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Author: Per Sjofors

Categories
Marketing Personal Development

Adapt or…

Charles Darwin famously got the inspiration to formulate his theory of evolution, or survival of the fittest, from observations of the beaks of different species of finches on the Galapagos Islands during his voyage around the world in 1831–1836.

Darwin wondered why the shape of birds’ beaks differed from island to island. Cactus finches have longer, more pointed beaks than their relatives, the ground finches. Beaks of warbler finches are thinner and more pointed than both. These adaptations make them more inclined to survive on the food sources that differ from island to island.  Adaptation is just as crucial for any business. Just like Darwin’s finches, the ability to adapt to differences in food sources, in a business sense, meaning to optimize revenue from your customers, may mean the difference between life or death for your business.

I’m writing this during the Christmas holidays 2020. We all know that the pandemic has forced a series of changes for a lot of businesses. We also know some companies that are doing really well while others have succumbed to the Coronavirus’s specific challenges.

Let me give you a short example of adaptation and another showing what could happen if you do not adapt. The restaurant industry has, of course, been really hard hit by the pandemic.

Just across the road from where I live is a woman who owns a small chain of pizzerias. She acted quickly on the change in circumstances and pivoted her business to delivery and pick-up only. But instead of contracting with one or several of the food delivery services that charge the restaurant both fees and take commissions on sales, she offered some of her waiting staff jobs as delivery drivers. So they deliver pizza to a home instead of to a table in the pizzeria. By doing this, she could retain some staff and drive up more sales. Business is better than ever because she adapted to her new circumstance.

I’m also acquainted with another restaurant owner who did not adapt to the change of circumstance and instead closed and now asks people to donate money so that they can eventually open again. The restaurant does not even offer those who donate anything for their donated money, like a discount coupon that can be used once they can open again. Which I very much doubt they will. They provided no incentive to potential donators, which makes for bad business practice. 

We also hope, me especially, that a COVID vaccine distributed to the general population will get us back to a new normal as these effects are seen throughout the populace. The keyword here is “new”; it will not be normal as before the pandemic. Too much has changed for that to happen. Many of your customers have different buying habits now, and what they valued before the pandemic will have differed from while it’s still going on. So how are you going to find out what the new normal means for you? Because I hope you intend to find out. If you believe that everything will continue to work just like before the pandemic began, you are greatly mistaken. Once we enter this “new normal,” if your competitors get a better understanding of the changed decision landscape, the decision behavior, the customer preferences, and your customers’ value perceptions, your company will not survive. Or at least struggle at best.

So what is the best practice to find out about the changes that have happened in your marketplace? Well, here is what I would like to suggest to you:

  • Of course, you need to talk to your prior customers and from them try to understand how their preferences, decision behavior, decision landscape, and value perceptions have changed. But there is a flaw here; not all your prior customers will be truthful. They may well withhold information or sometimes even outright lie because they want a better deal from you when purchasing from you again—more for the same money or lower prices. So take what you hear with a healthy pinch of salt.
  • You need to do market research into your market. A vital component of that market research is understanding how the monetized value perceptions or willingness to pay have changed. How different features and functions of your product or service affects what potential buyers are willing to pay. How various preferences and value perceptions will affect your sales volume at different prices.
  • Then you also have to do research into your own company. You have to understand the differences (and there will be many) between what you hear from the market and how your staff, especially customer-facing staff, perceives the market’s new value perceptions and preferences.
  • Finally, you have to develop and deliver a training program for the staff, so they truly understand the market. So they can act on the new circumstances. To ensure the company adapts and does not continue to do what worked well in the past because it’s highly unlikely to work as well now.

An involved process. Yes, for sure. But as we come out of the pandemic, your business success will depend on it. And you probably want to be a winner, at the top of your game, not leaving it for your competition to do better than you do! Are you ready to start the process of adapting your business to meet the new challenges that it faces at present?

