Pricing is a hard topic to deal with systematically. Especially for small companies without a lot of data to crunch. I’m preparing for a pricing session with a client, and thought I’d share a little with you here.

We’re using principles laid out in the book The 1% Windfall by Rafi Mohammed. The title comes from the idea that if a company can increase prices by 1% and keep costs the same they will reap a windfall. BUT what’s counter-intuitive is that you don’t just jack prices up across the board. Mohammed provides over four dozen pricing tactics, some of which involve actually lowering prices.

The goal is to use pricing to capture as much revenue across all spectrums of customers by appealing to what they are willing to pay – and by doing so raise your prices by 1% while keeping  costs the same. For example, did you know Starbucks (the company famous for calling their small size tall) actually has a 4th size? In addition to Tall, Venti and Grande (that’s small medium and large to you and me) they have a size called SHORT? It’s not on the menu, but if you ask for it, you’ll get it in every Starbucks. That way they can capture extra revenue from some folks without broadcasting to everyone that they have an “extra small”  size.

I don’t have room to go over every aspect of my session here but I will give you three points. These are inspired by the book, but I’ve added a twist or two.

#1 – Customers pay for value as they perceive it.

Before you can start any pricing strategy, you must understand value from your customer’s point of view. And not all customers value the same things. By appealing to different aspects of value, you can set different prices for different customers and capture more sales and more profit.

You are somewhat familiar with how airlines do this. Every time they make a sale they sell the same product (a seat in a metal tube that goes from point A to point B). But prices change based on other things that customers value. Things such as how far in advance to buy the ticket, if it’s refundable or not, if it requires a round trip or a Saturday night say etc.

#2 – All Sales are emotional.

Even the most sharp penciled CFO who eats and sweats spreadsheets is emotionally involved in getting value for their money. And you can benefit from appealing to that emotion as well as to logic.

#3 – The point of pricing is profit not revenue.

Your pricing structure as well as related policies (like your sales commission structure, when to give discounts and what to get in exchange for them) must be developed to maximize profit. Your bottom line is more important than your top line.

Takeaways:

1. Read the book.

2. Institute a pricing strategy based on the customer’s calculation of value and your calculation of profit.

3. Call me if you need help with #2

If the answer is NEVER then you’re doing it wrong.

Seriously. Check this out:

Time Management: How an MIT postdoc writes 3 books, a PhD defence, and 6+ peer-reviews papers. And finishes by 5:30pm.

You see you can’t really manage time. You can’t save it, spend it or do anything with it or to it. You have the same 24 hours a day that Bill Gates, and your cat have.

What you can manage is yourself and what you do or don’t do WITHIN the time you have. It’s a great article. Click and read it if you haven’t already.

My guest post on “A Never Ending Source of Money” is up on FreeYourData. Enjoy

Bill Bryson says it was done in large part by utilizing innovations and technologies that were invented in Europe. These were then scaled and perfected in America and the products sold back to the Europeans. Does that remind anyone else of what Asia is doing  today? China is the leading producer of many environmental technologies that were invented in the USA. Korea has much faster and cheaper internet service (a technology invented with American tax dollars). And other places are developing stem cell advances faster than we are.

I think one thing that contributes to this phenomenon is that while business people are very innovative when it comes to products, they often focus too much on the traditional and the short term when it comes to politics.

I posted four years ago that typical pro-business political positions are often bad for business because they are short sighted. In my experience working with business owners, lack of strategic planning is something they are almost always “too busy” to do, so it doesn’t surprise me that this problem expends to their politics.

Today Seth Godin writes a post with a similar conclusion – though Seth adds some more profound insights as he usually does. One interesting line from Seth is “At some point, a healthy and fairly paid community is essential if you want to sell them something.”

A business transaction must be considered as something that benefits both parties. I get what I want by selling you something that you want. And the result is not a zero sum game, but a bigger pie for all. Political forces, must take that into account to provide for a stable business environment. If I vote for policies that benefit me now and never consider you or the future then my business may prosper in the immediate but that prosperity will be short lived.

Before you vote, ask the candidates what their policies will do to ensure a healthy, prosperous, and stable market for your company, not just what effect it will have on your tax rate.

Takeaway:

• For long term business success, political policies must focus on the customer (aka markets) not just immediate cost cutting.

If you ever read anything about starting or running a business in the press; or if you go to hear people speak about the topic, in all likelihood you’ll find they’re probably not telling you the unvarnished truth.

