uncomfortable with the highly approximate/imprecise nature of making unit projections for each level of pricing. This is completely natural. The point is not to be perfect, but to consider this important point. Some people feel more comfortable when they look at several different scenariosvary the numbers and conduct the analysis with several sets of assumptions. For instance, do a second set of numbers where volume is more sensitive to price, and a third analysis where the volume is less sensitive to price. Doing this will reduce your need to guess perfectly and will still allow you to see the difference in total margins at different price levels. Success in this analysis relies on being comfortable making uncertain estimates, but still studying the results. Its better to work with estimates and revise over time than to ignore the volume component of pricing.
PRICING METHOD 6: TESTING BASED

But in the end, how you think customers will react to pricing isnt importanthow they actually do react to it is what counts. If you could narrow the pricing down to two options, wouldnt it be great to test both, then go with the one that worked best? While this is tricky, it can be done. With pricing, its important to test. The value of testing is the topic of the eighth CUSTOMER PILLAR. However, it is so important to pricing, it is worth introducing now. Price testing helps validate the assumptions you make about how the market will react to various pricing levels. So how can you do this? One way is to test different pricing levels in different markets. If you sell in two different cities, you could try each pricing level in the different cities and see which one works the best in a real setting. Another option is to change the price in the same market to see if there
77
is a significant difference. Phil Jensen developed and sells a battery charging device for tools sold through hardware stores. During the initial product launch, Phil chose to test two different pricing levels in different regions of the county. I felt weird charging customers a different price, but I wanted to see if the variation had an impact on how consumers perceived the product and on their purchasing patterns. The results of testing were important for determining the universal pricing approach we used in our nationwide rollout. No question, this can be touchy and your goal is not to give one customer a better deal than another. The aim is to test different pricing approaches to learn which options produce the best results for your company. Price testing is a great way to learn about the actual performance of the market in response to your pricing approach.
BRINGING THE SIX METHODS TOGETHER

Looking at each pricing method individually enables you to isolate certain important variables (margin, profitability, competition, image, volume, and testing) to see how each individually impacts the outcome of a pricing analysis. In the real world, these variables all interact to determine the success of a pricing strategy. You cannot, for example, consider competitive factors without looking at margin impacts. So, we must remove the blinders needed to conduct the initial work and pull it all together. Start by listing the outcomes of each method. If there is a high degree of consistency between the methods, it makes the last step simpleyou probably have identified the pricing strategy you want to start with in the market. If there is some disparity between the methods, list what you like and do not like about each particular method and which methods will have the most impact on your market, industry, and company. You may feel certain pricing variables have more meaning than others. Pricing, like most things in business, is fluid and changes constantly. So test and evaluate pricing factors on an ongoing basis, so
78
CUSTOMER PILLARS
you can adapt and modify your pricing approach over time. Pricing is certainly a complex issue. The best way to simplify the task is to break the pricing work down into the different methods, look at them individually, then pull them together to obtain important insights. One last thing to consider in pricing is whether there is a negotiation element in your pricing. When you put a price on your product or service, is that the price the customer actually pays? Or do your customers try to negotiate prices down? In some industries this is more common than others. For instance, its more prevalent in business to business marketing than in consumer sales. If there is a negotiation factor in your pricing, build in proper negotiating room to meet your overall pricing goals. It is always a lot easier to lower prices than it is to raise them.
EEEK! IM NOT THE CHEAPEST!

Never fear, many companies face this challenge and not only get over it, but thrive being above the low cost provider. In fact, since only one company can occupy the lowest spot in the industry, its difficult to stay in that spot. As the old sales adage goes, live on price, die on price. Here are some things you can do to succeed even if your prices are not the lowest: Beat the cheapies with Pillar Two, which focuses on value. For instance, branding and packaging are excellent ways to justify a higher price through increased perceived value. Similar products can be sold for significantly different prices if the quality or image is greatly enhanced. Use bundling. By combining products and services, you can often reduce the emphasis on price and shift it over to value and providing a complete solution. Value-added also helps overcome price objections. If you are adding unique little things to your offering, having the lowest price will become less important. How you present the price difference can make customers comfortable with higher prices. People regularly pay more if they
79
understand why. To do this, improve your ability to justify and explain a higher price. Dont send salespeople out into the field with poor explanations regarding price. If youre higher, dont hide itbe prepared to brag about it! Avoid the temptation to apologize when talking about price. Many people get embarrassed when their products are more expensive and try to hide this fact or go into one thousand excuses mode. Be proud of your pricing and dont hem and haw about it. Know the reasons for your premium pricing (and premium value) and shout it from the mountaintop. Lastly, people are often willing to pay for convenience. Lack of time and frustration with stress make customers willing to pay for anything that makes their lives easier. If your competitors have a lower price, consider making your product or service more convenient.
RECAP: TACTICS TO USE IF YOU ARE NOT THE CHEAPEST

Branding / packaging Bundling Value addedbring something else to the table Focus on important quality points Communicate betterbetter selling skills Dont apologize about it Help educate customers WHYhave a good reason Convenience
WHEN THE PERFECT PRICE IS FREE!

In some circumstances, the best price is none at all. The word free almost always makes people stop and listen. My favorite approach to free is the free with purchase strategy. People love to get something for nothing and will buy a product or
80
CUSTOMER PILLARS
service if they know they are getting another product or service for free with it. This is essentially a bundling strategy that emphasizes the free item. For example, Java Jeans Coffee Shop gives customers get a free mini-scone with premium coffee on Tuesday mornings. Samantha Harrison, the shops owner, feels the strategy works well. First, we see many people move up from a less expensive coffee to our premium coffee on those mornings; this makes the strategy profitable in and of itself. We also find it increases sales of premium coffees on other days. They learn on Tuesdays that our premium coffees are worth the extra expenditure. On top of that, the free mini-scones show people how wonderful those tasty products are and we have seen a huge increase in scones volume. The promotion has had a significantly positive impact. The great thing about this strategy is that it preserves the margin rates for the base products and preserves their pricing integrity, which makes it superior to a mere discount. It also provides an opportunity for cross-selling through sampling if the freebie is something the customer will buy in the future. Valuable freebies are another way to support selling and reinforce branding. For example, Jim Anderson realized clients coming to his law firm were seeking solutions to some significant challenges in their businesses. Most businesspeople feel uncomfortable when entering the legal realm, Jim shared. So I started reviewing commercially available books which described different legal issues and how businesses have overcome those challenges. It took some time, but I found the right books and a few articles that really connected with where our clients were at. We started giving the books and articles to clients. They appreciated the gift and started to feel more comfortable with their situation, and they seemed to understand our approach and feel more confident with our services. Giving the clients these books was an extremely small expense to us, but one that provided an extensive return on investment. Often the best way to sell your products or services is to allow people to try themfree. Once they try them, they want to continue using them. For example, Mark Conners executive coaching firm sells services around a base monthly package. And while Marks services produce
81
a strong value for his clients, they are intangible, especially when hes explaining them to someone who has never had a coach. So, Mark finds his best selling approach is to allow clients to actually experience his coaching. When I find a well qualified client I really want to work with, Mark explains, I offer them a free trial month of my services. I let what I do speak for itself; clients believe it when they live it. A large percentage of clients continue on with my services after the free month and usually greatly expand what I do for them. The investment of my time for that free month is less expensive advertising than any other method for the results produced. Marks success with this free trial of his services prompted him to expand the program. I offered my clients an opportunity to give a month of my services free to their associates. Since they believe in what I do, they have a huge amount of credibility when they refer me. And when they do it, they believe they are giving their friends something of great value. In fact, Mark continues, it went so well that everyone I knew who worked with the types of clients I wanted, like banks, accounting firms, chambers of commerce, got a coupon for a free month of my service to give their business associates. I gave everyone specific instructions about the kinds of clients I wanted who could benefit most from my coaching. I charge handsomely for what I do, but I start by giving my services away. My coaching practice has exploded as a result of giving clients a chance to experience what I do first hand.
RECAP: USING FREE TO YOUR BEST ADVANTAGE