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Investing Personal Development Sales

Business learnings from The Art of War by Sun Tzu (5th century BC)

This is what Wikipedia says about The Art of War:

The Art of War is an ancient Chinese military treatise dating from the Late Spring and Autumn Period (roughly 5th century BC). The work, which is attributed to the ancient Chinese military strategist, Sun Tzu, is composed of 13 chapters. Each one is devoted to an aspect of warfare and how it applies to military strategy and tactics.

Here is a link to the Wikipedia article: https://en.wikipedia.org/wiki/The_Art_of_War

It is one of those evergreen books that inspired Chinese military strategists and even philosophers ever since it was written as well as Western military strategist since it was translated, first into French at the end of the 18th century and into English in the early 20th century. Much of the book’s teaching can easily be applied to business because business and war, from a pure strategy point of view, are not all that different. In the end, war is about control of land and population; business is about attempting to control your market. In war, there is an opponent; in business, there is competition. Those who crush the opponent or competition wins. Simple? Not really.

Nevertheless, The Art of War is a short book, it takes an hour or so to read. An hour I would greatly encourage everybody to spend while thinking about how the teachings contained within the book apply to your business. Now, some of the chapters have a very different style than other chapters, so it is pretty clear that there is more than one author involved here, and some chapters lean more toward a commons sense angle than other chapters. But that really does not matter; it is still very worthwhile to read and engage with this book from a business perspective.

As I reread the book, I found this paragraph, number 18 in Chapter 3 of the book particularly profound:

“Hence the saying: ‘If you know yourself and know the enemy, you need not fear the result of a hundred battles. If you know yourself, but not the enemy, for every victory gained, you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.'”  

Let’s decompose this paragraph and find out how it applies to business:

If you know yourself and know the enemy, you need not fear the result of a hundred battles.

This sentence applies to the companies who are the market leaders in their market. The companies who know how to beat the competition and do it well; know better than the competition how potential buyers make their purchase decisions, how buyers perceive the product or service choices they have, how buyers perceive the various brands or competitors in the market and know the actual monetized value of their product or service. But they also know themselves; know their true strengths and weaknesses, they don’t believe their own press releases and they internalize the truth about their market, and they train their staff accordingly; product development and those who define services truly know what drives the sales and revenue, and sales and marketing know the profile of the customer that will generate the highest sales and revenue. They don’t believe in the corporate gut feeling generated from only listening to their customers but proactively research perceptions, preferences, and the ever-important monetized value that both customers and potential customers (the latter is where future growth will come from) associate with the company’s and competition’s products or services.

They know all of this better than the competition, they act on the knowledge, and because of that, they are in command of the market.

If you know yourself, but not the enemy, for every victory gained, you will also suffer a defeat.

Unfortunately, most companies fall into this category. They think they know themselves better (and to some extent, most companies do, just not as well as the market leaders), but they often miss important insights about their customer or market. They collect data from their customers by talking with them or communicating with them through other channels. There are a couple of issues with this type of approach. First, every company goes out to the market with a particular position and marketing message. Some portion of the market will accept that message, and a portion of those will become customers. What companies don’t get from communicating only with customers is what would make non-customers to become customers; maybe different features or different prioritization of features will drive more non-buyers to become buyers, perhaps if the company’s sales and marketing effort focused on a different market vertical, the conversion of non-buyers would increase, maybe if other marketing and sales messages were used, sales would increase, perhaps a different pricing structure would make the company’s product or services more appealing to a larger portion of the market and thus lead to increased sales and revenue?

Or to simply put it – communicating only with customers is like talking in an echo chamber! You don’t learn much from one of those, do you?

Surprisingly, this is what most companies do. When I speak to potential clients of my firm, most of them assume our work will be carried out for their customers only, and it always takes some effort to explain we work with a market, not only customers to our clients. Furthermore, when we show a client a gap analysis between “the market” and “what the client believes about the market,” there are always surprises contained within that data collected. Gaps reduce a company’s competitiveness and, many times, prevent the company from becoming the market leader.

And finally, the third sentence of the paragraph:

If you know neither the enemy nor yourself, you will succumb in every battle.