The Close Encounters Syndrome

Why don’t they tell you the truth? I call it the Close Encounters Syndrome. Some of my readers  may be old enough to remember the movie “Close Encounters of the Third Kind.” It’s from 1977.

Richard Dreyfus plays a guy who sees a UFO one day and it scars him for life. He can’t get this sound out of his head, and has a vision of a mountain he has to build – right in the middle of his living room. As you can imagine it doesn’t sit well with his wife. In the process of following his bliss obsession, he looses his job then his wife leaves him and takes the kids. And throughout it all he keeps at it, undeterred. Then finally the aliens really exist and they come back to earth to and take him away in a blaze of glory proving that his vision was right all along.

By the way, the ending is where they got the idea for the last 5 seconds of this ad:

So what?

Well you see they don’t make movies about people who hear things, have visions, loose their jobs and their families and end up in the loony bin, instead of in outer space. It just isn’t a story people want to pay to see – despite how wonderful and inexpensive the pop corn is at those places.

Likewise you don’t read much about how hard it is to get a business going, or the specific mistakes people made that caused their company to crash and burn. Or the ones who went bust trying to do exactly what Bill Gates, or Steve Jobs, or [fill in the blank] did.

Instead we read about how people got great ideas and never gave up and became rich, famous, beautiful and skinny. We’re left to figure the other stuff out on our own.

But things may be starting to change

Recently Eric Ries pointed out this problem. And quoted Paul Graham saying something similar.

On top of that, Inc Magazine had a series of short articles where they specifically profiled business failures. Check out the October 2010 issue starting on page 67.  I can’t find them online but if you search Inc.com for 2010: Learning the Hard Way, you’ll find them.

There’s More Learning in Failure

The funny thing is, there’s more learning in failure than in success. Why? Because when things go right, you don’t really know how much was luck, how much was timing, how much is able to be replicated. But when things go wrong it’s often easier to figure out what not to do next time.

Takeaways:

• Don’t believe everything you read.
• Especially about success.
• Learn what others did wrong.
• Learn what you do wrong as quick as possible.

flickr.com/photos/meddygarnet/3459415984

It’s simple: Give them what they want!

Hey, just because it’s simple doesn’t mean it’s easy. If you don’t have happy employees this will change everything. I mean EVERYTHING. The good news is it works. And the better news is it’s less expensive that you think (and probably less than you’re spending now). But it does take some effort. If that sounds like a good deal to you, read on.

UPDATE: BMW asked their employees what they needed and gave it to them [albeit this was focused on what they needed to be comfortable at work and nothing else] but the results were pretty spectacular.

Why Focus on Employee Retention?

Do we really need to review this people?

• It costs you money to replace people.
• The good ones leave first and the bad ones stay longest.
• Employees are (or should be) what makes you better than the competition. Yes, whether you’re making widgets (and I have clients who do) or have the most unique technology this is true.
• It’s more fun to work in a place with a community of people who’ve been there a while, then where people come and go all the time and aren’t a community.
• People are more productive if they’re content in their jobs.

What Do Employees Want?

Dreams. People have dreams. And remember, your employees are people not “resources”. Have you ever asked your employees what their dreams are? What they want to accomplish in life? What is some place they’ve never been they’d like to visit? Something they’ve never done before? It may be as broad reaching as to buy their own home and build a better life for their kids. Or it may be as simple a chance to see a pro sports game live. Or maybe pay off some student loans. Ask. See what you can do to help them accomplish their dreams.

A Good Boss. I’m talking about their immediate supervisor. More people quit a good company with a bad boss than a bad company if they have a good boss. And this is a two-fer. The better bosses your people are, you get the benefit of retention, and you also get good supervisors.

Security. This one frustrates a lot of entrepreneurs. We know things are constantly changing and we can’t promise how it’s going to be in the future. And we don’t have any job security and we love it that way. But consider the good news. If all your employees thought like you do, they wouldn’t be working for you. They’d be working for themselves.

You can’t promise lifetime employment. What you can do is be open and honest about the state of things (the economy, your company, and their performance) and give them a way to continually improve their abilities. That includes training, the proper tools, and most importantly the proper feedback, mentoring and coaching. If you do have to lay people off, do it all at once, be honest about it, pull the remaining team back together and move on.