Free with Purchase Valuable Freebies Trials / Trials with Referring Partners
82
CUSTOMER PILLARS
DISCOUNTING THE PRACTICE OF DISCOUNTING

Unfortunately, the practice of discounting has become incredibly common. Some retailers have clearance sales every week. Discounting is only practical when used with caution. It has some significant downfalls. First, discounting can have a disastrous impact on margins. Even small discounts can have a significant negative impact on margins and can place unreasonable requirements for additional volumes. (More on this later.) Companies usually underestimate the financial ramifications of discounting. Discounts can also lead to a downward price spiral. You discount. Then your competitor tries to one up you by discounting lower. Then a third company comes with even lower discounts. When does it end? Discounting can also shift the perception of what the real price is. If a product is normally ten dollars, but we can buy it regularly discounted at eight, the market often starts to believe the value is eight dollars. When this occurs, we lose pricing integrity. Similarly, discounting programs lead many people to purchase only when an item is on sale. Often customers are heard asking, When will this item be on sale? If used sparingly, discounting can have its place. For example, its almost always financially productive to convert slow moving inventory items to cash quickly, even at a discounted price. Or you can offer a discount with purchase, which maintains the margin rate and pricing integrity of the original item. If the discounted item is a cross sell product or service, this approach has the added benefit of introducing customers to the second product. Lastly, this approach typically increases sales volumes more than a standard percentage off discount. Or you can offer a bundled price on multiple items. This preserves pricing integrity (the individual item prices dont show), increases volume, and cross-sells other items. If a customer purchases larger amounts of a product, or buys more regularly than others, they may expect a volume price discount. This is particularly true in business to business selling situations, especially when the customer is a distributor or retailer who resells your product. Be sure to explain the volume pricing strategy clearly and take margin differences into account.
83
Businesses that offer credit often offer quick pay discounts, too. For instance, a common payment term is 2%/10, net 30. This means that the invoice must be paid within 30 days of the invoice date, but if it is paid in 10 days, the customer can take a 2% quick pay discount. The goal of this approach is to speed up the collections of accounts receivables and improve cash flows. Often quick pay discounts are dictated by industry standards. However, the company offering the discount is paying a very high effective interest rate. For example, if you break 2%/10, net 30 down, the company is giving a 2% discount if the customer pays 20 days sooner. Thats over 36% per year on that money: Thats expensive! If you offer a quick pay discount, understand that it has a real cost and consider adjusting your base prices appropriately. Similarly, if you can take advantage of quick pay discounts from your vendors, do so. A 2%/10, net 30 term means a 36% annual return on investment, which is excellent. (If you had a mutual fund that always produced 36% per year, you would invest as much as you could in it.) I once had a client who was offered a 5% quick pay discount to pay 20 days earlier, a 90% return rate per year. He had been in business for nearly 10 years before he realized the value of taking this discount. Learn how to calculate the true value of the quick pay discounts you are offering and are being offered. Compare that to the rate you get when you borrow money. Would you borrow money, either to avoid offering quick pay discounts to your customers, or in order take advantage of discounts offered by your vendors? Often, the answer is yes.
RECAP: DISCOUNTING STRATEGIES

Know when it is smart and when it isnt Discount with purchase Bundled pricing Discounting slow moving inventory Volume pricing discounts Quick pay discounts
84
CUSTOMER PILLARS
GETTING ON GREAT TERMS

How the price is charged is often as important as the actual cost. In other words, the terms of the payment can have as much impact on the transaction as the actual cost. There are multitudes of ways to incorporate terms into your pricing strategy. Many can create a competitive advantage. Some can even add an additional profit stream. Once, a client of mine was selling a $3,000 piece of industrial equipment to small companies and found the immediate cash impact to his customer was a barrier to the sale. To help with this, the client started a leasing program. This lessened the customers concerns and increased the profitability of each individual sale. And while there were capital considerations and management issues with this decision, the company was able to account for them and make necessary adjustments. Some of the common terms of payment are listed below:
TERMS OF PAYMENT
Cash Credit cards Check Check via internet CODCash on Delivery Payment Terms Leasing Layaway Rental Cash Discounts Quick Pay Discounts Volume Discounts Consignment Inventory (customer pays when they sell product) Barter (product or services exchanged for other products or services)
85
DOES THE PRICING STRATEGY ADD UP?

There is good news and bad news. Lets start with the bad news.. theres a certain amount of math when considering pricing. The good news. The math is simple addition, subtraction, multiplication, and division. To refine towards perfect pricing, there are several math equations to understand. First, understand the difference between margin and markup. These concepts are related, but are different. Markup is often used in the retail setting, and margin is found in most others. Margin and markup are both calculations using the selling price to customers (price) and the cost of those products (cost of goods sold). Lets take the example of a medical product from HernMedCo which has a cost of five dollars that they sell for twelve. Here are the calculations of both margin and markup.
Gross Margin % = (Price - Cost) / Price Markup % = (Price - Cost) / Cost
Gross Margin % = (Price - Cost)/Price Margin = ((12 - 5) 12) Margin = (7 12) Margin = 58.3% Markup = (Price - Cost)/Cost Markup = ((12- 5) 5) Markup = (7 5) Markup = 140%
Both formulas use the gross profit dollars (Price - Cost). Margin divides that number by the selling price; markup divides it by cost. So margins can never be over 100%. Markups can be, and often are, over 100%. This chart shows the margin and markup percentages at various pricing levels of a product that costs $5.
86
CUSTOMER PILLARS
Cost $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
Sell Price $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00
Margin 16.7% 28.6% 37.5% 44.4% 50.0% 54.5% 58.3% 61.5% 64.3% 66.7%
Markup 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
The next issue in the mathematics of pricing is to determine how much volume must increase to compensate for a reduction in price. For instance, Jenny Adams is considering a promotional discount program in her bike shop which will decrease the price of a certain set of carbon fiber wheels by 20%. How much must volume increase for profits to stay the same? Often people assume the answer is 20%, but thats wrong. To calculate this, we must have the discount amount AND the starting margin percentage. In our example, she is considering a 20% discount, but we need the initial margin percentage of the item. Imagine Jenny was starting with a margin of 60%. Discount being considered = 20% Initial margin % = 60% With the discounted selling price, Jenny must increase volume just to maintain overall gross profits. We want to know how much. To make this calculation easier, it is helpful to calculate an example initial selling price, cost, and new selling price. It actually does not matter what numbers we select (the math equals everything out), so well select an easy initial selling price of $100.00. Initial selling price = $100.00 Cost = $40.00 (calculated from the 60% margin rate) New selling price = $80.00 (based on the 20% discount)
87
Next, imagine she normally sells 100 of the wheels per year based on the original selling price. Based on this, we know the following: Initial selling price = $100.00 Normal unit sales = 100 Normal extended margins = ((Sell Price - Cost) X Units) = ((100 - 40) x 100) = 6,000 New Margin Per Unit = (New Sell Price - Cost) = (80 - 40) = 40 If Jenny makes $40 per item with the new discounted selling price, how many items must we sell to generate the same margin ($6,000) she had before the discount? To calculate this, divide 6,000 by 40. The answer is 150 units. Here is a comparison of the two scenarios: Before Discount Sell Price Cost $ Margin Per Item Margin at 100 Units Units to Generate $6000 in Margin $100.00 $40.00 $60.00 $6,000 100 After Discount $80.00 $40.00 $40.00 $4,000 150
In this scenario, for Jenny to generate the same margin dollars, unit sales must increase by 50%. If you have a starting margin of 60% and you wish to discount by 20%, you must increase volume by 50% just to stay even. A logical question to ask Jenny is that if she takes the price from $100 to $80, is it reasonable to expect a 50% increase in units sold? This is what the numbers tell her will be necessary. Most people underestimate the extra volume necessary to cover the lost margins of discounting, and often, when they learn the real numbers, believe it would be difficult to generate that much extra business to warrant
88
CUSTOMER PILLARS
the price decreases. This could be considered a hidden cost of discounting. Many people make discounting decisions without fully understanding this. Most of the calculations in business are pretty straightforward. If you can understand this one, you will be in a much better position to run a profitable, expanding company!
OTHER PRICING JEWELS

