Monthly Archives: August 2011

creating habits

I used to have an employee called Tim, that would dash over to a customer’s site, the moment they had a problem, and fix it for them.  Great customer service!  Unfortunately it was terrible customer service for the other clients whose site’s he was supposed to be at.  Saying “Yes” to the urgent  support request was a bad habit that Tim couldn’t seem to break.  What we wanted him to do was to refer the support request to our Operations Manager for scheduling.  When I spoke to a psychologist friend about how to form new habits, his answer was just “repetition”.

Exercise BikeRepetition?  “Not good enough” I thought, and have consequently been mulling this over for the last 15 years or so.  Interestingly the answers I have come up with so far came from sports coaches, not psychologists.  So here are the 5 tips I have so far for deliberately creating new habits:

Do Some Planning
You need to carefully understand what your objective is and break it down into its subcomponents or stages.  If you want to ride a bike 200km a week, start off with riding to work every day as the first stage.  If you want an employee to refer support requests to someone else for scheduling, perhaps start off with them having learn a standard response to requests.

Provide Feedback plus Carrot & Stick
You need to provide feedback and immediate rewards and or punishments to change the way you see the habit.  Having a chart that you tick off accomplishments with a reward is a great thing to do, perhaps a tick for every day you ride your bike and going out for breakfast on Sunday’s if you do it ever day.  If you want an employee to refer support calls to someone who schedules the support, make sure its a metric that’s reported on in weekly meetings and offer gift vouchers when certain levels are reached.

Create Physical Solutions
Physical Solutions or “Hard Systems” make it easier to “just do it” than to stay with your bad old ways.  If you wanted to ride your bike everyday, you could have your bike situated so it blocks access to your house.  You then have to go around the bike if you don’t intend to ride it.  For an employee that you wanted to refer support calls, you could have a large reminder on the front of his diary, and perhaps not have his mobile phone number  on his business card.

Lie to Yourself
According to my friend the sports coach, its easier to get motivated to do 5 minutes a day on an exercise bike than half an hour.  So lie to yourself when you jump on the bike and say you will do just 5 minutes, because dragging out 5 minutes to half an hour on the bike is much easier than going from zero to 30 minutes.  For an employee you want to refer calls, get them to put back every support call by at least 24 hours.  Going from “I will do it tomorrow” to “I can’t schedule support calls” is much easier than going from saying yes, to saying no.

Have Black and White Rules
Apparently if you have complex rules such as “its ok not to ride to work if I have had a big night”, its easy to feel lousy and convince yourself that you kind of had a big night.  Simple, or black and white rules such as “I ride to work every day regardless” are hard to break.  In a work environment, “only accept support requests if it a  customer emergency” is easy to fudge. You can always rationalise why there is an emergency.  However “You are not allowed to schedule support calls full stop” makes those rules much harder to break.

So fifteen years and this is what I have come up with so far.  I’d be grateful for any other tips though as I think that its not just my employees that need to develop some better habits.

revenue model innovation for service firms

I have been buying and selling services for around 20 years, and during most of that period, have only ever seen two pricing models. Fixed rate or Hourly rate. Each with a couple of tweaks that are normally of benefit to the supplier, not the purchaser.

Fixed Price – is normally used when the service is routine and of low risk. The supplier doesn’t have to waste time estimating and can make more profit by being efficient. The customer doesn’t wear any risk, but may pay more than they have to. Its great for selling haircuts or simple website builds.

Fixed Price with Variations – is normally used for large scale services where things appear routine but some decisions aren’t made until after the project has started and results can be viewed. Its a great way of getting things started for the supplier, and the customer has a reasonable idea of what his costs will be. The supplier is also incentivised to be efficient. Its great for building projects such as house renovations and for complex IT solutions where external parties, i.e. users, will have an unknown impact on the system.

Fixed Price as an Estimate – is normally used for large scale services where things appear routine but there is almost certainly devil in the detail. It gives everyone a confidence around the costs and the worst case scenario – eg it will be this price plus or minus 15%. Customers are happy, Suppliers are happy as risks have been mitigated. However whether its the best deal on the table is another matter.

Hourly Rate – is normally used when the supplier has no insight into how long a job will take, therefore the customer where all the risk. This solution works well for the customer when there is a small service job, eg repairing a fridge, but not so well when you are conducting legal proceedings against another party and the hours could be vast.

Hourly Rate with pre-sold blocks – IT companies seem to love preselling blocks, as it brings in revenue today. Unfortunately though, I have never met a customer that didn’t hate it. Especially when some of those blocks of time expire unused.