Money. Obviously. I don’t think anyone at your place is working just for all the fun and good coffee you provide. Even though entrepreneurs tend not to believe it – it’s true that if the money is decent it ceases to be a motivator and can even be a de-motivator. See Dan Pink’s book DRIVE for details. This is why a good retention program can be cheaper than what you’re spending now cycling through employees.

Recognition. Notice when people do a good job even if it’s their job to do a good job. Tell them. Mention it in front of others. In detail.

Takeaway:

Check out what  Rebekah Monson wants. She’s twenty-something. And she works for somebody. What would you do differently if you were her boss and she told this to you?

The title of this post is a play on the title of one of the best business books I know: Up The Organization by Robert Townsend. Townsend was president of Avis Car Rental in its prime and has some witty and insightful things about how companies (mostly big ones) should operate. The book has been revised and reprinted, but if you can find an out of print copy of  his sequel Further Up the Organization, I recommend that one.

What Do You Mean Organization?

That’s reaction some entrepreneurs have. They don’t need no stinkin’ organization. They just tell people what to do. Then they scream and curse when it doesn’t get done right. But whenever you have two or more people working toward a common goal, you have an actual organization, whether you like it or not.

The trick to developing a growing, thriving organization is to push as much responsibility as possible down the organization.

Yes, Down The Organization.

The more things that are handled as close as possible to where the work is done, the more people at the top have time and resources to do more strategic things. But this is hard to do.

Why? Because the people at the top often have more experience and ability. At least we say that’s the reason. Yes, they often are more competent. But the reason it’s hard to push that competence down the organization is that people who are good at what they do have what’s called “unconscious competence”. Remember when you learned to drive a car? Remember the focus it took? You were developing competence – consciously. At some point you got so good you could drive and talk and listen to the radio, AND think about something else. You became unconscious of the movements needed to maintain speed, steer, put on the blinker etc. That’s unconscious competence.

People Don’t “Get It” When They’re Not Unconscious

Probably the person down in your organization, the one who should be given some responsibility, is not unconsciously competent. And if you just told them to do something they wouldn’t do it right. They wouldn’t get what you wanted done. It may not be that they can’t do the job, just that they need training, mentoring, oversight (aka management) to be able to execute that responsibility as well as it needs to be done.  And that takes time and effort.

But more than time and effort it takes you being able to explain what you do well, and how you do it. That’s what trips most of us up. When we are so good that we are unconsciously competent, we can’t always explain to another person how it should be done. And so, we can’t figure out how to push some responsibility down to someone else. And we have to keep it ourselves. But that limits the growth of the company.

The Solution?

There are many: Checklists, Work Flows, Management Training, Mentoring, etc. “The Exercise of the Elves” is one of my favorites. They all take a skill set that is often quite different from the skill of actually doing the work. This is one reason many small companies stay small. They aren’t willing to invest in that skill. Big companies are. They hire people to do these things, or they bring in consultants [shameless plug] or both. Companies that aren’t willing to do this are forced to keep responsibility at the top and keep their organizations small.

But if you want to get out of the engine room and into the wheelhouse; if you want to take your company to new places; in short, if you want to function more like the CEO and less like the General Manager, it’s a skill you need to bring on board.

Then click on Lucky Day for a two and a half minute video of some of the luckiest people on earth – pedestrians, drivers, even bank robbers.

Stay for the last one – I laughed out loud.

On a serious note, don’t disregard luck as a source of your business success. Not the only source. You have to be smart enough to recognize the luck and take advantage of it. But I doubt Bill Gates would be as successful as he is if he’d been born 30 years earlier. Would Sam Walton have done as well in the 1800′s as he did in the 1900′s? Would George W. Bush have been President if he’d been born in Texas to an oil family instead of Connecticut, to a political family? (look it up) Or Obama if he’d really been born in Kenya?

There’s been some interesting research on luck. Turns out people who feel lucky are more open to seeing possibilities that others miss. But those who think their success is all of their own doing, miss a lot of opportunities.

I read of one person who asks everyone she’s interviewing for a job if they are a lucky person.

Are you a luck person?

UPDATE: Turns out that last bit of the video is fake. Thank you SNOPES – but still funny.

I just asked for a meeting with the CEO of a start-up I’ve invested in. The reason? I just got their half-year report and there’s no bad news! Andy, if you’re reading this, I’m talking about you.

Why is no bad news a problem?

