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Volumes Have To Rise 18.7% To Offset A 5% Price Cut

I recently heard a very interesting segment on the radio show Marketplace about the affect of rising or lowering your retail prices. How many sales do you think you’d lose from a 1% price increase? If the answer is “a very small amount” you might want to go for it. A 1% increase in your retail prices on average will increase a retailer’s operating profit by 8%. The inverse is also true. If you cut prices 1% you’ll see a 8% decrease in operating profit.

Would your customers even notice if you increased prices 1% this year? Unless you are in a extremely price sensitive market (like selling a staple commodity, got milk?), I’m guessing probably not.

Further Reading

This research comes from McKinsey & Company report The Power of Pricing – McKinsey Quarterly (pdf download). I took a look at their website and it has a number of excellent articles on pricing you might want to read.

What’s Your Experience

Share your wisdom in the comments below.

We’ve never been very good at sales. Calling up prospects (cold calling) isn’t fun. Repeatedly following up with warmer leads just ends up becoming tedious and painful.

Despite all this, we have been successful in growing our company. Here’s what we do.

Using Our Strengths

People love our support and we feel like it’s a major element of our product. When people call in and press two for sales in our directory, they’re just getting routed to very experienced support people (not sales people!). This has several major advantages.

1. Support people know the product inside and out. When you ask questions, you’re getting the best possible answer we can give you from someone who is experienced in actually using the software. Prospects appreciate someone who knows their product really well.
2. They don’t feel pressured to sell you. They aren’t paid on commission and there is no penalty or reward whether you sign up or not. They are simply answering your questions. This makes the whole conversation less stressful for you and the support person. You’re not trying to figure out if we’re just trying to push you into a sale and we’re not trying to just say the right things and get you to buy.
3. Support is motivated to steer you away if our product doesn’t fit your business. This is one of the greatest benefits. A salesperson often could care less about you once they sign you up. You’re just going to be passed off to support. A support person helping you make a purchase decision will have to support you if you decide to use the software. If a support person promised you the world, they’re the ones that are going to have to deliver it.

There’s More To It!

This strategy works pretty well for us but we still have to get you to pick up the phone and call us or send us an email. We spend a good amount of time and money on marketing online and we dabble in print advertising every now and then but I think our real secret sauce is again in using one of our strengths.

Focus On: Product, Support, Reliability

When it comes to software we are big geeks. We love making retail software easy. We think it’s fun to release an update, design new features, make systems work together, insure high availability of our service, and improve security. Our focus on these types of things has lead to what we hope is a fantastic product that is going to get even better over time.

With Your Help!

We hope to win over our customer’s hearts with this strategy. Once we get customers on our team, we’ve found that you tell us what we need to do to improve the product further and you tell your friends about us. Both of which are becoming an increasing factor in our growth.

How Would You Sell MerchantOS?

We’d love to know how you would sell MerchantOS if it were your job. Would you do print advertising (in which journals?)? Online? Concentrate on word of mouth? You are the people we are targeting so how best should we reach people like you? We’d love to know!

Justin and I have come to accept in running a business that we’re going to fail. The trick for us has been identifying and containing our failures as quickly as possible. We believe this has ultimately led to the general success of our company.

Failure = Success?

I would be lying to you if I said we knew exactly what we need to do with every dollar we earn and every decision we must make. Many times despite trying to make as informed a decision as possible, we end up having to use our instincts and feelings. Unfortunately that leads to the wrong answers sometimes. Once we understand a mistake was made we are able to understand more fully why that was the incorrect action. We then use that information in future decisions which will continue to lead to the ultimate success of our company.

Risk vs. Reward

If you don’t take chances, you are going to drastically limit your likelihood of success. Taking too many risks can lead to the ultimate failure of your business. Recognizing failure however, allows you to take more risks with less cost. It’s extremely important to try new things but when you do, you need to be prepared to carefully watch progress and results. Identify small tweaks that need to be made and nurture your decision as much as possible. Just as quickly though, be prepared to recognize a failure and try again on something different.

Our most recent large failure

We make a few smaller mistakes pretty regularly. These are often small enough that they have little or no effect on our business and are easily reversible. But when I think of the most recent large expenditure on a failed endeavor, I think of our attempt to build our own e-commerce system. We went into it with huge ambitions thinking we could do it better than everyone else. As the project progressed, we realized it was distracting us from our point of sale system and we also realized it was going to take a long time to have our system be as good as other already existing e-commerce services.

