Promotional Sins

I hold the belief that you should never run a promotion for the sake of running a promotion, because you think it's a good idea, that it will miraculously improve the business or because your competitor is doing it!

Consumers are becoming more and more discerning and getting turned-off quicker to brands, products and services where promotions are flaky, don't add real value or are dysfunctional with the brand or products values and messages.

Don't get me wrong promotions are an important part of your marketing plan and in certain cases, depending on your strategy, an essential ingredient to improvement of your bottom line. However promotions must be part of a clearly defined strategic plan and must be meaningful in your consumers eyes.

First things first, apply the S.M.A.R.T. principles, with one other ingredient: a B for budget, to your promotional planning process. The S.M.A.R.T. principle is as follows:

S - specific: Answer the question why you are running the promotion. Is it to grow sales (increased basket size or GP%?) or reward customer loyalty for repeat purchase, or a drive to enlarge a mailing list? You need to clearly state why you are running the promotion and it's objective/goal.

M - measurable: How are you going to measure the effectiveness of the promotion against your predetermined goals? For example if your goal was to increase sales by 10% then it's easily measured after the promotion has ended.

A - attainable: Do all stakeholders (staff, suppliers, customer sample) buy into the promotion (understand it and their role?) Is the implementation path simple and the business accommodating to ensure that the promotion is a success? Too many steps or procedures ruin the enthusiasm for promotions and staff may quickly lose interest and not advertise the promotion to customers.

R - realistic: Do you have enough resources (People, budget, etc), knowledge and time to run the promotion? It's no good that you have the resources and the time but your people don't know how to run the promotion because of it's complexity, i.e. setting up the POS system to process the discount or where internal controls/procedures have to be circumvented or changed..

T - time-bound: Have you set clear start and end dates. Too little time has the result that just as customers get to know of the promotion it ends or the converse where the promotion is too long that customers lose interest.

B - budget: A key principle when considering and planning your promotions is that there is no such thing as a free (or no cost) promotion. Even if you have managed to twist your supplier arms for funds to pay for printed material and competition prizes, you would still incur costs distributing the printed material and prizes. If you are giving a discount then this is a cost (lost opportunity cost) and represents a value to the business.Although these costs may be small in comparison to the overall cost of the promotion they still need to be accounted for in a business budget.

Something else to bear in mind with promotions is that you may protect your margin where you sell an item for the usual selling price but add something to it for free to make the offer appealing (Value add.) Or you may decide that you want to increase your average shoppers basket so you might bundle items together for a special price which is lower than the normal single unit price times two. Another type of promotion to consider is that customers qualify for a large prize and/or many small prizes if certain items are purchased. There are many more types of promotions which can be matched to your promotional plans and objectives.

I would suggest the only promotion to avoid are those that involve straight discounting. It might result in a price war, with a competitor, which will not benefit either business in the short term as margin and profitability fall.

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As a leader you should always start with where people are, before you try to take them to where you want them to go.

Annon

 

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If you can keep your head when all around you are losing theirs ... it's just possible you haven't fully appreciated the situation.
Annon

Mark-up vs Gross Profit (GP)

Mark-up is the percentage that we add onto the cost price of a product or service to determine the selling price or mark-up is the difference between the selling price and the cost price of a product or service. The gross profit is the actual profit that we make on the transaction. 

Many mistakenly believe that if a product or service is marked up by 50%, the result will be a 50% gross margin. However, a 50% mark-up produces a gross margin percentage of only 33.3.%.

For example: A product costs 100 and we add a 50% mark-up then the selling price is 150. However the gross profit is only 33%. Why? Lets look at the following calculations using the same cost and selling prices:

Mark-up:          100 x 50% = 150

Gross profit:      50 / 150 = 33.3%

We bank the GP as profit. so we are banking 50 of the selling price which is 33.3.% of the selling price. When looking at your business margins you should be working on your GP percentage and not your mark-up.

Different industries, products and services attract different GP's. This is true within a single store. Convenience stores have a GP on milk and bread of 10% but on cool drinks this rises to +30% and on their emergency grocery products to over 50%. Their average GP comes out at between 25% and 32%.