Because we’re running a business here and there’s always bad news in a business. The only time there’s not bad news is when there is terrible news (the company just went out of business), or when there is amazingly, unbelievably,  terrific news (the company just got bought by Google, here’s your check for $100 million). The rest of the time there is bad news. And the CEO’s job is to find it and fix it. And do it quickly so you can find more bad news, fix that, then rinse and repeat till Google buys the company and we all get checks for $100 million.

If I get a report that doesn’t mention the bad news, then either the CEO hasn’t found the problems or the CEO isn’t telling me about them (and probably isn’t asking for the help he needs to fix them quickly enough).

Let me take that a step further.

The thing that gives me the most confidence in a business owner or CEO is how they handle bad news and problems. This doesn’t mean they shouldn’t be upbeat. There was some legitimate good news in the half year report I just read. There’s always good news too (or you’re out of business). But a good CEO is upfront about the problems, is looking for the root causes (not just the quick fixes) and is putting together a plan to deal with them.

Andy, if you’re reading this, two things.

1. Get back to work – you should be reading the blogs of your investors, your competition and your key customers – but enough already.
2. You’ve now got the agenda for our meeting.

Wow. That title ought to get me some hits on the Google -  doncha think? But really this post is about …

How to Treat Your Customers Right

And about how I got get free drugs from people who are doing it wrong. I have rosacea, a disease that makes my face  break out like a teenager with acne. One of the treatments is a low dose of antibiotic. So they make one that’s time released so I only have to take it once a day. (It doesn’t help much but my doctor says we have to give it a year.)

The drug is basically tetracycline. You can buy 300 capsules (250 mg) of tetracycline for $30. Mine is time released (a common process that I can’t believe adds that much cost) but which cost $311 for 30 capsules of 40 mg each. You do the math. Never mind. I did the math. Mine cost 25.9 cents a mg. The other cost 0.04 cents per mg. Mine cost 648 times as much. Six hundred and forty eight times! Just for making it time released.

But that’s not the story of treating your customer’s wrong. That’s the story about the health care in the US and I already wrote about it. I don’t actually pay $311.00 each month for my drugs. Yes I have health insurance, but the deductible is so high ($10,000 per year) because it’s an individual plan that unless something catastrophic happens I’m paying for my health care myself.

No, the reason I don’t pay $311.00 is that the doctor gives me a card which allows me to get 30 pills for $25. So maybe if every one pays that much the real cost is 2.08 cents per mg – only 52 times  as much as non-time released. Go figure.

It turns out the pharmacies in my area all want new customers. So it’s easy to find a coupon that gives you $25 in savings, gift cards or whatever if you bring a new prescription  to them. And many places in my area do this. So guess what I do? Each time I get a refill, I bring it to a new place and get $25 off of a $25 prescription  so I get my drugs for free.

So what are these pharmacies doing wrong?

Mistake #1 – They are treating prospects better than customers.

That’s a very stupid thing to do. Your existing customers are the cheapest ones to market to. Not the ones you should be forgetting about. It’s not as easy to measure your results with existing customers. You don’t know if they would have bought anyway. And this leads me to suspect the reason these pharmacies are doing is wrong.

Mistake #2 – Measure the right things.

Somebody at corporate probably figured every new prescription  customer was worth $XXX because they would keep their business for a while, they would buy other things while they are in the store etc. So they figured it was worth $25 to get them in.

And you know what? They might be right. I’m not like most shoppers.  So maybe the $25 they didn’t make on me is just the cost of doing business. Maybe the whole promotion does pay off. Maybe. I doubt it. But even if it does make money for them it’s probably not the right thing for you. Why?

A Small Company is not a mini-Big one.

You can’t take what works at a $500 million dollar company, scale it back 100 fold and expect it to work at a $5 million dollar company. The scale doesn’t work like that. These big pharmacy chains are faceless companies to me and probably most of their customers (and employees). You aren’t – or you shouldn’t be.

Takeaways:

• Measure the right things
• Treat your existing customers better
• Be a face people can have a relationship with

I’ve been saying for years, that there are only three things any company must do to succeed. And as simple as that sounds, I was wrong. The revised three things are:

1. Create Value that people want to pay for.
2. Find those people and sell to them.
3. Build an organization that does the first two, over and over again at a cost below what your customers want to pay.

I used to say the first thing was “Make something people want to buy.” That’s subtly but significantly different from the way I say it now. What made the change? Three reasons.