Hourly Rate with a minimum commitment – I have noticed a trend of some suppliers working through likely long term engagements and offering customers a discount on the minimum hours they commit to per month, and further discounts on extra hours. When the numbers are estimated right, this seems to be a the best longer term hourly rate solution as everybody gets a win.

But the key to selecting the right revenue model is understanding your costs, risks and most of all, understanding what the customer wants. Looking at your revenue model from the customers point of view is key, and any customer worth having will always offer you a response more than just “cheap hours” if you ask them.

For instance most customers would love to pay “yeild pricing” if given the chance. ie you take a percentage of the upside or a success fee. It means that you both parties are aligned to getting the best outcome. Its rare though, despite the fact that business cases normally show incredible returns for only a small outlay. You see it on occasion amongst consumer law firms that offer a “no win / no fee” option. I also noticed that Domenic Carosa effectively favours it with his “you have a great business, lets do a JV to bring you onto the internet” style of deal.

Why am I talking about this ? Because at the small business end of town, nobody else seems to be talking about revenue models. We are all “revenue model takers” not innovators and we need to get smarter to compete on a world stage. The business Olympics are going on and nobody seems to have noticed.

tweaking break even points for fun and profit

The difference between a good business and a great business is normally just a tweak or two.

Now about 20 years I remember sitting in a lecture thinking that the concept of Break Even Analysis was just a little too basic and boring. Accountants describe the Break Even Point is when:

When n x sales = n x variable costs plus fixed costs.

Or even more plainly, when:

Revenue = variable costs + fixed costs.

Now I thought this was a little t0o basic and boring because it gave me a fairly obvious goal,  but as a business owner, it didn’t help me figure out how to get there and there was no point doing things to simply “break even”. Fast forward twenty years though, and I have picked up the tweak along the way that makes all the difference. The key is realising that the break even point is very psychological. In more than one organisation I have worked in, I found staff tended to start cruising as soon as they get to their break even point, as they are then revenue neutral.

But from the owner’s point of view, their break even point needs to include a return for undertaking the activity in the first pace and taking on risk. Therefore, I now see and use the equation like this:

Break Even is when:

Revenue = Variable Costs + Fixed Costs + My Required Profit.

If we get revenue that exceeds what I need, we then enter the realm of super profits i.e. my upside for taking a risk.

Its not just me that uses the equation that way, if you look around you will see “My Required Profit” hidden in plain view. In the Car Industry its called “Dealer Delivery Charges” in the Telecommunications Industry its called the “Service Fee”, and in personal services it sometimes get called the “Account Management Fee”. Because when profit masquerades as a cost, nobody gets upset. Do you think the Cap on your mobile phone spending would be as palatable if it was called more accurately “your minimum monthly spending”?

When I trained as Accountant the problem was the the tools where never described from the point of view of “Here’s how you tweak it to make a sh*t load of money”. Perhaps if they were, I would have paid more attention.

having fun going global

Everyone wants you to “go global” if you are not already “born global”. Its fashionable because in a global economy it means money flowing in Australia and increasing wealth through the multiplier effect. But despite it being great for Australia for firms to be “going global” it can kill your business if you don’t have a clear strategy and do some research.

Consequently I decided we were going to have a look at building global sales channels at the Churchill Club soon, but wanted to outline where we were coming from first. Now I have had a bit to do with selling overseas, having personally setup new operations in Indonesia, Vietnam and Romania as well as appointing distributors in Europe and supporting business in Asia. The way I see it is that you have five options, each with its own set of challenges and benefits.

Sell Direct

Selling directly to overseas customers is the quickest and easiest way to get started. Its also the quickest and easiest way to get ripped off. You also need to have a good understanding of supporting warranties, currency fluctuations, shipping arrangements and payment arrangements. Organisations like haul have had a steep learning curve selling internationally from their website, but are now starting to realise some of the benefits. A great source of advice and support for this area are actually the banks as well as government programmes like Tradestart and Enterprise Connect.

Sell via Distributors

Selling via distributors is a slightly slower way to start, and it will reduce your margins, but you will get much more revenue growth in the market. Local organisations like Ecotech support around sixty distributors around the globe to generate a decent chunk of their revenue. As well as the normal export issues, you also need to start thinking about how you intend to recruit, support and terminate distributors in regions, as well as a host of other transactional issues and what precedents you are setting that will get discussed at downstream distributor conferences. When looking for distributors its useful to speak to organisations like Austrade and the export division of your State Governments – click here for Victoria’s.