To determine your average mark-up:    GP / cost of sales x 100

To determine your GP:                         (Selling price - Cost price) / selling price x 100

To determine your ave GP:                   Gross profit / total sales

To calculate selling price where you have determined your GP%, for example if you want a 25% GP margin then use this formula:

                                   Sales Price = cost price / ( 1- GP margin percentage)

Why would we be concerned about GP margin. Well the GP margin is the percentage of every Rand that is earned which can be applied towards the costs of running the business. If your operating cost is running at 40% of sales and your GP margin is only 23% (even though your mark-up appears healthy at 30%) then you are heading for bankruptcy. Below is an extract from an article from Warren Buffet giving a simple explanation.

Note: 

1. Exclude VAT or Sales Tax from both your cost and selling prices. Add Vat or Sales Tax onto the selling price after you are happy that you have the right GP margin and that the market will pay the final selling price.

2. You can work the selling price backwards by determining what your GP% will be however this is more complicated. Tables are available to simply these calculations (available at: http://www.mrhvac.com/download/free/MarginMarkup.htm.)

"A Message from Warren E. Buffett
Chairman, Berkshire Hathaway Inc.

What You Should Know About the Jewelry Business
You don't need to understand the economics of a generating plant in order to intelligently buy electricity. If your neighbor is an expert on that subject and you are a neophyte, your electric rates will be identical.

But jewelry purchases are different. What you pay for an item vs. what your neighbor pays for a comparable item can be, and often is, widely different. Understanding the economics of the business will tell you why.

To begin with, all jewelers turn their inventory very slowly, and that ties up a lot of capital. A once-a-year turn is par for the course. The reason is simple: People buy jewelry infrequently, and when they do, they are making both a major and very individual purchase. Therefore, they want to view a wide selection of pieces before zeroing in on a single item. 

Given that their turnover is low, a jeweler must obtain a relatively wide profit margin on sales in order to achieve even a mediocre return on their investment. In this respect, the jewelry business is just the opposite of the grocery business, in which rapid turnover of inventory allows good returns on investment though profit margins are low.

In order to establish a selling price for their merchandise, a jeweler must add to the price they pay for that merchandise, both their operating costs and desired profit margin. Operating costs seldom run less than 40% of sales and often exceed that level. This fact requires most jewelers to price their merchandise at double its cost to them or even more. The math is simple: Jewelers charge $1 for merchandise that has cost them 50 cents. Then, from their gross profit of 50 cents they typically pay 40 cents for operating costs, which leaves 10 cents of pre-tax earnings for every $1 of sales. Taking into account the massive investment in inventory, the 10-cent profit is adequate but far from exciting.

At Borsheim's the equation is far different from what I have just described. Because of our single location and the huge volume we generate, our operating expense ratio is usually around 20% of sales. As a percentage of sales, our rent costs alone are fully five points below those of our typical competitor. Therefore, we can, and do, price our goods far below the prices charged by other jewelers. In fact, if they priced to match us, they would operate at very substantial losses. Moreover, in a virtuous circle, our low prices generate ever increasing sales, further driving down our expense ratio, which allows us to reduce prices still more ..."

For the full article go to: http://shop.borsheims.com/Borsheims/CustomerServices-Buffett.aspx

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Control your own destiny or someone else will.
Jack Welch

Quick Tip: Keep your hands out of the till

I've seen too many cases where business owners take money out of their tills for personal expenditure. They forget to add this to their total drawings from the business and wonder why the business is not a profitable as it should be. Another negative consequence of this is that employees witnessing this may think that it is acceptable that they can also help themselves to cash from the till. The mentality begins with "if the boss can do it why can't I?" There may be occasion where employees are wrongfully accused of cash shortages when the boss has forgotten to record the cash removed from the till. Rather pay for any good or services that you consume from your wallet or assign the purchase to your personal account.

Big Business Appearance on a Small Budget

Here are a few ideas to make your small business appear to be a big business with a small budget. These ideas could also be used to cut then cost of a traditional brick and mortar set-up.