Confidence. Pricing can reflect the confidence you have in yourself and in your company. This often shows up in young companies and their tendency to under-price. This requires taking a hard look at the value you are providing. Pricing reflects your confidence and to excel at building a business, youll need to be confident in your offering. Psychological Pricing Approaches. For years marketing books have touted the benefits of a psychological approach to pricing. The suggestion is to round down slightly with prices to create the perception of a lower price. In other words, instead of $20.00, sell the product for $19.95 or $19.99. In general, this is used extensively in business to consumer (B2C) selling situations, but is normally skipped in B2B settings.
89

Consider things that would cause your pricing to be less than perfectwhat would it take to move in that direction? Study each of the six approaches to pricing individually with blinders on; then bring them together Keep an excellent tab on your cost of goods sold/cost accountingthese numbers are vital for making important pricing decisions Manage your business around marginsknow industry averages and use this information to help you make progress Ensure your pricing structure helps you attain your income goalsknow how pricing impacts this Understand the range of pricing in your industry and where you plan to fitconduct a competitive analysis Use pricing as a mechanism to consciously create the image you convey in the marketplace Make projections about how different pricing levels will yield different volume levels in the businessseek the ideal combination Develop strategies and train your people appropriately when you are not the low cost provider (the cheapest) in the industry
90
CUSTOMER PILLARS
Use free to your advantageknow the situations when this makes sense for you and when it does not Understand the math behind discountingensure you realize the volume increases necessary to cover the reduced prices/margins

PILLAR FOUR
FORM PRODUCTIVE LINKING RELATIONSHIPS

Kenny Candy! Kenny Candy! Kenny Candy! There were a handful of retail establishments in Nortonville. But the children had their favorite. In fact, they would chant the owners nickname to their parents before making the trip to the IGA. Kenny Clinkinbeard always had an ample supply of Smarties or butterscotch candies in his pocket. He gave the children a piece of candy as their parents shopped, earning him the affectionate nickname Kenny Candy. As this preceded the Happy Meal, I like to joke that McDonalds stole the kids meal concept from the Nortonville IGA. But what both companies knew is there are important linking relationships, for instance the powerful influence children have on their parents, connecting a company to its customers. Business builders know and use this well!
91
92
CUSTOMER PILLARS
PILLAR 4: FORM PRODUCTIVE LINKING RELATIONSHIPS

Linking relationships, those important people and companies who help connect a business to their customer base, and multiple ways to develop them are discussed in this chapter. The central question is, Who is vitally important to bridging the gap between the company and our customers? While looking at these important intermediary relationships, we consider four major categories, including:
TYPES OF LINKING RELATIONSHIPS

Referral Partners Distribution Partners Strategic Alliances Key Influencers
Linkers greatly influence the companys sale of products or services; though they may or may not actually purchase products or services themselves. Cultivating these key relationships grows many businesses even more than other traditional marketing efforts.
WHATS THE BUZZ ALL ABOUT?

Referring relationships are individuals or firms who tell others about your company. No matter how honest and integrity-driven your efforts are, you will never have as much credibility when describing yourself as other people do when they are talking about you. Its better to let others brag for you than to do it yourself. When they have a great experience, people usually like to talk about it. Word of mouth advertising is always most effective, because it comes from an independent source who has experience as a customer. Word of mouth helps develop an outstanding reputation and its cost is negligible. Sheryl Hoffman started her IT firm working for just a few clients. One day, somewhat out of the blue, she was contacted by a new
Pillar Four: Form Productive Linking Relationships
93

customer prospect. I was taken back when I got my first client by referral, Sheryl recalls. When I picked up the phone, Bill, who I did not even know, told me he had been speaking with one of my clients, Rebecca, at a networking function. He was having some significant challenges with IT issues and Rebecca praised us. I set up a meeting and was able to secure his business. After that, Sheryl continued, I thought well that was easy to myself. Knocking on doors was how I obtained most of my first clients. Word of mouth advertising greatly simplified the process. I decided it was something I wanted to incorporate into my approach. Instead of just letting it happen, I did things to make it happen. The first thing I did was drop in on Rebecca with a hand written thank you card and a small bouquet of flowers. I wanted to thank her for the referral. During our visit, I told her the gesture was important for growing my business and she seemed touched that Id reacted so positively. To her, it was a simple conversation with someone at a meeting. But to me, it was an important part of developing my business. I also gave her five more business cards and asked her to pass the cards along whenever appropriate. I want it to be easy to share my name and simple for that person to contact me. She said she would. But then Rebecca got this quizzical look on her face, as if she were thinking. She said, You know there are a few people you ought to contact, Im not sure what they are doing for their IT needs, but I would think they would have similar needs to mine and Bills. As I recall, Rebecca gave me two names that day. When I contacted the people, I was able to say Rebecca had given me their names. This opened the door much more quickly. And while both people said their IT needs were under control, I sent both some information on my firm. About six weeks later, one of them contacted me regarding a problem they had not been able to solve. I picked up that work too. Thats how powerful referrals from a single satisfied customer can be. You can also build relationships with centers of influence, people or companies who have many contacts with and influence over your desired customer base, such as chambers of commerce, banks, and accountants, civic leaders, and real estate agents. Dan Phillips used a centers of influence strategy with his pool
94
CUSTOMER PILLARS
and spa business. Dan and I were brainstorming growth strategies, when he mentioned realtors and home builders as great sources of referrals for his business. Dan had met with a few of these possible linkers and given them brochures and business cards and described how he could assist their clients. Lets amp that strategy up a little bit, I suggested. Sounds good, Dan replied. What do you have in mind? Everyone in the home business from flooring companies to plumbers wants to build referral relationships with realtors and builders. So I asked, What can we do to stand out? Well, for one thing, I would really like to get them into the store, Dan said. When people enter our building, they see the great products we have and we can show them our photo album of unique projects we have done. Maybe that could be part of the solution. I agreed. There was something about walking into Dans store that seriously made me want to own a hot tub. The atmosphere was definitely conducive to his sales process. It puts you in a bathing suit frame of mind! How about this, I continued, lets send a quick letter to the centers of influence, and instead of doing a hardcore sales job on your store, lets simply offer them a free gift for stopping by the store. Something inexpensive to you, but fun and valuable to them. Dan thought about it for a while and said he could give them a pair of movie tickets. We could call the campaign Hooray for Hollywood! Dan contributed. That was clever. So we drafted a letter to prospective centers of influence, incorporated the movie theme, and invited them to stop by the store. When they came in, Dan gave them the tickets and showed them what he had to offer. Response was strong. Even though a pair of movie tickets is not that expensive, people like the idea of getting something for free. Dan was able to connect with these valuable referral sources, to differentiate his company, and establish stronger referring relationships. You can also increase your base of referring partners by networking. You simply meet other people who learn about your products or services. This is often facilitated by organizations, such as the Chamber of Commerce, or formal networking groups such as Rotary or BNI.
95
Good networking allows you to create more eyes and ears on the street who know what you do and can pass your name along. A great way to do this is to volunteer with some of these organizations. Often if you volunteer for a committee related to your line of business (like a small business council, or a welcome committee), you will meet other people and these relationships lead to valuable business and community contacts. Remember, people prefer to do business with people they know and like. Meeting people through networking is also an excellent way to acquaint yourself with others in the community. If you market nationally, get involved with some national industry groups and connect to others within it. Also consider formal networking groups, like BNI (Business Networking International). These organizations usually meet over breakfast or lunch with the sole purpose of generating referrals for members. Typically, participants give an elevator speech about their business and describe the types of referrals they are looking for. After hearing everyones pitch, people provide customer leads. Some groups have a formal method for recording and keeping track of leads sharedsharing them is required for ongoing participation. You can also find ways to generate value for a given group of people or companies within your target market. For instance, once a client was targeting national fitness firms. As she was researching these companies and the issues facing them, she came across new accreditation standards. She wrote articles about the new standards, became known as an expert on this topic, and used that to get her foot in the door with important customer prospects. This networking technique was effective in gaining access to her target markets. Look for these and other networking opportunities to expand your business and generate a large number of highly qualified potential customers.
RECAP: TYPES OF REFERRING PARTNERS

Satisfied Customers/Word of Mouth Advertising Centers of Influence Networking
96
CUSTOMER PILLARS
SO WHATS IN IT FOR ME?