Eventually we understood we could not continue on that path and killed the project. On reflection I realize that I understood our failure long before we killed the project. The biggest mistake we made was allowing the project to progress the additional time between when I sensed failure and when we actually killed the project. It’s difficult to pull back on something we’ve spent so much effort on but if we’re fairly certain of failure, we need to get out as soon as possible. I think this is the most important lesson we learned out of this particular failure and my hope is you can use our failures to your benefit.

What are your worst failures and how did you use them later towards your own success?

At first look, you might think this is a trivial feature in MerchantOS. But the email invoice button has a couple of advantages over printing receipts for your customers.

• It saves paper. It might not be much paper but it adds up.
• Your customers will have a harder time losing their receipts. It is more difficult to lose an email than a piece of paper crammed into a wallet, purse, desk, or car.
• Collecting customer email addresses is easier. You can use the first two advantages to help convince your customers to share their email address with you. When you have your customer’s email address, it makes it easier for you to contact them via email and hopefully gain followup visits and purchases. Eventually we’ll have ways for you to mass email your customers from MerchantOS making it even easier for you to contact your customers.

Update: we now integrate with MailChimp for email marketing.

Actually we’re not talking about SWAT, we’re talking about SWOT – Strengths, Weaknesses, Opportunities, and Threats. It’s an analysis technique to access how your business is really doing.
“The power of SWOT analysis is the ability to continually and realistically analyze your business environment so that you’re in charge rather than simply having to respond.”

Business Strategy

Business strategy doesn’t have to be intimidating, time consuming, or boring. Like building a solid house, you want a good business plan for your foundation, a good marketing plan for your walls and roof, and a SWOT Analysis to stop leaks and prevent fires.

Business Plans

A business plan allows you to put everything your thinking on paper, edit it, pull it apart, and then pull it back together again as you look for external funding, partners, and customers. Your business plan should reflect how you differentiate yourself from the rest of the market. Business plans have a 1-3 year time line. For mature businesses, possibly as much as a five year time line.

Marketing Plan

A marketing plan pushes you to think about the 4 Ps (Product, Price, Promotion, and Placement) and things like price elasticity, market positioning, and even a cheesy tag line. Marketing plans also have a 1-3 year time line.

SWOT Analysis

SWOT Analysis (stands for Strengths, Weaknesses, Opportunities, and Threats) is a tool to use on a quarterly/semi-annual basis to work with your employees and closest partners and determine where your organization really stands.

Components of a SWOT Analysis

• Strengths: These are your internal strengths. What are your advantages? What do you do well? What relevant resources do you have? What do other people see as my strengths? Do not include external factors, these come in your Opportunities section below.
• Weaknesses: Your internal weaknesses. What can you improve about your offerings? What do you do poorly or not at all? What should you avoid? What objections do potential clients frequently raise?
• Opportunities: External opportunities you may be able to exploit. Changes in technology and markets on both a macro and micro scale. Changes in the economy. Changes in social patterns and media. Changes in my local events.
• Threats: External threats you might need to mitigate or make contingency plans for. What obstacles do you face? What is your competition doing? How will changes in your area of expertise affect what you do? Is changing technology threatening your position?

How To Conduct A SWOT

Warning: This is a quick overview of how to conduct a SWOT. To gain the most benefit you should do further reading (below) and/or hire an experienced business consultant to help mediate your SWOT session.

1. Brain storm your Strenghts, Weaknesses, Opportunities, and Threats. Remember brain storming is an open process, don’t get critical – just write down everything you and your colleagues come up with.
2. Prioritize your lists of Strengths, Weaknesses, Opportunities, and Threats.
3. With your top 2 or 3 items in each S,W,O,T list come up with a plan of attack. How are you going to show off your strengths or leverage them? What can you do to turn a weakness into a strength? Seize opportunities and mitigate threats!
4. Return to your old SWOT in 3-6 months and evaluate your progress towards each item.

Further Reading

Books

• Analysis Without Paralysis: 10 Tools to Make Better Strategic Decisions
• Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition
• Early Warning: Using Competitive Intelligence to Anticipate Market Shifts, Control Risk, and Create Powerful Strategies

Websites/Articles

• Noha Gindy (Contributor to this post): OrganiSe It Now: Professional organizers who work with businesses in Thurston County, Washington
• SWOT in Wikipedia
• SWOT Analysis from QuickMBA
• Don’t do SWOT: A Note on Marketing Planning – A case for not doing SWOT (and doing more formal planning in it’s place.)
• SWOT analysis method and examples, with free SWOT template