Pretty obvious what that means; if your company is a startup, the company will die when investors’ funds run out. If the company is well established, it means that a shift in the market, a shift in buying behavior, or the competitive landscape, or maybe when a new piece of technology will become available, any of these will kill the company outright.

So, in light of the learnings that you can glean from The Art of War, the choice is pretty straightforward. Gaining a better understanding of the market and ensuring that the entire company knows and acts on that real market understanding and not some corporate gut feeling is the key to market leadership! So are you ready to take up the challenge?

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

 

Categories
Best Practices Growth Personal Development

Your business and the 2d law of thermodynamics

The surprising relationship between the second law of thermodynamics and business excellence

Those who may remember their physics lessons back in school may recall the laws of thermodynamics. Simplified, the second law of thermodynamics says that heat will transfer from a hotter object to a colder object until both reach the same temperature. A similar thing happens in every business, the innovation and uniqueness of hot products or services transfer to colder, not as interesting, products or services of the competition. This transfer of interesting or valuable features does not mean that the competitions’ products or services become more valuable, it just means that it leads to commoditization – every company in a market vertical offering identical products or services. 

But the fact is that you have a choice; keep your company hot, or accept a cooling off and commoditization. 

So, from a pricing perspective, what is the difference between a hot product and a cold product (or service for that matter)? Well, a hot product or service or company has “pricing power.” Meaning that there is uniqueness or innovation that may be directly related to features, functions, go-to-market strategy, or even the brand. These differentiators are strong enough to generate a higher willingness to pay among at least a portion of buyers. A commoditized product or service can be one of two things: a product or service that has no differentiators compared to the competitions’ product or service. Zero. Nada. Nothing. This is extremely unusual. Almost every product or service has some aspects of it that are unique and that can be used to gain at least a little bit of pricing power. What is more common is that a company look at the main features or benefits of their product or service and find them to be identical to the competition, but are unaware that some lesser features or benefits may drive a substantially higher willingness to pay among a smaller portion of the marketplace. Then, because they believe they are completely commoditized, they price their product or service just like the competition. (This is under the assumption that competitors’ prices are published. If they are not, they set the price based on a guess of what their competitors charge.)  

But let’s go to an example where the product is a true commodity and the prices are published. Gas. Here is a link to a short article from the Harvard Business Review. 

https://hbswk.hbs.edu/item/when-your-customers-don-t-care-what-you-charge-what-should-you-charge

This is an interesting article in which they conclude that the majority, albeit small majority, of gas buyers, do not look around for the cheapest gas but instead, follow habits, simple inertia or in their minds they consider the “switching cost” of going to a gas station they are not familiar with, as being off-putting (that would be a very low switching cost, by the way).

But in the article, the authors fail to make one important conclusion. They correctly assess those price-sensitive customers are the least loyal. This is valid not only for simple commodities like gas but for other products or services, too. Thus, companies chasing price-sensitive customers with low prices and rebates often end up being less profitable than peers who focus on delivering customer value, and therefore, earn the right to charge higher prices while maintaining customer loyalty. The reason is obvious; if they price low to attract those price-sensitive customers, the price will be low for all customers, including those who are actually willing to pay higher prices for the product or service and the result is that they leave money on the table. And in some cases, a lot of money! 

But how do you make sure that the heat of your product or service is not transferred to colder, competitive companies’ products or services? Well, the truth is that you cannot. It will happen. Even if you have patents for your products or services this process is slowed down, but it still happens—just a little slower than otherwise. 