Many companies say referrals and word of mouth advertising are central goals of their expansion plans. And they should be; these strategies are effective and efficient. They work and do not have large costs. However, fewer companies take a critical next step to fully leverage this strategy. We all want referrals. However, when we ask people to give us referrals, we are essentially walking up to them and asking Hey, would you help me build my business? Most people are busy with their own lives, their own companies, and their own concerns. What does the person giving the referral get out of the equation? To fully leverage a strategy relying on referrals, you must shift your perspective and produce value for the people providing the referrals, as well. Essentially, it means you give them something somehow. Take the time to study the benefits your referral partner gets.
WAYS TO PRODUCE VALUE FOR REFERRING PARTNERS

It makes them look good It makes them look progressive/current It makes them look intelligent/knowledgeable It shows they are a resource It helps their business You make their lives easier It improves their reputation You solve a problem for those they refer to you It earns them a commission
This is called a value partnership approach to referrals. Like other relationships in business, we participate in those which produce
97
mutually beneficial outcomes and avoid those that are one-sided in their benefit or that create pain. If you want more referrals, take a partnership approach and create as much value for your referral partners as they give youor more! For example, I was once involved with a product for pregnant women who were experiencing back pain. The obvious place to contact pregnant women is at the OB-GYN office. The doctors were not involved in selling this particular item, but their referrals were worth their weight in gold. Many people told me doctors would not take the time to refer their patients to this product. Doctors were simply too busy. I was getting a lot of feedback telling me not to waste my time. After digging into some medical journals, I found that nearly all pregnant women experienced some back pain during pregnancy, and a large percentage of them experienced significant back pain. When they asked their doctors about solutions, there were few, if any, excellent options. The common nature of the complaint, coupled with the lack of alternatives, actually cost the doctors a significant amount of time in the office. Armed with this knowledge, we developed a brochure explaining the whys of pregnancy related back pain, how our solution worked, and provided an easy ordering option. And while the doctors were not able to endorse the product, they were extremely happy to have an easy, information-packed brochure they could pass on to their patients. In the end, we saved them time. People will always be more willing to refer customers to your business if you create value, present opportunities, or save them timeso take a partnership approach. WARNING!!!! When people refer you, they are staking their reputations on your performance. Make them look really good. Reward them for their trust by doing a great job. If you do, you will get a steady stream of referrals. If you dont, they will dry up.
TAKE IT OFF AUTOPILOT

The work I do gives me the opportunity to interact with many people growing their businesses. When I ask what has increased their
98
CUSTOMER PILLARS
revenues most, many people mention word of mouth advertising and referrals. So what do you do to encourage referrals? I ask. The usual response is something like we offer a good product and we take care of our customers. These are prerequisites, not driving forcesbut most people believe that if they do a good enough job, the word will just get around. If you are really good, it willbut on its own time frame. You can and should take more control of the process and expedite the benefits. Start with the premise, ask and you shall receive. Doing a great job with clients does not automatically turn them into a powerful, volunteer sales force for your company. Customers may not even realize that you would like referrals from them. The simple act of asking for a referral or offering to assist their friends and contacts plants a seed. You can do this several ways, including saying things like: Thanks for visiting our restaurant today. We hope you enjoyed it enough to recommend it to your friends. We are in the process of expanding and I would greatly appreciate it if you would pass my name on to anyone who could use the services we offer. The greatest compliment you could give us is to refer a friend. Our business is great, but we are always looking for more customersbe sure to tell your friends.
Comments like this could be used in personal interactions or printed on invoices or receipts. You will improve the quality of referrals if you are specific about the kinds of customers you are looking for. This helps them identify potential customers, whether they give you the name of the prospective client directly or they give your name to them. I assumed people fully understand the kind of clients I wanted, Mark Conners explained about his executive coaching firm. They didnt. In fact, I found when I was more specific about the types of clients I wanted, my descriptions helped them think of people they
99
could send my way. You have to be specific about what you are asking for.
IT SHOULD BE EASY TO GIVE YOU REFERRALS

Tad Billings develops relationships with local school music directors. In addition to the products they directly purchase and rent from his music store, the directors refer a tremendous number of students to his store. To facilitate this process, he developed a set of tools to help them share this information. The band directors are really busy and the last thing they think of is how to help me build my business. So to help them give me referrals, I gave them some tools to make it really easy to share the name of my business with their students, my prospective customers. The first was a brochure with a free coupon. I customized the coupon to the specific school. This made it seem special to the band director, like I was offering them a personal discount they could pass onto their kids. They really liked that. Next, I developed a series of posters promoting overall participation in band. They really highlight how being in band is fun. Band directors are always trying to increase their enrollment, so I gave them these posters to help out. I simply put my logo on the bottom of the poster as the sponsor. They displayed them. It helps them and it helps me. Tad is right; people may give you referrals, but certainly their primary interest is not promoting your business. They have other challenges and opportunities in their own world. Give them simple selling tools to make it easier to refer you. The pregnancy back pain situation is another example. Had we just gone to the OB-GYNs with a brochure and asked them to hand them out to all their pregnant patients, they would have thrown us out on our ears. Our pretty, glossy brochures would have ended up in the trash can. But we were producing value by helping them solve a patient problem, so we took the time to point out how common back pain was among their patients, that there were few great options, that they spent much time speaking with patients
100
CUSTOMER PILLARS
about this, that their patients were unhappy when there were no options, and that we were not asking for their endorsement, just for them to pass on the brochure. As we explained this, the doctors and their staff members realized our brochure was going to save them time. Its doubtful they would have come to this conclusion on their own. So another important part of making referrals work is explaining the benefits the referring partner gets out of making the referrals to you. Point out how they win! You can take this a step further and reward referring partners. This can be as direct as financially compensating them (formally or informally), sending a gift, or as simple as a handwritten thank you note. (Handwritten notes are extremely effective!) If a referring partner helped you build your business, it is good karma, and just good old fashioned courtesy, to thank or reward them. Keeping top of mind with referring partners is another critical step in this process. When I first started my referral programs, Tad shared, I was thrilled with the initial response. The band directors were really responsive to the tools I was providing them. But after a while, I noticed the response was kind of dwindling. Then one afternoon I was watching a baseball game on TV with a buddy and this commercial kept repeating over and over. My friend was complaining and I joked they were just trying to remind us, a lot! Later that night, my casual joke stuck in my mind. Could the reduction in activity from my referral partners be related to the fact they just forgot about me over the course of time? You know, out of sight out of mind. So I started a monthly reminder mailing to the band directors. Every other month, I sent a newsletter. On the off months, I sent a postcard. I also made a conscious effort to ask them for a referral when I spoke with them on the phone or met with them in person. The referrals picked up again like clockwork. If you dont remind them, theyll forget. Keep in touch with your referring partners, remind them of your activities, and share news and success stories. These things help keep you in their minds so when referral opportunities surface, they remember you. Remember: they are focused on their own lives. Make it easy for them to remember to give you referrals.
101
JUMPSTARTING THE BUZZ