1. Virtual office: Rent office space on a permanent or temporary basis from a virtual office provider. You get a prestigious office address on your business card, dedicated mailbox, personalised call answer service using your business name, your own dedicated number and office space for meetings.

2. Virtual Assistant: Rent a virtual assistant to provide professional administrative assistance to clients from a remote office. Calls are screened and then forwarded to the relevant person in your business. These services provide a personalised call answer service using your business name and your own dedicated number.

3. Virtual helpdesk: There are a variety of virtual helpdesk services available for hire from IT, to employee support programs to customer service, etc. IT helpdesk's are the most common where your business has technicians on call instead of hiring a permanent employee.

4. Virtual call centre: These services can be employed to answer calls and route to appropriate geographically dispersed staff using your personal business number or become more advanced where they provide dedicated customer support and service, at a fraction of the cost of setting up your own call centre and dealing with high staff turn-over.

5. Virtual software: This utilises software and 3rd party servers, instead of yoru own, to create a virtual office and intranet environment. Types of services offered are e-mail, calendar syncing, document storage and management, intranet work spaces, forums, web conferencing, etc.

People are Your #1 Resource - Keeping Employees Happy and Motivated

It does not matter how small or big the business is, without people it would not be successful or profitable. People are the number one resource in any business. Employees need to be treated with respect and dignity regardless of the antics they get up to and how you might be feeling at any given time. 

The next key ingredient in organizations especially small to medium sized ones is MOTIVATION! This is one of the toughest challenges that an entrepreneur / owner faces especially when most of their time is spent dealing with the everyday challenges of staying afloat. A motivated and enthusiastic workforce can in many instances make up for a lack of talent and knowledge where they try harder, work longer and are prepared to go beyond the expected. 

In many minds motivation = monetary incentives and bonuses! This is simply not true. Firstly lets deal with money as a motivator. Money is a short term motivator. As soon as its spent the the cycle need to be repeat to keep the same level of motivation. Although money is an important motivator there are 100's of  motivational ideas that could be implemented that don't have to cost the company big money and will keep employees motivated for far longer than a cash bonus!  In addition, as an added incentive, keeping employees happy and motivated is likely to result in fewer people leaving the business. Employee retention saves money. Hiring new employees is a time consuming and expensive process.

The psychology behind most incentive programs is that the promise of a positive outcome or reward can have a huge impact on an individuals behaviour. Tasks that offer positive outcomes will promote employee productivity and assist the business achieve better results. In order to do this employees need to understand what you want them to do and what the reward will be if they do it. Part of the process is that they need constant feedback in order to understand where they are in relation to their goals / targets.

As previous indicated there is a belief that incentive programs are expensive however here are 5 essential motivation components that are cost effective and require very little effort to implement:

1. Culture of the business: including shared values, beliefs and norms. this starts and ends with the owner.

2. Communication: celebrate successes and counter negative news, especially through the "grapevine."

3. Participation: Motivation through belonging to a social group and through recognition of  being needed and of achievement.

4. Engagement: Different groups have different needs whether social, demographic or identities.

5. Small tokens: The smallest, simplest and most cost effective things can have the greatest impact.

1. Culture

An organization without values or negative values invariably destroys motivation and the fostering of desired behaviour. These values come from the owner of the business who has to encourage and reward the right behaviours and be a role model for the value system that encourages and motivates. Leaders  in the company will be constantly watched by employees and their actions and behaviours will become then norm. Some are small and some send out long lasting messages. For example if the leaders are always late then the message to the organisation is that its okay to be late. If leaders treat their employees with dignity and respect then they are likely to treat customers in the same manner which in turn should improve customer satisfaction. Getting a the right culture in place cost nothing except time and effort.

2. Communication

Almost everyone has e-mail  and access to the internet today. Establish a company branded newsletter that can be e-mailed (or printed and placed on the company notice boards.) This way the business manages the communication process, highlighting positive achievements and events and proactively dealing negative news , with a positive spin, in a better way that the rumour grapevine. Its also a great vehicle to celebrate successes, big wins and to welcome new employees or show that an employee that is leaving will be missed. 