Setup Joint Ventures

Setting up a joint venture in a foreign market is away to get the best engagement and revenue growth in the market, with reduced risk, investment and profits. Qantas has just decided on this strategy in Asia. The issues are of course making sure you get into bed with the right partner, making sure Accounting and Financial policies are squared away before you start and understanding the brand risks you may take as you no longer control your own destiny. Some good advice here can generally come from your lawyer and the trade and investment teams (eg London ) from the region you are looking to invest in.

Setup your own Operations in Foreign Markets

Setting up your own operations in foreign markets is also called Foreign Direct Investment. Its issues tend to be around selecting the right market and the right footprint before you invest, of course you wear all the risk, but you also get all the profits. Organisations like Aconex have been quite successful with this strategy. Once again some good advice here can generally come from your lawyer and the trade and investment teams from the government of the country you are looking to invest in.

Buying and Established Operator

The final strategy is to buy and established operator, and introduce your brand under theirs. The issues here are obviously about the risk in selecting the right target and paying the right price. Its also quite a challenge to find the potential targets as brokers and investment bankers are generally aligned with the sellers, not the buyers. That being said both Melbourne IT and REA Group have both chosen this course globally. The strategy of buying an established operator of course means that you will be immediately able to capitalise on their existing markets, however you will pay a premium for this. Again, speak to your lawyer and trade and foreign investment review boards of the country you are looking at. Its also worthwhile speaking to other members of transcountry commercial associations (eg the Australian British Chamber of Commerce) as the experiences of other organisations who have previously bought in the market can be gold.

Going global isn’t any where near as hard as it would appear, you just need to do some quality thinking and a bit of research first. After that its a hell of a lot of fun.

competing with lower prices is stupid

The other week I said “Cutting costs and only competing on price is a death spiral. Always has been, always will be.”  I then got asked why a couple of times, so I thought I might expand on this point a bit.

I don’t want to give a lecture, but I thought it might be time to delve into a bit of business 101 first.

Business FailureCosts generally come in two flavours; the first type type is variable costs which can also be known as direct costs, cost of goods sold, cost of materials etc.  Variable costs are the $10 that you spend to acquire a light fitting that you sell for say $25.   The second type of costs are the fixed costs; also known as indirect costs or overheads.  These are costs like the annual rental for the shop you sell the light fittings in.  Of course some costs are hybrids, having a fixed and variable component.

The key to sustainable profitability is understanding exactly what yours costs are and how much of your variable and fixed costs to get allocated to each dollar of sale.  Unfortunately, this is where things get tricky.

  • The timing of variable costs may be out of sync with the sale. Take for example General Aviation.    Every time you run the engine on a light aircraft, you not only use fuel, but  create an engine maintenance liability.  The engine may need to be serviced every 1,000 hours and overhauled every 10,000 hours.  This is horrendously costly and must be factored in to the cost of running your business.
  • The true costs may be hidden from you. Take the example of employing a computer service person.  He may cost you $75,000 plus superannuation at $6,750.  This makes a total of $81,750 , a figure you thought you could be confident about.  However that employee is only going to work 48 weeks of the year as you have also offered them leave.  This means you will need to buy in a another resource to cover them, whilst they are away.  Turns out that resource is going to cost you $10,000 for the four weeks.  So your labour costs are actually $91,750 – or 22% higher than the salary offered, and we haven’t even discussed other on costs such as payroll tax yet.
  • It may be difficult to “apportion” fixed costs to every sale due to uncertainty about expected revenue. You can argue “but I don’t know if I will sell $400,000 or $500,000 of light fitting this year, so how can I apportion the  shop rental when working out my costs?”  The answer is of course to make an estimate or budget, and review it regularly.  Its probably better to estimate on the conservative side so that any variance is likely to be in your favour.

These three examples, and I’m sure there are more, highlight the key to sustainable profitability – “knowing your costs”.  But they are not the key to being competitive and having a successful business.  This is because you will  always have competitors that don’t have this insight into their products and services.  They will unwittingly sell below cost, and when the costs that they haven’t factored in eventually appear, their business will go under.  Sometimes they will naively sell below cost deliberately to buy market share in the hope they can ramp up prices later.  Unfortunately they you don’t get to win then, because there will always be another fool ready to step into their shoes and compete below cost.

Over the last 20 or so year, I have worked in oil, electrical equipment, engineering, computing and marketing.  In every industry I have seen multiple examples of firms competing with prices that are too low to sustain business over the longer term.  In every case when these businesses fail, they were immediately replaced with someone with the same strategy.  There will always be people prepared  to run unprofitable business, mostly because they don’t know they are doing it.