You can let word of mouth advertising or a buzz just happen or you can strategically plant it. To generate momentum, consider studying your customers communications channels and networks. Imagine that no one knows about your business and the only way you can promote it is by telling only ten key strategic people. Who would those people be and how would the information reach the rest of your prospects? Studying how information spreads through your markets helps you figure out how and where to plant seeds that will spread growth. Who in your market is both highly visible and viewed as a source of information? These are the people who can generate interest in your product and start chain reactions that lead to sales. They may be the people who are the most popular, the most famous, or the most knowledgeableor just people who know everyone. Get them on your side: they can generate positive word of mouth advertising. When we opened the bike shop, Jenny Adams explained, we looked for every organizationbike clubs, hiking groups, running groups, kayaking groups, and triathlon clubsremotely related to our products. We found leaders in each of these groups. Sometimes they were hard to identify, but once we learned who they were, we really courted them. Often this meant personally inviting them into the store. We went way out of our way to get to know these people. We found when we had one or two key people from a group, knowledge and positive feelings about our company spread very rapidly throughout the rest of the group. To make this strategy even more effective, try giving those key referral partners something interesting to talk about. Word of mouth networks rely on people talking to other people. If they have something interesting to talk aboutlike a new product, class, or techniquethey are more likely to share it with others. Study ways to harness and leverage into the power of referral networks.
102
CUSTOMER PILLARS
RECAP: MAKING REFERRAL PARTNERSHIPS WORK

Ask for the referral Be specific about types of customer prospects you want referred Use selling tools that make it easy for others to talk about your biz Point out how the referral benefits the referral partner Thank them for giving you referrals Remind referral partners regularly Two waysthey share your name with others or they give you names to contact directly Understand communication networks and target specific early adopters/high influentials/leaders
LINKING THROUGH DISTRIBUTION PARTNERS

When Phil Jensen developed the N-Charger battery recharger, he thought he was going into the design and manufacturing business. He quickly learned that he was really in the distribution business. The more exposure he gets at the hardware retail level, the more people see and buy his product. For him, distribution is the name of the game. Many businesses use distribution partners, people or firms who participate in the sales and distribution function of moving products and services from their point of origin to their final customer. Often you will hear distribution referred to as supply chain management. Even businesses that seem to sell direct to the customer have distribution opportunities. If youre tempted to ignore this section because you think it doesnt apply to you, read ityou may be surprised! I never thought Id use distribution to sell my products, Arturo shared. We have a small retail store and import unique gift items from Guatemala. Due to family connections there, we were able to secure an excellent supply source. Doing a good job of purchasing for our own store was how this came about. On a trip to another city, we found a store that sold gift items from all over the world, including Guatemala. We actually saw some
103
of our productswhich they were selling at much higher prices. Luckily, the store owner was in the shop and we were able to strike up a conversation. In the end, I learned they were buying from an import wholesaler and I could actually supply the same products at a better price. So we shipped products to her and opened the wholesale distribution part of our business. We did more research and realized we had an opportunity to distribute products to stores all over our region. This actually became a bigger part of our business than our retail store. The extra volume allowed us to get better prices, coordinate more regular deliveries, and turn our inventories more regularly. We backed into a great new dimension to our company. This can be true of services, as well. Remember Jim Andersons law firm? One of the opportunities he identified was to perform specialized services for smaller law firms. This helped his firm extend their reach; as they formed partnerships with other law firms, they expanded their revenues. Be open to distribution opportunities: There are many different types of distribution partners and methods.
TYPES OF DISTRIBUTION PARTNERS

Retail Dealers / Wholesalers Independent Sales Reps Catalog / Mail Order Telemarketing Internet / Ebay InternetAffiliate commissions OEM / Private Labeling Marketing Alliances Franchising Network Marketing Vending Machines
104
CUSTOMER PILLARS
I once toured a manufacturing firm that made high end products for home improvement enthusiasts, and who distributed those products through major retailers. In their traditional distribution, they employed independent sales reps to call on major retailers for the selling function and sold to wholesalers for the movement of products. Recently, however, the firm had added Ebay, the internet auction website, to their distribution methods. When the company received product returns from customers, often the items were completely suitable for resale. Before Ebay, they had little outlet for these products, so they were often wasted. With Ebay, they were able to put these products up for auctionof course, described as used or refurbishedand were able to move the returned items. The owner shared his goal when starting the Ebay program was to recover 60% of their cost of the returned items. Doing this would mean many thousands of extra profit dollars each year. He was pleased to tell us they had actually been recovering 115%, significantly exceeding their goals. Being open to distribution options helped this firm develop a successful solution to one of their major problems. So what are we trying to accomplish with distribution partners? Here are the main objectives:
OBJECTIVES WITH DISTRIBUTION PARTNERS

Sharing informationcreate awareness, education Physical movement of product Creating local inventories Tapping into relationships distribution partners have with their customers Tapping into expertiseselling / customer / logistics Leveraging into existing overheads Rapid increase in the number of selling outlets Increase speed to market penetration Reduce costs to market expansion Get closer to the customer base Increase order size Utilize manufacturing capacity / turn inventory faster
105
A common approach is to eliminate the middlemen, which marketing textbooks call vertical integration. The theory is that compressing the distribution channel and eliminating distribution steps saves money, which can be passed onto the customer in lowered costs. Sometime, this works: Dell Computers is a good current example. But eliminating middlemen is not always profitable. Distribution partners often bring products and services to the marketplace more efficiently and actually reduce the total distribution cost. Always consider how working with other companies in distribution can create an opportunity for your business to develop. To succeed with distribution, fully understand pricing and discounting strategies all the way through the channel. Imagine youre a manufacturer of cooking utensils, who sells spatulas to wholesalers who sell them to grocery retailers who sell them to consumers. For simplicity, assume the product costs you $0.50 to make and you sell it to the wholesaler for $1, who sells it to the retailer for $2, who sells it to the consumer for $4. Understanding how the dollar moves throughout the entire distribution channel will help you (1) determine if the approach is efficient for your company and puts you in the best position for success, and (2) if the margins generated at each level allow your distribution partners to succeed. Just selling the product to your customer is not enough; the product and its pricing must be profitable at each step in the channel. If you succeed with your customers, but they fail, or their customers fail, your success will be short-lived. The product must move efficiently throughout the entire channel, generating adequate profits at each step. In the spatula example, the manufacturer sells the spatula to a wholesaler for $1; eventually consumers buy it for $4. In other words, the manufacturer is giving up $3 per spatula. Is this a good deal? It really can be. Each of the distribution partners contribute competencies, relationships, financial investment, or ideas that the product needs in order to reach the end customer. Here, since the spatula is ultimately sold in a grocery store, it would be difficult for the company to reach the millions of customers who visit grocery stores on its own. It could not do thisor even sell directly to grocery storesin a cost effective way. However, a good wholesaler can sell the companys spatulas with other product lines quite efficiently. In this case, selling to the best grocery wholesalers in the market is probably the best, most cost effective strategy.
106
CUSTOMER PILLARS
DOING DISTRIBUTION WELL