Reason #1:  COSTCO. Costco doesn’t make anything but they are one of the most successful companies around. They do create value that people are willing to pay for by finding stuff, bringing it to an accessible location and pricing / packaging it in a way that is appealing to their market. So from that perspective it makes sense to think of creating value rather than making something.

Reason #2:  Passion-blinded entrepreneurs. These are folks that get so fixated on the thing they’ve invented that they don’t listen to the market. Either they believe that because they love it everyone else should too; or they refuse to listen to how the market wants to buy it or use it. So I thought changing the emphasis from “making something” to “creating value” would get those people to consider engaging the customer more. Maybe.

Reason #3 – For a business to succeed, you don’t do these thing independently from one another. It’s not like you create value. THEN go out and sell it. THEN build an organization. The best companies create value that is easy to sell and take their organizational strengths and weaknesses into account when doing so. It’s all of a piece. I thought saying “create value” makes it seem slightly less distinct that “make something”.

As I said – a subtle difference, but a significant one.

Takeaways:

1. Create Value that people want to pay for.
2. Find those people and sell to them.
3. Build an organization that does the first two, over and over again at a cost below what your customers want to pay.

UPDATE: Tom Cooper has pointed me to this TED TALK by Eric Dishman. One of the most innovative ideas in health care that I’ve heard about. Spend 17 minutes and watch it.

If you run an American business, check out this guide to the new Health Care Bill. Thanks to Andrew Tobias for pointing it out.

If you have fewer than 50 employees, you may be able to get a tax credit to help pay your health insurance.

Now that the bill has passed, the furor seems to have ended, but the problem is far from solved. I believe the new bill is a step in the right direction, but we must continue to think about this problem and work toward a better solution, so here are some thoughts.

The last though is one I’ve not seen anyone else talk about. Ever. But I hope you’ll really click through on #8.

1. Insurance is a way to spread the financial burden. Don’t be mislead by advertising hype that insurance “protects” you from anything other than financial consequences. Auto insurance does not protect your car or your safety. It just spreads the financial burden of a crash among those who pay for insurance and never have a claim. So the more who pay, the more fairly the burden is spread.
2. Insurance, like any free and fair economic transaction, requires that neither side be privy to what economists call “informational asymmetry.” That’s why, if you sell your house in most states, you’re required to disclose if there’s been mold, or the basement floods.
3. If either side is able to adjust the deal after the fact – like insurance companies reducing coverage after you get sick – then it’s not really spreading the financial burden, it’s taking unfair advantage of the other side.
4. From an economic point of view, one of the most ridiculous aspects of health care in the US is that it is tied to employment. I understand the history of why this happened, but that doesn’t make it good policy. It basically keeps people in jobs (or out of jobs) for reasons that have nothing to do with them or their job. And that makes it harder to run a business.
5. It also keeps people from leaving their job to start companies and that’s bad for the economy.
6. It puts small companies at a disadvantage to big ones because any administrative function or cost that must be amortized over 15 employees is more burdensome than one that can be amortized over 1,500 or 15,000.
7. It puts American companies at a disadvantage to firms in other countries where health care is not a line item on a company budget.
8. Americans are getting ripped off by the system. Check out this post. And click on the graphic. It blew my mind. This makes me believe that we could solve the problem entirely at an over all cost savings – system wide. Many others are doing it with better outcomes for cheaper. So it’s obviously possible. The problem is that the savings would not be universal. Some would pay more than they are now even though on average, all would pay less. Unfortunately, our legislative system is organized so that those that would pay more have much stronger clout than those that would pay less.
9. Sick people are bad for business. If your customers have to choose between paying for pills and paying for groceries, they won’t have a lot of money to spend with you. If your employees are in a similar situation, they won’t be their most productive. I know most people’s situations are not that extreme but I think the point still holds.

One of the biggest challenges I deal with in helping people improve their companies, is changing beliefs. All of my clients are successful and what they’ve done (based on their beliefs) has gotten them where they are. But many times what got us here, won’t get us there – wherever we want “there” to be. And facing up to that reality often requires real courage. I think health care is one of those situations.

I don’t get the proliferation of Business Competitions I see lately.

Being in business means you are competing for the customer’s dollars. What other competition matters?

But consider that you’re not competing with “competitors” as much as you are competing FOR your customer’s trust and desire for the value you provide. I’ve said before that business is like sex not like war. It’s just that the result is profit not babies.