So its quite obvious to me that competing with “lower prices” is generally a stupid idea.  The nice thing though is that there is a virtually unlimited number of other areas you can compete on, and you are only limited by your imagination.  The first step is to find out what your customer’s actually value, because its always going to be more than lower prices.

musings on privacy and sausages

Saturday afternoon I made some sausages with a mate.  Pork & Fennel, Chicken with Tuscan seasoning and Lamb with Rosemary and Honey.  And as always when we finish making the sausages, we BBQ them up for our families.  Delicious.  If you make your own sausages, you will never eat supermarket sausages again.  And on this particular evening we had a slightly  disturbing discussion, not around the sausages, but around privacy and the internet.

  • The mate, who I’ll call Jimmy, has rented a campervan to take his kids to outback South Australia over the holidays.  Clearly, his intentions had been picked up by his web browser (Google Chrome) and now when he surfs the web, he is endlessly served up advertising for Maui vans by Google Ads.  Unfortunately Google can only infer his intentions to rent a campervan.  Its not able to  determine that he no longer has the need as he has rented one.  This has both irritated him and creeped him out a little.
  • Secondly there was a discussion around search results.  As we use web browsers more and more to conduct our business, more and more information is collected about us.  This combined with search engine innovation means that every search we conduct is now being tailored more and more to us invidiously.  The end result is that if you and I both search for the term like say “ceramic tile suppliers” we are starting to get different search results.  None of us at the table couldn’t figure out how this wouldn’t kill a large chunk of business for those offering Search Engine Optimisation services, as there task becomes pretty much impossible  – if not pointless in the first place.
  • The third thing was discussed was that one of us at the dinner table, setup a Facebook account with a false name, using a temporary email address and connected to the other members of her family to see what would happen.  She hasn’t apparently responded to any offers or installed any apps.  It took a couple of months, but offers for goods and services have started to trickle in to her email account.  But chillingly some of them aren’t just spam, they are optimised to information from her fake profile, including the suburb where she lives.

Now I get the fact that there is no privacy on the internet, but I am starting to wonder where there is all going.  Especially when the comment was made, “You know we are still at day one of the internet”.     At least the sausages were good.

The reality of online retail in Australia

Not good enough!

I read today that Myer intends to do away with shipping and handling costs for its online store, to stop the leak to internet shopping.   Apparently “Commonwealth Bank estimates that Australian consumers spent $9.5 billion online last year, with $4.2 billion going to overseas online retailers and the remaining $5.3 billion paid to domestic retailers.”

MyerCompeting on price isn’t going to work,  as the competition is always going to roll you.  Here’s a real example.

This week I had my quarterly breakfast meeting with Scott Kilmartin of haul.  haul is a highly successful  multi channel retailer that upcycles advertising billboards into laptop bags, ipad cases and promotional products for companies from their materials.   Scott and I get together regularly to dissect each others business and offer impartial advice.  I value Scott’s insight into retail trends  as he is a keen watcher of players in the market, a keen reader of analysis of retail trends and has bags of experience (excuse the pun).

Scott conducted a couple of experiments this week that have got him worried.  He purchased two items off eBay that were direct shipped out of  China.  The first was a black sweater, XXL size, and in his words  “well made, no loose threads or rough sewing/joins. It could be from Country Road”.  The total cost AUD$9.90 including shipping – But retailing in Australia for around $89.95.  The second item was a fake leather iPad case, for AUD$10.45 – Retailing in Australia for around $49.95.  Both were delivered in 10 days in an Australia Post eParcel box.   Note Scott’s rate to send an empty eParcel box from Carlton to Fitzroy is a whopping $7.65 at the 1,000-5000 pieces a year contract rate.

So can Myer & big retail compete on:
Price? Not a chance.
Quality? Nope, goods are coming from the same factories.
Delivery Speed? Perhaps if they lift their game.  7 days deliver from local stocks is slow when you can get something from China in 10 days.
Risk of Fraud? Absolutely.  The is much lower risk  buying from an Australian retailer – so a fear campaign could work well.
Impact of Fraud? Nope.   Almost everyone I know is happy to trial an order or two and write off the $10 if it doesn’t work.
Nope.  Australian retailers can’t afford to stock all shapes and sizes  – as most men in their 40s find out when they go to buy jeans.

The conundrum retailers face is old though, just not in retail.  On a number of occasions, businesses I have worked for have had an agency for wholesaling electrical products that we practically built the market for.  And when our sales were strong enough, the manufacturer decided to directly step into the market and we just couldn’t compete.  This always happens.

The solution though is not to compete on price, but to endlessly innovate and provide superior customer service.

Cutting costs and competing on price only is a death spiral.  Always has been, always will be.