31/08/10

By John Rosling, UK CEO of Shirlaws

“Make your product easier to buy than your competition, or you will find your customers buying from them, not you.” Mark Cuban

“The essence of a successful business is really quite simple. It is your ability to offer a product or service that people will pay for at a price sufficiently above your costs, ideally three or four or five times your cost, thereby giving you a profit that enables you to buy and to offer more products and services.” Brian Tracy

What you sell – be it a product or service – is the foundation of your business. Most of us would accept this unquestioningly. But for most smaller businesses their product is a given and the Board doesn’t spend a lot of time thinking really strategically about what else the business could do to leverage its resources (intellectual and financial) to drive more revenue more profitably.

For a start, many small and mid-sized companies have one product or service — let’s call this P1 — and distribute it to one channel or type of client or “distribution” base, which we’ll call D1. But what is obvious is that the more products and distribution channels you can build, the more profitable and valuable in equity terms your business will be.

What is key is that when you introduce another product (P2) to the same customer base, you are lowering the cost of that sale because you already have the loyalty of customers who know you and will be ready to accept the product. You are therefore able to get a higher margin on your P2 products.

Sometimes organisations think they have diversified in a market when in fact they haven’t. For example an accountancy practice may think it has three products (P3) i.e. tax returns, audits and a company structures and advice service, but as far as its clients are concerned these are all seen to be the same thing, just one product. If however, the accountancy practice establishes an IFA division selling financial services to the same customer base, then it has developed a second product.

A client we recently worked with is a distributor of organic vegetables and it was looking for ways to grow its business. Stocking a few more varieties of vegetables would not constitute a multiple product range — selling vegetable is what it did. To develop real, profitable growth it needed to look for something else it could sell to its existing customer base, many of whom were catering outlets. Its solution was to set up a training section teaching chefs new ways to cook vegetables, particularly the more exotic varieties. It had already established credibility in providing quality produce and had loyalty from its existing customers, so the new training division proved successful quite quickly.

Of course, it’s a strategic choice for the business whether to focus on building a range of products and sell into one distribution channel or to have just one product and develop multiple distribution channels for it.

If you pursue the first strategy of multiple products and develop five quite distinct product offerings we would say your business model is P5/D1 (ie 5+ Products/1Distribution channel). An alternative business model might be to have just one product and to develop a variety of distribution channels across which to sell it. We would call this P1/D5. A third model would be to develop multiple products and sell them across multiple channels which we refer to as P5/D5.

Which business model you choose has implications for the value of your business. In terms of building equity these models rank like this (from most valuable to least valuable):

1. P5/D5
2. P1/D5
3. P5/D1
4. P2/D1
5. P1/D1

Obviously, a multiple product and multiple distribution (P5/D5) growth plan for an SME business would be a fairly long term strategy and one that would need careful implementation, but if you are currently a one product, one customer base (P1/D1) business then introducing a second product will positively impact on growth and profits.

So, what else could you do to drive the value of your business from the foundations up? You could usefully reflect on what your product or products look like. Your product can be defined as what customers give you money for. It sounds obvious, but for most of us our product is a whole bundle of different offers some of which we charge for and some of which we give away. By getting really clear about what it is that customers are actually paying you for you may be able to unbundle your product and charge very profitably for the bits you currently give away (advice or consultancy for example). You may of course choose not to charge for these services as you derive value from giving them away but this needs to be seen within a strategic framework based on your position and your Extras strategy (which we’ll cover in future months).

The opposite approach, of course, is to bundle a set of products together, to create a competitive advantage to capture share and increase the volume of sales. You’ll see McDonalds following this strategy and will recall that is what Microsoft did with Office when competitors offered word processing and data packages separately.

It’s a good idea to look carefully at what your competitors are doing — and consider adopting the opposite approach to create competitive differentiation.

This is of particular importance as the economy moves towards a recovery phase as it’s exactly the right time to be innovating product.

A simple exercise can be very helpful in understanding how you can innovate your product packaging to react to changing market conditions. The reality is that it is hard work and expensive, generally, to create completely new products; but relatively easy to repackage your existing offer.
If you haven’t significantly repackaged your offering over the last two years, using the diagram below may be helpful.

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Insert a description of the product you have been selling over the last two years, how you have packaged it, and what the customer is really buying — what the outcome of the purchase is for them.

In the next line start by describing what your customers really want today as an outcome. In the last two years this is very likely to have changed. You can then describe how you could package your product to meet this demand. For most businesses who have not repackaged their product in the downturn the chances are you are selling a boom proposition in a bust market and are likely to be driven to compete on price which will obviously undermine your margins.
While you are about it, you might also look to the future and consider the output your customers will seek in two year’s time — hopefully as markets are back in growth and how you might repackage to meet that demand.

A proactive strategy to product development is key to any growing business. By looking at your Product Portfolio you will enable your business to grow its customer base and span wide-ranging markets, a necessary requirement not only for immediate profit but also a strategy to develop longer term equity.

Shirlaws helps business owners transform their businesses. From unblocking barriers to growth to ensuring the business pays richly in time and money, our systematic programme has transformed the lives of thousands of owner-managers all over the world. Founded in 1999 Shirlaws has now grown to include operations in North America, UK, Europe, Middle East, Australia and New Zealand. Shirlaws has redefined business coaching with our unique approach based on establishing a balance between commercial outputs (e.g. increased revenues, profits, efficiencies) and cultural improvement (e.g. better leadership, communications skills, life balance). Our coaches take the many complex issues involved in running a business and help make them simple and easier to manage. We work alongside clients to guide their businesses to achieve long-term, profitable and sustainable business growth. What Shirlaws brings is a language and system for growing businesses and building internal capability. A language and system that gives our clients three simple things: more time, more money, and less stress.

If you’d like to know more about us please take a look at www.shirlawscoaching.com and www.shirlawsonline.com or email shirlawsuk@shirlawscoaching.com

John Rosling will be speaking at Fresh Business Thinking LIVE!. His session will explore: how successful businesses understand the unique “intellectual property” that is the rocket fuel of their business; how they use that knowledge to drive extraordinary future revenues; why innovating the way you package what you sell is the fastest way to secure new markets at this stage in the cycle; how product evolution and looking “beyond service” will create clients for life; and how the businesses that fail will be the ones that simply carry on selling the same product in the same way at the same price.

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