Photo credit http://www.flickr.com/photos/tedsblog/39671954/sizes/s/

Think for a minute about what would happen if your employees were better motivated.

Would there be fewer problems at work?

Would you get to spend your time doing different things? What kind of things?

Would it mean more money in your pocket? How much?

You probably won’t be surprised to learn that what motivates you is different from what motivates most people. That’s why you’re an entrepreneur and they are not. You probably will be surprised to learn (as I was) that much of we think we know about motivating people is wrong. Would it be worth 10 minutes and 48 seconds of your time to learn to do it better? Check out this video.

If you have more time, read the book

And why that’s a good thing!

Just like a bicycle built for one doesn’t usually grow into a bicycle built for two, there is not a linear continuum from small company to big company like there is from little kid to big adult. It doesn’t work that way.

Why? Because the business model has an external component: customers. And if you hadn’t noticed, they have a mind of their own. It’s been said, the things you can’t change include the weather and other people. The things you can change include yourself and the oil in your truck.

But the truth is, if your burrito sales max out at lunch time because there just aren’t enough people in driving distance who want your burritos, then making more of them faster, or adding more chairs or a bigger sign won’t conjure up any more sales. Now if the bottle neck is chairs, or how fast you can roll a burrito, then that’s an internal problem and you can fix it.

But if you’ve maxed out the external aspect of your business model, you just can’t grow it any bigger without changing the model. Opening another store to become a chain or selling online would change your model and allow for more growth. But without changing your model, the company won’t grow in size – but it can grow in profit.

Why is this a good thing?

The silver lining is that most really big business models REQUIRE size. They can’t survive at all when they’re tiny. They need life support (in the form of outside investment). And they need to grow really fast. Because of that, competition can often do a lot more harm to a company with a business model that requires growth.

As Ridgely Evers said “A Silicon Valley start-up is completely focused on getting big, and naturally risks failure to get there. A true small business, on the other hand, is focused on becoming profitable, feeding a family, and staying in business. That’s a fundamental psychographic and cultural difference.”

I’ve often said you need to do three things to have your company succeed.

1. Make something people want to buy.
2. Find those people and sell to them.
3. Build an organization that does the first two, over and over again at a cost below what your customers want to pay.

As I was thinking about Evers’ quote, it occurred to me that people who run small companies focus more on number one and two than they do on number three. While big companies put a lot of focus on number three.

The problem is not that small companies don’t grow into large ones – the problem is that if you ignore point number three, your company is not as successful as it could be regardless of its size.

The better you build your organization the more profitable and less frustrating it will become. Building an organization is the true job of a CEO.

It’s a statistical fact that people with bigger feet are better at spelling than people with smaller feet. Why? … They tend to be older!

Sorry for the bad joke, but ask yourself what’s the difference between big companies and small ones?

Did you answer things like: more customers, greater revenue, larger staff production capacity or sales force? Then you made the same mistake as the joke. Not understanding that size is the consequence not the cause.

What do we mean by “Scale”?

Scale has to be understood in context. If you’re a surgeon, or a personal trainer or a voice coach, then your business is a “practice”; and the maximum size you can get is going to be smaller than the maximum size for a company that makes computer hard drives. (It’s also true that the minimum size you can survive at is likely to be smaller as well.)

The same is true for a restaurant or a knitting shop.  You can only get so big before you’re serving all the customers who want what you sell and are within a reasonable distance from your shop. You’ve saturated the “addressable market” in business jargon.

Of course, a restaurant can open other locations and become a chain, and the knitting shop can start selling stuff on line. But think how different your day would be as the owner of a knitting shop compared to the owner of an online knitting shop. In the latter case you’d be analyzing your page views and conversion rates. You’d have a shipping department and your business would be open 24/7. You might even need to conduct business in multiple languages.

The difference is not one of size or quantity but a difference of kind or quality.  You’re not really in the same business at all. You are (to use jargon again) operating in a different business model.

And that brings us to the difference between a big company and a small one. A big company is one that understands it’s business model and exploits it for maximum size; and a small company doesn’t.

What is a Business Model?