The only way to protect the pricing power you may have with your product or service is to innovate. And this is really hard, but consider the following:

  • You cannot trust everything you hear from your customers, especially for a couple of very important reasons. First, they are your customers because they appreciate, and are willing to pay, for the features/functions and benefits your product or service has – not what it is missing. So, to ask them what they are missing is not going to be a very productive discourse. Your customers have already self-selected your current product or service buying it. They have accepted the bundle or feature and functions. They have accepted your marketing and accepted the price. Thus, asking your customers is not the same as asking the entire market.  The key is to understand what would make those who did not buy, to buy. 
  • Secondly, customers will lowball what they value. In some cases, even making things up and certainly withholding information that you would value knowing. They simply don’t want you to know how much they value your product or service – in the hope that you will lower prices further. They are after the best possible deal from you and price-sensitive customers always purchase on price, the lower the better. 
  • Thirdly, a market rarely knows what it wants in terms of features/functions and benefits. It knows the problems and frustrations it has with current products or services, but a market rarely knows how to solve these problems.

Let me give you some examples. I’m an Apple guy, so I like to use examples from the time when they were a true innovator:

  • Early MP3 players were hard to use and moving digital songs, from ripped CDs or illegal downloads (which were often distorted or abruptly cut off) from your computer to your MP3 player was a difficult and unreliable process. With the creation of iTunes and the integration to the iPod, Apple solved all these problems in one fell swoop. Few, if any, consumers would say they “were looking for a website to buy songs that sound good and magically appear on their MP3 players.” Apple identified the problem and came up with a solution.  
  • The iPhone was neither the first smartphone nor the first cellphone without buttons. Yet, its innovation disrupted an entire industry. That innovation was the App Store. Not the phone. At the time, cellphones were mainly used for calls and the occasional email, text or simple games. Being a user of some of the pre-iPhone smartphones, I certainly wished for a few very specific apps and maybe better games. I did not, nor did other consumers ask themselves: “I need to select games and applications from 10,000s of game and app developers, and I want to find those on a website and then they magically appear on my phone.” But Apple realized that if this service and product is offered, consumers will soon find ways to see the value of using such a service and product, driving both sales of the iPhone and the Apps.  

But Apple became complacent and stopped finding a better solution to consumers’ problems. They did not hear consumers saying, “I want access to more songs than I can afford, especially if I have to buy every song for 99 cents.” This opened up the market to Spotify to become the dominant streaming music player. Nor did they listen to consumers saying, “I want access to more movies than I can afford, especially if I have to rent every movie for $4.99.” This opened up the market to Netflix to become the dominant video streaming player in the market. The current Apple+ streaming service is, by the majority of analysts and commentators described as a joke. Too little too late. 

So, my point here is how important it is to understand the problems your market has, so you can come up with a solution to fix those problems. The key is to understand the difference between “the market” which include all possible buyer and “customers” that are self-selected to your existing products or service or company. Once you know “the market” you can come up with a solution, an innovation, that is better than that of your competitors. That is the only way to fend off commoditization. In order to do so, not only do you need to know what problems your market wants to have solved but more specifically, you also need to know what problems the market wants to pay for them to be solved. And how much. There is no use coming up with innovation “everybody wants” and “nobody wants to pay for it”!

But here is the big difference between business and the second law of thermodynamics: A hot body in thermodynamics has no choice but to lose heat. But a hot company or a company with a hot product or service has a choice. It can elect to retain or even increase the “heat,” or not. The choice is yours!

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Best Practices Entrepreneurship Marketing Personal Development

Think pricing lives in a vacuum? Think again.

I recall reading on LinkedIn, no more than a couple of years ago, a comment that was made by a well-known speaker and author who works in the price-consulting sector. He’s a renowned “thought-leader,” and he commented on “Why do pricing projects so often fail?” I was astonished by his remarks, but I soon realized what was problematic with what he wrote. He believed, like many of the consulting firms (which there are actually very few of) who help companies with their pricing strategy, that pricing is a separate activity conducted without any relation to a company’s “other” activities. There is a mistaken belief that companies can arbitrarily change their pricing at will. This can be true for “some” companies but for the vast majority, it is not a true reflection, and that’s the reason “pricing projects” fail. But why does this happen?