If you use distribution partners to bring your product or service to the markets, start by thinking about the concept of value partnership. Your distribution partners have their own profit motives. Like you, they are selecting from a myriad of opportunities to determine the most successful ways to evolve their business. If you contribute to this by giving them a line they sell profitably to their customers, they will listen and be eager to support your initiatives. If you ask without giving, they will not. A successful CEO of a manufacturing firm used several methods of distribution for the different markets his company served. Some approaches were working extremely well. Others were not. I just dont understand why these independent sales reps are not doing better with our line. We manufacture excellent products, the prices to their customers are great, and we are paying strong commission rates. They just must either be lazy or mediocre sales people. When we get some good reps, we will be in a better position to grow, Gerald shared. Do me a favor, I asked, pull me the commission statements for these reps for the last six months and let me take a look. When I received the reports, I noticed that the reps, who were paid only with their commissions, were getting checks of only a few hundred dollars per month. Usually, independent sales reps are autonomous businesspeople that represent multiple lines. I had to ask this CEO a key question Gerald, do these reps earn a living doing what they do? I asked. He indicated they seemed to. They drove nice enough cars and lived in upscale neighborhoods. Then theyre making a living, but not from your line. I responded. I told him about another CEO, Alex, in a different industry. This business also used independent selling reps to sell their products. When I say jump, Alex told me, I want those reps to ask how high. When I call and leave a voicemail message, I want them to call me back before they call anyone else. I want to own the reps versus just renting them. And the only way to do that is to make them so much money that their rep businesses are heavily reliant on mine. If their mortgage is dependent on selling my line each month, I know I will get their full effort. What Alex understood (and Gerald did not) is that independent businesspeople are looking for partners who contribute to their
107
success. Alex was making the mortgage payments for the reps each month; Gerald was only providing lunch money. If your goal is to motivate other businesseswhether they are independent sales reps, wholesalers, retailers, or catalog companiesgive them a business opportunity sufficient to motivate them, capture their attention, and get the time allocated to make your line successful. Using distribution partners can create a very interesting dynamic. Lets say youre a sporting goods wholesaler and you sell to hundreds of retailers in one geographic region. Doesnt that mean your customers are competitors to each other? It does, which can create a situation called channel conflict and may lead to distribution partners asking for exclusives on your products. A bit of advice to handling this situation: First, try to construct a level playing field for all customers to compete in the marketplace. If you sell something to retailer A, who sells the product to their customers at $8.00 and you sell the same product to retailer B at $8.25, then they have no way to compete. Start with an end user price, such as a list price, or manufacturers suggested list, and discount from there. Again, try to establish a situation where each company has the opportunity to be successful in the market. Some customers buy significantly more than others and volume based discounts will create a lack of balance in this level playing field. However, if you consistently apply volume discountsin other words, you have a common volume discount schedule you use universallyyou are taking important steps to create a successful situation. In distribution, your goal should be that all distribution partners have equal footing to be successful. The more successful customers you have, the better. What about exclusivities and protected distribution? My suggestion is to make distribution partners earn any exclusive you grant. For example, if a distribution partner complains that your other customers are competing with them and requests an exclusive, resist the temptation to just say yes. Set a certain sales goal and say the distribution partner can have the exclusive when hes met it, and that he must keep meeting it to keep the exclusive. Sometimes this doesnt work. A distribution partner may have enough power in the marketplace to ask for the exclusive without proving themselves. Then you need to evaluate what you are sacrificing and determine if it is worth the risk. If you do decide to grant an exclusive, establish ongoing performance requirements. You
108
CUSTOMER PILLARS
dont want to give an exclusive to a distribution partner who doesnt do anything with your line. Be careful and protect your business! If your company is committed to using distribution partners as part of your selling effort, develop a strong communications program to them. As you probably know from your own company, running a business can be a very challenging effort with many complex issues. When using distribution, you are relying on the success of other companies to make yours successful, which takes careful partnership and coordination. Great communication is crucial. Study the success patterns of your top producers and share those best practices with the other distribution partnersthis will help elevate the entire group. You dont want your distribution partners to recreate the wheel in learning how to become successful with your line. HernMedCo sells supplies and products to medical offices, who dispense them to patients and are reimbursed by insurance companies. Recently, HernMedCo noticed some medical clinics seemed to be much more successful with a certain group of their products. Through interviewing these customers, HernMedCo learned the successful offices were using the products for a wider variety of medical indications/ailments. To boot, the offices had developed better procedures for insurance reimbursement. HernMedCo wrote a white paper describing how the products could be used in multiple medical situations and how to achieve better results with insurance reimbursement. Reading about these best practices helped other offices increase their success with the products. To help your distribution partners promote your line to their customers, develop selling tools that facilitate the communication process throughout the channel. This helps your distribution partners bring a consistent message forward, one you have carefully crafted for them. Making it easier for your distribution partners to gain success with your line is part of making the program work. Facilitate the smooth and easy movement of the product and information throughout the channel. Another distribution success strategy is advertising your products to end user customers farther down the distribution channel than your direct customers (pull through advertising). This promotes your products to people who will purchase from your distribution partners or their customers. This generates demand for your distribution partners and pulls demand through the distribution channel. For instance, the brochures we provided doctors to give their
109
pregnant patients is an example of pull through advertising. The brochures drove customers into the retail stores who carry the product. Advertising deeper into the distribution channel pulls demand through your distribution partners. Whatever you do, stay in control of the distribution process. If you depend upon a small number of powerful distribution partners, you may need them more than they need you, and the balance of power shifts out of your control. Its better to stay in many, balanced relationships than in a small number of unbalanced ones. Develop positive and appropriate relationships with all your distribution partners and have backups, so whenever you lose a distribution partner, you can replace them quickly. When you create great value for distribution partners, they will want to work with you, and the relationship will be good for both of you. This requires ongoing management, planning, and execution.
RECAP: WORKING WITH DISTRIBUTION PARTNERS

Be open to distribution opportunities, even in unconventional ways Value partnership approachcreate profit opportunities for distribution partners and their customers Understand the financial aspect, including list prices and discounts, throughout the entire distribution channel Work the whole channelyour success is dependent on the success of all in the channel Manage channel conflict by creating a level playing field Require distribution partners to earn into exclusives Develop strong communication approaches to distribution, including best practices Develop consistent selling tools that make it easy for distribution partners to succeed with your product line Use pull through marketing techniques Control the process by having alternatives and backups
110
CUSTOMER PILLARS
WINNING IN THE MIDDLE

Many reading this book will be involved with distribution, but will be in the middle of a channel. Perhaps you purchase products and resell them to others. Making distribution work and creating value in the middle of the chain by performing important linking functions is critical for your business. Heres how to make that work best. Start by understanding your role. Look at the businesses of your suppliers and customers. What are the most important things you do to link your suppliers products to your customers? Why do they need you? What would their businesses look like if you were not providing linking functions and they sold directly to end users? This exercise is designed to help you better relate to the value you bring: if you werent bringing something to the channel, you would not be there. You can increase your success by clearly understanding what you do for the channel and studying how to improve within that role. Understanding your role helps you develop your company to support your function. The more value you produce for the channel, the more important you become to your suppliers (those behind you in the channel) and your customers (those in front of you in the channel). Moral of the story: Know your role and perform it well. When you understand your role, you know what your key assets (usually, your relationships with customers) are. Know them, enhance them, and protect them. As a specialty catalog, my company, The Audio Files, sits in the middle of a distribution system, says Jonathan Squire. We are the middleman in most of our transactions, as we purchase our products from manufacturing companies, and sell them to our customers through our catalogs. Obviously, our key assets are the relationships we develop with our customer base. We cater to a special kind of audio enthusiast, one who desires a certain kind of product; these people do not shop at the big box retailers. Our mailing list is our prized possession and we are very protective of it. Additionally, we serve an important function in the distribution channel by crafting our product offering strategically to serve our customers needs. We rarely sell an entire line from a manufacturer. We know what our customers want and one of the reasons they shop with us is they know we have already evaluated the products and eliminated
111
any undesirable items. We bring our market exactly what they want. Important to maximizing those key assets is to have the support of your vendors. If you purchase a product or service from a vendor and sell it to a customer, your ability to satisfy the customer is heavily dependent on the performance of your vendor. Essentially, you can do your job extremely well, but if vendor falls down, they can negatively impact how customers view your business. Because of this, it is important to be demanding of suppliers. Again, their performance has a major impact on yours. Timothy manufactures a tool for the automotive repair market and several key components come from subcontractors, who contribute greatly to his profitability. Initially, some vendors were difficult to deal with regarding minimum order size, price, and delivery time all factors that made it more challenging for Timothy to serve his customer base. After evaluating other subcontractors and negotiating with them, he was able to get better performance out of his vendors and make the subcontracting work. Vendors can usually do more for you than they offer initiallybut you will have to be demanding in an effective way to get their best efforts. Here are a few ways to be demanding of suppliers:
WAYS TO BE DEMANDING OF SUPPLIERS