A business model is how you transform the customer’s desires into profit. It happens at the intersection of the following:

• Your goals, passion and financial targets. (Otherwise why on earth would you be running your own company if you didn’t have goals and passion for it?)
• Your customer’s desires. (They have to want what you sell more than they want their money or they won’t buy.)
• Your internal processes. (To make a profit, you have to make something  customers want, find those who want it, sell it to them, then build an organization that can do that repeatedly and less than the cost they’re willing to pay).

Two Kinds of Small Companies

Let me mention that there are two kinds of (small) companies that don’t understand or exploit their business models.

The first is what most companies are like. 50% of American workers work for small companies and most are like this. They actually have a business model, and they operate within that model. They just don’t consciously analyze the model so they don’t know how to incorporate it into their business decisions.

The Devil in the Details

To understand and exploit your business model, you have to know what really drives your customers to buy. Is it price? quality? features – and which ones? convenience? That’s why Ray Kroc (McDonald’s founder) used to say that they weren’t in the hamburger business they were in the real estate business. Their customers bought for convenience and consistency (not quality). So the key to their success was picking the right locations to give their customers the most convenient access to their consistent products.

You have to understand all your internal costs and how to maximize the impact of every dollar you spend. Do you know the cost of lead? The cost to convert each lead to a customer? Whether spending an extra 10K to improve production capacity will improve or hurt your bottom line and by how much?

Scalable companies know these things. And they’re always working to improve their execution of the model in which they operate.

Companies without a business Model
The second group of small companies is exemplified by the newest internet start-up. I’d name one but by the time you read this they’ll be supplanted by another.

But it’s true of any novel invention. Novocaine was invented to be a local anesthetic for military use – but found it’s market in dentistry. Early telephones were wired in pairs. You needed a separate line to the phone of each person you wanted to talk to because the business model was predicated on sending only urgent messages (faster than a telegraph). PayPal started selling cryptography on hand held devices. No one bought it. They tried several other business models before they found that people would pay to transfer cash electronically and that required security which they were good at.
These companies don’t have a business model or rather they haven’t found it yet. So what they should be doing is NOT growing. They should be learning. They should be learning what customers want, how much they’ll pay, how to find and sell to them, and how to do this in a way that makes money. Once they’ve figured that out, then they should grow.

This video of Dan Ariely from TED  has several enlightening and surprising ideas you can use. It’s 18 min long but the last 2 minutes are an ad.

Why people cheat and steal and how this can be encouraged or discouraged. The reasons are not at all what you’d expect.

How these conditions were exacerbated by the stock market and financial systems to cause the mess we’re in.

Why our intuitions can lead us wrong and what to do about it. This doesn’t come up till about the 14th minute but it’s the most important takeaway. It broadens the appeal beyond cheating and beyond the financial mess. How many of your intutions do you rely on to run your business and how many have you really tested?

Takeaways:

1. Buy Dan’s book here  http://www.predictablyirrational.com/
2. Test your intuitions. This is a hard and painful process for most people. Hard because our intuitions are often invisible – we just think of them as “how things work.” And painful because self inspection often is. Hire a coach to help if you want to break out of the limits your intuitions are imposing on your growth.

[tags] CEO skills, entrepreneurs, intuition, small business, management [/tags]

I had sporadic problems getting online. It would work fine for anywhere from a few minutes to an hour. Then (sometimes in the middle of loading a page) it would tell me sites were loading (no “page not found” errors) but they never loaded. This happened in all my browsers (Firefox, Chrome and IE). At the same time email would work and I could see other computers on the network. And any other computer could get on the internet fine. I had to reboot to get back to normal.

All my other computers are running XP. This one is my first with Vista (Home Premium) and like I thought I was supposed to, I loaded protection: AVG anti-virus and Zone Alarm. Both free versions. They’d worked well in my history with XP.
Solution:
A shout out to Mark Wasserman of Janus Systems in Branford Connecticut who diagnosed it in ten minutes over the phone. Zone Alarm was the problem.  He says windows firewall is fine for what I do (I don’t spend lots of time online in what he calls dangerous environments – like airports and coffe shops) so I uninstalled Zone Alarms, turned on the windows firewall and am good to go. Mark also said that AVG is fine and virus protection is more important for me.
Bonus – shut down and start up are a lot faster. Also I used to get an error with Firefox. If I shut it down while it was having a problem and tried to restart it without rebooting, it would tell me it couldn’t start because it was already running. This has now gone away.

NOTE: This is a blog about business tips not my cat (or my computer) but I’m posting here because I had the hardest time finding any solution online. I hope that by posting it here the search engine spiders will pick it up and others can be helped. As always there’s a takeaway for business.