Other opportunities for communication is to have an open-door policy. Where this is not practical  then consider an electronic suggestion box or paper bag get-together (there are structured informal meetings held over lunch break.) This will only work if you encourage employees to participate and that their suggestions and ideas will be taken seriously regardless of the topic, which could be company or employee performance. Feedback is essential and promises need to be kept. Empty promises will kill the process and alienate employees. There is very little cost associated with regular effective communication.

3. Participation

An easy way to get participation is to get employees to set there own goals and targets, that are linked to the companies strategies and objectives. This gets their buy-in because they have a stake in the outcomes of their performance. Getting employees to take ownership of their behaviour and performance is key to a businesses success. There goals should be simple, less than 10 and easy to measure. A situation is created where employees realise that "we win together or we loss together." This is also likely to translate into a sense of ownership where employees begin to act and think as if it was their business. Other ideas to get people participate could be a braai (barbeque) where empoyees get a little time to relax and feel appreciated. Team building activities are good for motivation, these could be a dinner with employees and their spouses through to more structured events with professional team building venues.

A few cautions:
1. It is preferable to make these alcohol free events. This will remove all booze related issues  such as drink driving and harassment.
2. Spirit built during off-site team building events is often not transferred to the workplace.

4. Engagement

Different employee groups have different motivators. Younger employees, in their early 20's, have different needs for example they don't want long term share options and a career for life. To get them engaged in the business requires that their triggers are pushed. The only way to do this is to talk to them, listen to them and understand them. They may perform better with a simple thing like music in their work section.

5. Small Tokens

These are small inexpensive things that are often forgotten, like a pat  on the back for something well done or when the company has a promotion that the employees get a sample or hamper linked to the promotion. What about  a dinner voucher for two attached to the welcome letter of a new employee or just a simple personalised hand written message from the owner. Other ideas could be adding a picture of the new employee and a short welcome message on  a newsletter to all employees or something similar for employees that have long service awards (5, 10 or 15 years.) An extra day off for extra time spent getting something exceptional done. There are hundreds of small token ideas that can be generated and have very little cost involved.

Watch out for motivation killers - repetition, routine, prescription! Every business has limits to what it can afford. Employees have a stack in the business and they are key to its success. Get them on motivated and enthusiastic. The idea is simply: give-back and you will get-back!

Why Succession Planning is so Important

In a previous post, 10 reasons why businesses fail, I made mention that constructing a business plan was crucial to ensure success. Also in this post mention was made that a proper systematic and standard process needed to be put in place to find and employ new staff again to give the business greater opportunity to succeed with the right people in the right positions with the right skills. I hold the firm belief that people are a businesses most valuable resource, after the owner. Without good people a business is unlikely to be profitable or have the ability to grow or embrace and adapt to changes in the marketplace.

What would happen to businesses if owner/s were not there to provide guidance, motivation and make decisions? In most cases the businesses would operate very inefficiently or possibly even go insolvent. It is critical to draft a succession plan where key staff are identified to take over key functions within the business in the event that the owner is not available or incapacitated for a period of time.

So why bother with succession planning? There are a number of advantages when identifying talent from within the business. These are people that are intimately familiar with the business culture, strategies and plans and would be able to continue implementing and executing them. Bringing in external talent is time consuming and relatively expensive. It would also take time for an external candidate to be trained and inculcated into the businesses unique culture and methods of doing business.

So where to begin? The first thing that should be done is an analysis of the current talent in the business. If there is insufficient talent inside the business then a plan needs to be drafted to acquire it from external sources. This could be done though head hunters or advertising a vacant (or new) position which would be developmental in nature. Another starting point is to identify talented individuals at the time of hiring them.

The next step would be to cultivate and nurture the talent. A plan needs to be constructed around each individual where there strengths and weaknesses are identified and where opportunities are then created where these individuals could acquire the required skills, knowledge and experience. At this stage the plans would be flexible and reviewed regularly, as staff leave or where performance changes.  It is important to realise that not every talented employee can become a great leader. It may be that an average performing employee has the leadership attributes needed to lead the organisation. These plans would not be shared with the identified employees.