Ask for better prices Ask for better payment terms Ask for improved delivery times Ask for a smaller minimum order size Ask for better contractual terms Ask for discounts or co-op advertising dollars if you give them something positive, i.e. larger orders, orders with a longer lead time, or if you are going to feature their item in a specific promotion If the vendor fails to deliver on important promises, ask for concessions (free expedited freight, discounts, etc.) or penalty clauses in your performance agreements
112
CUSTOMER PILLARS
Begin by realizing that negotiation is a part of the business to business process. As consumers, we go to a store, see the sticker price, and pay it. There is little haggling. Its different in B2B, and because of this, vendors will typically budget in some wiggle room. Your suppliers probably dont print their best deal on their price sheets. Ask for better. This is not being greedy. Your customers are demanding of you and to meet their needs you need your vendors support. If customers ask for a level of performance higher than your vendors, there is a service gap and its not working in your favor. You want vendors to perform for you at a level equal to or higher than your customers demand. A service gap that works against you puts a downward pressure on your profits. You are your vendors customer and they should be as committed to serving their customers (you) as you are to serving your customers. A firm planning to rent kiosks at malls around the country was not aware that they could negotiate with the malls on lease terms, until they heard me say be demanding of suppliers. Luckily, they went into only one mall without bargaining. They negotiated all their subsequent leases, saving themselves thousands of dollars. Your suppliers, vendors, and their reps can also be important sources of information. They can share the best practices of other firms and provide competitive knowledge. But you should be leery about sharing proprietary secrets of success or any confidential information with your vendors, as you can be certain they will tell others in the industry. Know how to use the knowledge your vendors possess. Having multiple supplier options also gives you stronger leverage in the middle of a distribution channel. If you have only one viable supplier, the balance of power shifts from you to the supplier. However, if you have multiple sources, including several backup suppliers, the negotiating strength comes back to you. It is great to be loyal when you have high performing vendors. However, having backups and multiple suppliers gives you a better chance to negotiate the best terms. I remember working with a company who used a proprietary material in their products. They had to custom order this material and lead times were as much as 12 weeks, which left them very little room for error when ordering. When a supply problem developed, the companys lack of a backup left them quite vulnerable. Then, when a run of defective material came in and the majority of the shipment was rejected by their quality inspectors, the company was in a difficult position. A backup supplier would have reduced the risk and improved their situation.
113
There is a limit, though, to how demanding you can be with vendors. You dont want to be unreasonableif you are, vendors stop listening to your requests and you could develop a bad reputation within your industry. Your demands should not harm the vendors business; you need them to be profitable and you need to be a good customer. Seek the best deal, but be reasonable. Finally, if you are in the middle of the distribution stream, there are two fundamental approaches to expansion. Lets call one wide and the other deep. A wide approach takes the role in the distribution channel you currently perform and expands within that same role. For example, a retailer could open other retail locations. Or a wholesaler could expand their geographic area or the manufacturers they represent. A deep strategy expands the role you play in the distribution channel through vertical integration. This can happen by expanding backwards into the distribution channel, for instance a retailer who gets into wholesale distribution. This can also occur by expanding forward in the distribution channel, such as a manufacturer who opens a retail location. The deep strategy changes the role you play in the distribution channel, where the wide one does not. Firms can explore both deep and wide expansion strategies at the same time.
RECAP: WINNING IN THE MIDDLE

Understand your role Understand your key assets and be vigilant in protecting them Be demanding of your suppliersnegotiate the best deals Learn from suppliersbest practices and competitive knowledge Have supplier optionsdont be single sourced Look at both wide and deep distribution growth strategies
114
CUSTOMER PILLARS
PARTNERING FOR PROFITS

Intelligent, mutually beneficial relationships with other companies can be one of the fastest ways to increase your business. These strategic partnerships bring assets, competencies and strengths together to form an attractive and profitable approach to the market. Thinking creatively, you can devise programs that produce great benefits for all the companies and customers the partnership serves. Strategic alliances are an outstanding way to form linking relationships and can add greatly to profits.
TYPES OF STRATEGIC ALLIANCES

OEM/Private label Marketing partnerships Licensing partners Joint venture
OEM stands for Original Equipment Manufacturer and essentially means you act as a contract manufacturer for another company. You make it based on their design, to their specs, under their label, and they sell it. Similarly, private label is when one company takes a product or service it already manufactures and sells it to another firm under the customers brand for resale. Both strategies can be extremely effective. This approach is often facilitated when one company has a product or service and another firm has a way of bringing those things to market, such as an established distribution system. For example, Your Elegant Home, a home decorating store, was recently approached by a local specialty candle manufacturer with an interesting proposition. Instead of promoting other candle brands, the company contended, they should be promoting their own brand of candles. The firm would sell them candles with a label affixed with their business name printed on it. To the customer, it would appear they were marketing their own line of candles. To Susan Miller, one
115
of the stores owners, it made perfect sense and was another way to remind customers about their store. The private label candle manufacturer closed the sale! In this example, private label was a growth strategy used by both the candle maker and the store. If you have a product (like the candle maker) and are willing to sell it under other brandssomething very easy to do with todays printing technologyconsider making a list of possible companies to approach. Similarly, if you have a way of bringing products to market, like Your Elegant Home, consider marketing products under your own brand. Mark Conners also used this strategy for selling his executive coaching services. In the early days of his practice, he approached other firms who were providing business services to the types of clients he wanted to serve, such as accounting firms and consulting organizations. I told them they were missing out on an easy revenue stream: executive coaching. I explained how I could provide services to their customers, bill them for my time, and the accounting firm could bill the customer for my services at a markup. There was a lot of interest, as it was easy for these firms to implement. These two illustrations of a private label approach demonstrate ways these strategies can be used in a very small setting. There are certainly many examples of very large companies, such as automakers and consumer product manufacturers, using similar strategies. The sky is often the limit with this strategy if you are creative and develop approaches that produce profits for all parties. Marketing partnerships are another profit-producing approach to strategic alliances. This arrangement is simply when two firms come together for better sales and marketing. Examples include sharing customer lists and incorporating cross promotions, such as invoice stuffers or cooperative branding. I am always looking for ways to expose new customers to my coffee shop, Samantha Harrison shared regarding her business, Java Jeans. Recently, I was in my favorite independent bookstore and began thinking that people who liked this bookstore would also like my coffee shop. So I contacted the owner and asked her if I printed some bookmarks with their logo on the top and a coupon for my coffee shop on the bottom, would she distribute them. The bookstore owner thought it was an awesome idea and felt it
116
CUSTOMER PILLARS
was great for her business and its customers. She asked how quickly we could start. So I jumped right on it and had a promotional program in place in just a few weeks. It has worked brilliantly and is supercheap advertising for us! Co-branding, another marketing partnership approach, makes sense when it is better to approach the market combined with another company or brand rather than apart. Recently Fed-Ex and Kinkos joined forces and utilized a co-branding approach. This strategy makes sense when the reputations of the firm are synergistic. There are many chances to work together in the marketing of a product or service. Joint venture, when companies come together in partnership and actually create an entirely new business entity together, is the most elaborate form of strategic alliance. In many instances, you will not need to go to the length of establishing a new company. However, in all strategic alliances, it is important to have a clear understanding of the partnership, who is doing what, the parameters, and how money will flow through it. Committing these points to paper in contractual form or a letter of understanding is a sound business practice.
FINDING THE RIGHT STRATEGIC PARTNERS