Takeaways:

• Technology keeps evolving. (I thought windows firewall was bad and Zone Alarms was almost a reguirement – those may have been true when I learned them but certainly aren’t now). Every company needs a relationship with someone who keeps up with it.
• That person should not be you unless that’s your job or your hobby.
• One size does not fit all – Mark asked me a lot about how I used my computer and would have a different recommendation if I hung out at Starbucks all day. Make sure your tech person understands this.

[tags] Technology, Small Business Computing [/tags]

Mark Cuban – owner of Dallas Mavericks – put an interesting perspective on the AIG bonus situation using an analogy to a free agent athelete. Did I say he owns the Dallas Mavericks?
Hint – to keep good employees, financial firms will have to offer not bonuses but options. IF they do well in a few years they will get filthy rich and it will look like they did it off taxpayers money. How will that play in the press?

Seth Godin writes about how company founders can split equity.
Key point: Don’t give out all the common stock. If you and I split a company 50/50 we each own half. If we you get 5% and I get 5% for all practical purposes we still each own half. But we have a lot more latitude about how things work in the future. Seth doesn’t say this, but as an angel investor I know, founders often have no idea of the most useful place of common stock in the pecking order of a growing company.

“What’s new since we talked last?” I asked. “Meetings,” she said. “I’m doing one-on-ones with my people, like we talked about.”

She is a client.  Her company makes web sites and on-line products for a specialized industry. They’ve got a reputation for high end work, solid market penetration and about a dozen employees. She is the primary sales person and has the most common complaint I hear from business owners: “I can’t find good employees”

The meetings were going well. She was staying on track, learning what people were up against, and heading off complications before they became actual problems. The words were very positive, but her tone was not.
“So?” I asked.

“All these meetings. They’re keeping me from my real work.”

But she was wrong about that. What a small company has in common with a small child is despite their size, they still need all of the parts. So even small companies need three levels of management, someone to do collections, to analyse the numbers, and all that stuff big companies have whole departments for. But being small you don’t need them all full time. So people wear multiple hats. And when that happens, you tend to wear the hats you’re best at or enjoy the most. So my client loves sales and coming up with new product ideas.

Because she’s done a good job in those areas, the company needs more production capacity, and better coordination. So now she must consider management to be her “real job”. By focusing on this (not exclusively but predominantly) she’ll enable others to do more with fewer problems. That’s the real job of building a company. When problems decrease, and productivity improves, she’ll be able to wear this hat a little less and put on another a bit more.

One-on-one’s: Great management tool.
Have one with each of your direct reports.
Meet weekly at the same time for 30 minutes. Never reschedule. It’s that important – it is your real job.
Prepare. They should and you should too.
Don’t solve problems. Or train. Some of that may happen. But if you can’t fit it into 30 minutes along with the other stuff, then you need  a separate meeting for training or problem solving.
It’s a time for you to share certain things and learn certain other things. Generally the same kinds of things each week (maybe even in the same order depending on your style) which makes it easy for each of you to prepare.
What to share. Anything the other person must know to do their job better. That’s your role as manager: to help them do their job better. Maybe share what’s happening in other departments so they can interact better. Maybe it’s feedback of how they really made a difference. Share what they can expect from you and the rest of the company; both before the next one-on-one and longer term. You prepare by keeping a notebook around all week and jotting down stuff that you’ll need to share with each person.  Then spend a few minutes pulling it together before the one-on-one.
What you should learn. Status: what happened since last time and how that compares to what you expected. Why there’s a difference. What problems they are running into. Their opinions on things. Insights you don’t know about because you don’t live at their desk. Over time, you’ll get a sense of who they are as a person: what motivates them, what puts them off. You’ll get a feel for what they do well and where their limitations are. Make notes about this.
Written take-aways: What each of you will do before the next meeting based. This becomes the status for next week’s meeting. Notes you can use for their annual review. They should take away your impressions of how they’re doing so nothing (I repeat nothing) in their review is a surprise. If it is, you’re not doing it right, but that’s another column.

Trust (in both directions) is a non written take-away.

Beware: You’ll think you don’t have time. But it reduces time spent on interruptions and problem solving. And it’s your real job.

Takeaway:

• Do Them.

[tags]management, CEO skills, entrepreneur, small business owner [/tags]