There are four Ps in marketing—pricing being just one of them. Product, Place, and Promotion make up the other three Ps; all the four Ps interact with each other. Edmund Jerome McCarthy, an American professor of marketing and author, wrote about the concept of the four Ps in his book Basis Marketing: A Managerial Approach. This book was published in 1960 and since that time, McCarthy’s four Ps concept remains an integral component in marketing literature, especially as a way for any company to look at an example of the “marketing mix” for their products and/or services.

The main component for a better pricing strategy is the fluid interaction between the four Ps. When a company takes a fully holistic approach to their marketing and pricing strategies, they will not experience pricing projects that will fail. But how can this be assured? Let me explain in more detail:

Product: The product need not be just a product, but it can be a service, too. However, a product or service contains three components: features, functions, and benefits to the customer. Within these, they can also include its quality, what product family it belongs to, branding, packaging as well as warranties. Also, it can include services that are added to a product and vice versa.

Place: This is where customers gain access to a company’s product or service. The place includes the selection of sales and distribution strategies and how they are used; it also shows the type of customers that an individual company target as their main focus group. For consumer goods and services, customer focus attributes can include location, interest area, demographics, etc. Although, for business-to-business products or services the attributes differ (size, industry, location, buyer title, etc.).

Promotion: In a nutshell, this is all concerned about the “how” and “where” the company’s marketing should be concentrated on. Promotion can include numerous attributes such as the channels a company uses or what marketing messages will best promote their product or service. Also, the company’s media strategy and setting the frequency of any promotions given to their customers are further attributes. It can also include a mixture of various promotional activities.

Price: The last of the four Ps. Price is concerned with a set price for a specific product or service, but also, the pricing strategy used by a company as well as discounts and payment terms. What is vital to our discussion is to recognize what the theory says about price (being the sole “P” that can affect revenue) and recognizing a “different” school of thought. Let’s continue.

So, does McCarthy’s theory make sense? Actually, it doesn’t. But why? For this reason, theories that are generally crafted out of academia and dispersed worldwide through its teaching, can be wrong or flawed in some respect. This theory is no exception. It’s wrong, but not completely. Let me explain why that is. Its main flaw is twofold. It does not recognize the interaction between the four Ps and how they affect each other, as well as denying that the other three Ps (Product, Place, Promotion) also affect revenue. Price is not the sole factor here. 

Products and services (Product) can have unique features and benefits over a similar product or service. This uniqueness can be missed when the customer focus (Place) may be different; the company is targeting the wrong customers through its marketing channels and messages (Promotion) by not adequately crafting them to reach the customers they are focusing on. Specificity of features, benefits, targeted messages, certain marketing, and sales channels will all generate higher sales volume as well as higher revenue than those that are non-specific. Which means that the theory’s statement that Price only affects revenue is clearly way off the mark. The other three Ps affect revenue, too.

So, if any company wants to outshine the competition, then they need to recognize that the four Ps interact with each other. There is synergy going on here. Thus, a company needs to know (exactly) what features and benefits will generate for them the higher sales than other features and benefits. The company needs to have an excellent awareness of the specific marketing channels and messages as well as the sales methods and channels that will contribute to generating higher sales than other marketing channels, messages, and sales channels and methods. Knowing the correct customer profile to focus on and target will help generate higher sales over other non-specific customer profiles. Ultimately, the company needs to grasp the importance of how all these aspects of Product, Place, and Promotion affect what Price should be set for each product and service.

I hope that you will be in agreement with me in understanding the importance of the interrelationship between the four Ps and how it is essential to not see each P as separate from the other Ps. Do companies really see this interrelationship between the four Ps? More importantly, do they recognize the impact that this interrelationship has between the different attributes of a specific product or service, that in turn, affects the success (or failure) of a product or service?