So how do you actually identify opportunities for strategic alliances? First, study and understand the different ways companies can come together; the last section provided a few examples. There are many different forms that can be applied in a multitude of situations. Be creative! Next, look at other companies that serve markets like yours. Pay particular attention to firms that market to the same types of customers, but are not competitors. Many times these are great potential partners. The Fed-Ex/Kinkos partnership is a good example: they both served small business clients, were not competitive to each other, and working together created synergies. This one might shock you, but also consider your competitors. Many of you might rather poke your eye with a stick than help them expand, but often there are strong opportunities to work with competitors. Sharon Salisbury did this with her bed and breakfast. Though she
117
would prefer to have people always visit her B&B, she also knows that many people like variety, so she approached three other bed and breakfast hotels she liked and felt would appeal to her customers. They all came together and put together a package deala weekend at each B&B over a two year time period. While the program required a great deal of cooperation between the inns, it ended up being a great success and generated incremental revenues for them all. OEM and private label can also work well with competitors. It takes some different thinking, but can be beneficial for all parties. Stephen Fortner has used this strategy with his telecommunications equipment. A competitor contacted us two years ago about putting their label on one of our items. The competitor had invested heavily to build their own brand and marketed everything they sold under that umbrella. We had a product they wanted to offer. For us, it was not difficult to private label and it did not create a huge problem with our other marketing efforts, so we did it. The biggest challenge was working out the pricing structure to ensure the competitor could bring the product to market though their distribution at a reasonable cost to their customers. True, our margins are lower on this item, but our marketing costs are basically nil and the private label customer places large orders and we have negotiated longer lead times into the delivery commitment. We love it and are looking for other private label customers as I speak. The next approach to finding strategic partners is to conduct an assessment of your key strengths. What are the significant assets you bring to the market? In particular, which of these assets might others be interested in tapping into? This could be a great product, a chain of retail stores, or relationships with important customers. Studying these assets will help you identify who might be interested in using them. Conversely, you can look at your weaknesses and try to find a company who excels in that competency. A client once had a great product, but was weak in distribution. We found a company who had strong distribution and put a private label program together. It was profitable for both companies (essential!) and worked well for their customers. Finally, work only with firms who share your values, especially those of cooperation and hard work. Partnerships never work when
118
CUSTOMER PILLARS
they are one-sided. You want partners who will treat you as well as they expect you to treat them. If you are above board, honest, and caring with customers, choose other firms who have the same approach. Assessing the values, ethics, and business practices of your potential partners is important and your gut can be a good guide. With strategic alliances, youll find other companies very open to ways they can improve their profitability. Take the time to understand their company and how you can work with them to produce mutual benefit and growth. Strategic alliances can be incredible profit centers!
RECAP: STRATEGIC ALLIANCES

OEM/Private label Marketing alliances Customer sharing Cross promotion Selling your products through their distribution Selling their products through your distribution Joint venture Analyze your strengths and weaknesses and how they might create opportunities with other companies Consider firms who sell to the same markets, whether they are competitors are not Partner with firms who have similar values, ethics, and business practices as yours
TEAMING WITH THE GRAND PERSUADERS

Purchases are often very visible and are frequently influenced by other people, especially spouses and children. This next linking relationships strategy looks at key influencers, those who have the ability to alter your customers approach to the purchase.
119
As I am writing this book, a TV commercial shows a very pregnant woman eating a hamburger with much delight. The announcer then says something to the effect of, Enjoy it now because you will soon be eating at our competitors place. Because theyre great, if youre seven. This ad highlights the huge impact children can have on purchase decisions. Most of us are also influenced by spouses, friends, peers, neighbors, and co-workers. Can you imagine selling to teenagers without considering what their friends will think?! Of course not; this may be one of the most significant success factors in that market. When evaluating linking relationships, consider how the people who influence your potential customers will look at the purchase. How can you interest them? A client once started an upscale, hip clothing store catering to a very specific high end market. Within this specialized group, the company went out to find very visible and influential people in their target markets to join their street team. Once this group was identified, the company contacted these influential individuals to educate them about the store and to offer them a free clothing item. In exchange, they asked the street team members to carry a few business cards and generate word of mouth advertising and a buzz regarding the store. Central to their campaign was only accepting people onto the team who had a genuine positive reaction upon entering the store. What can you do to turn influential people in the lives of your customers into advocates for your product or service instead of impediments? Study them to determine how they influence the purchase process, and then get them on your side. Peer pressure, keeping up with the Joness, and maintaining the family peace can all have an impact on your success in evolving the business. Make attempts to study and control the process.
RECAP: KEY INFLUENCERS

Other people often influence purchase decisions Understand who will be influencing your customers Develop an approach to appeal to those influencers such that they help your success instead of hurt it
120
CUSTOMER PILLARS
Every business setting contains people and companies who can link customers to your business, and these linking relationships referral partners, distribution partners, strategic alliances, or key influencerscan help build the business.
121

Identify the different type of linking relationships (referral partners, distribution partners, strategic alliances, and key influencers) who impact your business and quantify how important these relationships are to your firm. List possible linking relationships for your businessreally brainstorm a long list of people or companies who could send a great deal of business your wayand determine ways to approach these people. Focus on the value partnership approach to linking relationships where you strongly consider what the linker gets out of the proposition of helping you build your businessincorporate reinforcements and rewards when people assist you in growing your company. Become proactive about generating referrals instead of just letting them happen. Develop techniques for asking for specific types of referrals, remind referring partners about your business, and make it very easy for others to refer to you. Look for distribution opportunities, such as alternative approaches to distribution, ways to improve communication throughout the channel, and ways to prompt success throughout the entire distribution channel.
122
CUSTOMER PILLARS
If you are in the middle of a distribution channel, understand your role, improve the value you create within the channel, be demanding of suppliers, and explore both wide and deep ways to expand your business. Look for strategic partnerships with other companies that improve your approach to the market, these can include private label/OEM relationships, joint ventures, or marketing alliances. Identify, study, and cater to those key influencers who impact the way your customers buy.


CP Book - Part 1 of 2

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CP Book - Part 1 of 2

Uploaded by

Copyright:

Available Formats

Nine foundational business building principles which dictate the revenue and profitability progress of every successful company

WHAT OTHER PEOPLE ARE SAYING ABOUT CUSTOMER PILLARS

AN OPEN LETTER TO READERS

INTRODUCING THE CUSTOMER PILLARS

Introducing the CUSTOMER PILLARS

PERSONAL USE ONLY NOT FOR RESALE

LETS TALK GROWTH

INTRODUCING THE 9 CUSTOMER PILLARS

THE 9 CUSTOMER PILLARS

Introducing the CUSTOMER PILLARS

THE 9 CUSTOMER PILLARS AT WORK

Introducing the CUSTOMER PILLARS

WARNING: PLAIN ENGLISH AHEAD

FRANK TOTALLY GETS IT

Introducing the CUSTOMER PILLARS

E ONLY AL US ERSON P ESALE FOR R NOT

IT ISNT A YES OR NO QUESTION

Introducing the CUSTOMER PILLARS

DO WE OWN THE MARKET ON GROWTH?

Introducing the CUSTOMER PILLARS

IDEAS ARE EVERYWHERE

PERSONAL USE ONLY NOT FOR RESALE

YEAH, BUT IS IT SMART GROWTH?!!?

Introducing the CUSTOMER PILLARS

Year Revenues % Change in Revenues

2003 $575,275 11%

2004 $655,813 14%

Prots % Change in Prots

Growth Efciency Ratio

Introducing the CUSTOMER PILLARS

THE KEYS ARE IN THE IGNITION

QUICK TIPS FROM THE PILLARS

Introducing the CUSTOMER PILLARS

FOR PERSONAL USE ONLY NOT FOR RESALE

FOCUS ON GROWTH CUSTOMERS

Pillar One: Focus on Growth Customers

PERSONAL USE ONLY NOT FOR RESALE

PILLAR 1: FOCUS ON GROWTH CUSTOMERS

THERE IS A DUMB ANSWER

DIFFERENT STROKES FOR DIFFERENT FOLKS

Pillar One: Focus on Growth Customers

THREE CUSTOMERS EVERY COMPANY SELLS TO

Pillar One: Focus on Growth Customers

Pillar One: Focus on Growth Customers

% Share of Customer 16.85% 18% 20% 22% 25% 33%

Average Customer $ 337 360 400 440 500 660

% Change in Revenues 0 7% 19% 31% 48% 96%

Pillar One: Focus on Growth Customers

COMMUNICATING WITH EXISTING CUSTOMERS

a follow up telephone call at the anticipated reorder time

PERSONAL USE ONLY NOT FOR RESALE

RECAP: RETENTION ACTIVITIES

WE WANT YOU BACK

Pillar One: Focus on Growth Customers

REACTIVATION REPORT FOR HERNMEDCO

Pillar One: Focus on Growth Customers

RECAP: REACTIVATION STRATEGIES

SEARCHING FOR NEW CUSTOMERS

Pillar One: Focus on Growth Customers

ADDING PRODUCTIVE BUSINESS TO THE MIX

Pillar One: Focus on Growth Customers

RECAP: NEW CUSTOMER ACQUISITION STRATEGIES

READING THE MINDS OF CUSTOMERS