Where progress and performance meet the required standard and as those individuals progress to the next stage in the process, generally where they hold a senior position in the business, then it advisable to share the plan with them. This would allow them time to adjust to their future opportunities and responsibility. It is at this stage that a few individuals would be working closely with the owner of the business so then if they needed to take over the day-to-day management of the business it would be a smooth and painless transition.

Quotes

Change is not merely necessary to life - it is life.
Alvin Toffler

Failure: Dry your self off and Try again!

There are occasions where we have analyzed and planned. We execute things go horribly wrong! It's during these times that we need to realise that:

1. Things are not as bad as they may seem;
2. Just about everything can be fixed, repaired, and resolved;
3. That failure is a great opportunity to learn - understand why things didn't go according to plan and adjust it;
4. Dust your self off and try again - the opportunity for success is far greater the second time round;
5. Two key values are honesty (with yourself and others) and perseverance - these will get you through the tough times.

Presentation: Positivity Reinforced to Reach Your Goals

This is a ready made presentation to reinforce positivity, in thought and word, within your business, organisation or team. You are welcome to use it, change it, and add it to your company slide template.I'm not sure who the original author was however I don't think they will mind.

http://www.filefactory.com/file/b2dgb50/n/Frogs.ppt

Why Small Businesses Fail: Top 10 Reasons

Author: W Tullidge (July 2010)

As many as 75% of all small businesses fail within their first 3 years. I suspect that during the current global recession that this figure has been higher. These are alarming figures and in most cases could have easily been avoided. Over the past 15 years I have coached and mentored almost 400 small to medium sizes business owners and entrepreneurs.

About 40% were successful and the extent of my input was to assist them improve their profitability. In the remaining 60% of cases the businesses were a mess and needed to be rescued and made profitable. In my early 20's I had my own business failure. It was a valuable and expensive learning opportunity.

I have identified the following reasons for small business failures (in no particular order):

1. Not heading advice and /or lack of motivation;
2. Drawings exceed what the business can afford;
3. Lack of skilled or incompetent employees (which could include the owner;)
4. No plan and no budget;
5. Underestimating or ignoring the competition;
6. Ineffective or non-existent marketing;
7. Limited or lack of operating capital;
8. Poor location;
9. Key areas of the business not managed;
10. Over extending.

1. Not heading advise and /or lack of motivation
All too often the entrepreneur and owner of the business views it as his/her baby and there is a reluctance to listen to the advice being provided because it would entail change or conflict with their view of the business. In instances they refused to listen, believing that the problems will just go away. In some cases they will agree with the person providing the advice however do nothing when they have left. This may be because they have no confidence that the advice will produce the necessary results/changes, or they have no motivation to make the advice work because they have given up.

2. Drawings exceed what the business can afford
Many new business owners either raid the till removing cash without proper record keeping or draw monies to fund their lifestyles.  These withdrawals in many cases exceed what the business can comfortably accommodate. There are instances where the business activity has dropped off reducing the income to the business yet the owner doesn't reduce their withdrawals resulting in additional burden on the cash flow. Generally this reason for failure goes hand-in-hand with other reasons such as lack of control, poor planning or lack of a budget.


3. Lack of skilled or incompetent employees (which could include the owner)
Staff are hired without any knowledge of interviewing process, no reference and background checks, ability to analyze a CV or with a clear job description in mind. This is a recipe for disaster. Even with the very best processes you are never sure about the person you are employing until their first day on the job, however this would reduce your risk or a bad hire. To own and manage a business requires a multidisciplinary skill set. An owner you need to be aware that you are not an expert in every business discipline and that it is okay to acknowledge this. Identify skills that have weakness and then hire-in those skills. There are essential skills that cannot be delegated such as over-all financial control or the ability to read financial statements.

4. No plan and no budget
Without a plan the result will be failure, unless you have a huge amount of luck. As the proverb goes "he who fails to plan, plans to fail." No business can survive without a written plan. Think of it as a road map showing you your point of departure and your point of arrival and the route you are going to take to get there. Occasionally the route (aka plan) needs revision because there is a new road or you change your destination. It is critical that goals are identified. There is little point establishing a business if you have no idea of what you want to achieve. Likewise producing a written budget reduces the risk of financial mismanagement and drawing monies for personal use in excess of what the business can afford.