 Over the many years that I have been working in this field, I have talked to thousands of companies. There is always a willingness to try and understand the principles behind the four Ps, but to be honest, not willing to “fully” understand. They like to talk to their customers. That’s good, but there’s a problem with that approach—customers don’t always tell the truth, they lie. This customer tactic makes it harder for the company to really “understand” their customers’ wants. Customers withhold valuable information, so as to gain more benefits, a lower price, and features from a company’s product or service (this is a topic for another article), the next time they purchase it. Some companies look to the competition but there’s a problem with this approach as well, as the competition is invariable using the same “flawed” method to try to understand what its customers want, so nothing is learned in the long run. Still, other companies just guess, okay, it may be an “educated” guess but it’s still a guess all the same. There seems to be so few companies who are willing to understand the interrelationship between the four Ps and the correlation this interrelationship has on the affective influences on sales volume and revenue at different prices. Some believe that it can’t be done, while others (mistakenly) think the process will be too “involved” in gaining this understanding.

Yes, it may take some time, to gather this information but this information regarding the interrelation of the four Ps and how they affect sales volume and revenue across various price ranges can be found, and with great accuracy, too. Other precise information gathered will reveal what product and features drive the highest sales volume as well as at what price this can be achieved at, the specific customer profile (persona) that can be targeted through a company’s marketing and sales strategies that will generate the highest sale volume, finding out what marketing channels and messages will generate the highest sales volume and revenue, minimizing sales friction and generating the highest sales volume by optimizing the sales methods and channels used, and finally, but not least, ensuring you have the “right” set price for your products and services that is going to provide the highest sales volume and revenue for your company.

So, what are you going to do about it? 

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Economics Entrepreneurship Marketing Personal Development

Why a low price and a discounted high price is not the same

If you think the buyer perceives your price equally whether it is just a low price or a higher price with a discount – then think again. 

When we are considering buying a product or a service, our subconscious mind creates a whole slew of associations. We decide if we believe the features and functions of the product or service will deliver the value we expect to receive. The brand and everything we associate with the brand influences the value and benefit we expect to receive from the product or service. So, does the lack of a brand, how the product or service is presented to us affect how good we think it will be once we purchase it? If the product or service is sold by a salesperson, how that person presents themselves and the product or service will have great influence over how we will associate value and benefit to the product or service. Some of these associations will add to the value we expect; some will detract from them. Some brands will add value; others will be totally neutral; some will detract from the value. Also, some features will add varying degrees of value; others will be neutral, some will detract from the value. 

This cocktail of associations can be summarized as “perception of value,” and it happens in the blink of an eye, while the potential customer is going through the decision-making process as to whether they will purchase the product or service, or not. This also means that for most of our purchases, we do not make a true valuation of the various products or services available but we use our “perception of value” or gut feelings to aid us in making a decision. In behavioral economics, the term for this process is known as heuristics. 

As soon as we see the price of the product or service, we make an immediate association between our “perception of value” and the price. It is an association that is emotional, but where the outcomes are pretty simple to come by. There are only three possible outcomes:

  • The price is above my “perception of value,” and therefore I will not buy the product or service.
  • The price is generally in line with my “perception of value,” and therefore I will buy the product or service. This is valid for a range of prices.
  • The price is below my “perception of value” and therefore, what I initially thought was an adequate product or service must have some perceived flaw I did not initially discover, and hence, I will not buy the product or service.

It is also important to know that different people will have differing “perceptions of value,” and the very same people will have a different perception of value across various times and circumstances. But for now, that is a topic for another article. 

So, if a too low price is set, then what can occur is an expectation with the buyer that the product or service may be inferior (even though that cannot be proven at the time of them making a purchasing decision). Why does a price plus a discount work differently? That is because the buyer’s “perception of value”  is then tied to the original price before the discount was put in place, and the discount just means the buyer now perceives the product or service as a bargain, it is a better deal for them.

So, to sum this up in a more formulaic manner:

  • Price compared with “perceptions of value” = a buy or not buy decision
  • Price compared with “perceptions of value” + discount = a bargain

However, it needs to be noted that the discount cannot be too large. If it is, a significant discount in itself will make the potential buyer think twice about purchasing the product or service. It might have the opposite effect to what the seller initially intended – a higher sales volume. Just as with a too low price, to begin with, an excessively large discount will generate doubt in the mind of the prospective buyer. They will think, “the vendor must be desperate to sell this, probably because nobody wants to buy it because it is not a very good quality product or service,” or ”the vendor has figured out there is something wrong with the product or service so they must offer a deep discount to sell any of them at all.” 