5. Underestimating or ignoring the competition
I have experienced many business owners who don't know who their competitors are let alone what they are up to until it's too late and their customers have all migrated to the competitor. A key to success is to know your competitors, both direct and in-direct, what their strengths and weaknesses are and what you should be doing to counter their strategies. Its a good idea to visit and even shop at your competitors. See for yourself exactly what customers experience when they visit your opposition. A point to note: many businesses compete solely on price and end up getting into a discount war with their competitors. This very seldom benefits anyone in the medium to long term. Rather consider the points that make you different (USP's (Unique Selling Propositions)) and market those strengths.

6. Ineffective or non-existent marketing
Many small businesses fail because they do no marketing and advertising, or their efforts are ineffective. This point is coupled with a lack of skill or knowledge. Advertising in particular is tough to get right. You need to understand exactly who your customers are so that you can find the right medium to use. Decisions need to be made to use above-the-line or below-the-line media. A note about promotions: there is little point implementing a promotion for the sake of having a promotion. You need to have an objective (a goal like grow sales by 5%), a budget, and some means to measure the success or failure of the promotion.  In times of trouble businesses cut their marketing and advertising budgets. It is in these times that they should be maintain or even increased their marketing and advertising spend.

7. Limited or lack of operating capital
This is probably the most obvious reason why businesses fail. However this is the likely end result when the other reasons listed are either not implemented or resolved. There are a few scenarios, the first of which is underestimation of the capital required to operate the business after the doors open for trade and then the realisation that there is no opportunity to acquire further capital as all collateral has been utilized. Many owners assume that their operating capital requirements will be satisfied by the income generated from month one. Rather plan to have sufficient operating capital to cover costs (such as rent and salaries) for at least 6 months. Other scenarios include business trading environment changes were costs are not reduced accordingly; or expansion removes cash from the business; or cash is not managed sufficiently (such as poor debtor management.) These could all result in situations where the business has insufficient cash to operate and where there is no opportunity for access to additional funds. 

8. Poor location
Location, location, location retail and marketing gurus instruct, is the most critical element when considering the establishment or relocation for a business. In most cases I would wholeheartedly agree with the only exception where businesses are classified as destinations. When considering location in the context of small business failures the overwhelming issues are where locations are identified without thought to customers needs, visibility from high traffic areas or in relation to existing competitors. In many cases the reason for the choice of location is purely financially driven. Cheap rentals generally mean poor locations. Consider more expensive locations because they may be more suitable.

9. Key areas of the business not managed
I have seen time and time again where owners of businesses have no idea what inventory they have, how much is outstanding on their debtors book or have allowed debtors to exceed their credit terms without any action, where assets are being used incorrectly or not maintained adequately, or where spend on simple items such as staff teas and coffees is not being checked (I realise this could be seen as petty however you would be surprised sometimes to learn how much tea, coffee, milk and sugar staff are taking home.) It is important that business owners understand their business from the back door right through to the side walk. Do regular stock takes, make sure that you have the right controls in place to receive and store stock, make sure that you are on top of your debtors book and that shrinkage, wastage and business consumables are in line with your plan and budget. Something to know: 95% of all theft in a business is perpetrated by staff.

10. Over extending
Overextending comes in many forms such as hiring too many staff, or financing more assets than the business actually needs. Others are expanding your business footprint and operation into new locations or factories, and tying up valuable capital with more inventory that required. It is important that before you extend you play the what if game. Ask what if "x" happens or what if "y" happens. How will this impact the business? Make sure there is a plan and a budget when extending and that if things are not going according to plan, that you quickly adjust.

Everyone of these reasons for failure have tips and simple plans which could easily be implemented to resolve the weaknesses or eliminate them completely and ensure that the business is on the road to improved profitability. As a final note, if you happen to fail know that its not the end of the world and that you will learn more through the failure than any course could ever teach you. As the cowboys say "dust your self off and get back in the saddle."

Feedback is an important component of the learning process. As such I welcome your feedback, opinions and thoughts.