In conclusion, most buyers are usually quite quick to decide the value they perceive with a product or service they are thinking of purchasing. They then compare that value with the price and decide to buy or not buy the product or service. Discounts, if reasonable and not too large, will drive higher sales because the buyer’s “perception of value” is anchored to the original higher price, not the discounted lower price. Thus, a discounted high price is not the same as a lower price – even if the dollar value is the same!

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Best Practices Investing Marketing Personal Development

NPS surveys are a failure!

Net Promoter Score (NPS) surveys are a staple of customer satisfaction surveys. We have all had exposure to them. When we buy something or interact with a company, consequently, we get a message from the company asking us to rate how likely we would recommend the company itself, or the product or service we recently bought for a friend or colleague. We fill in our answer on a 10-point scale. A score of 10 means that it is incredibly likely that we will recommend the product or service, and a lowly 1 means that it is extremely unlikely any recommendation will be forthcoming.

Those who select a 9 or 10 are called “Promoters” as they are likely to talk about the product, service, or company in favorable terms. Those who choose a 7 or 8 are called “Passives,” and those who select a 6 or less are called “Detractors.” Promoters are loyal to the company, Detractors are not, and Passives can go either way.

Fred Reichheld of Bain & Company invented NPS in 2003, and implementation has soared rapidly since its first introduction. NPS’s output is a single number from -100 to +100, and the calculation to get to the NPS score is relatively straightforward: the percent of Promoters minus the percent of Detractors. The aim is to have as high a number as possible. So, if the percent of the Promoters and Detractors are the same, the NPS becomes 0. An NPS score below 0 means a general dissatisfaction, between 0 to 30 means the company is doing average, and above 30 means customers, in general, are satisfied with the company’s product or service.

NPS’s goal is to provide an easy to understand snapshot of how satisfied, or not, a company’s customers are. Unfortunately, that is a promise that NPS does not deliver. In fact, the whole premise of NPS is flawed. While the question: “Would you recommend?” means that a buyer can sum up the complex mix of feelings and assessments related to a purchase or interaction with a company, into a single number is brilliant, as that is how actual decision-making works. Still, the rest of NPS simply does not work. And here is why! Take a look at the following:

1. Survey respondents’ bias.

In a statistically significant consumer survey conducted by my company Atenga Inc., during September 2020, we found that the majority (58 percent) of the population will only fill in an NPS survey if they are already fans of a company or a product or service, while a smaller portion (32 percent) say they may or may not fill in an NPS survey. (See charts at the end of this document).

Only a very small percent of those who are directly dissatisfied with a product or service (6 percent) will fill in the survey. This means that the reported NPS is not even a close approximation of the satisfaction profile of a company’s customers; the resulting NPS score will be much more positive than the actual customer satisfaction really is. This by itself will render NPS virtually useless for almost all purposes.

2. The dangerous Passives

While Detractors are unlikely to buy from your company again, Passives may. And the way that NPS is calculated, Passives are totally ignored; they are not part of the calculation. This is a big problem because if a company has a large number of Passives, NPS may indicate they are doing well. Yet, they will have few returning customers or a significant “churn” rate if what the company sells is a subscription. And this leads to the next issues with NPS.

3. Actions resulting from the NPS

The next issue is, what should a company “do” as a result of its NPS score? Well, if the score is high, the CEO of the company can “waltz” into the boardroom and joyfully proclaim to the board of directors: “We are doing really well.” Good for him or her, but that’s about all that it will do.

If the NPS is not so good, it does not tell the company why the score is not good. It does not tell the company what to do to improve the score. It does not say if customers are dissatisfied with the experience of dealing with the company and what part of that experience needs to improve. Also, it does not say which aspects of the company’s product or service might need to be improved. Again, making NPS pretty useless.

Furthermore, as a company’s NPS score typically is separated from its competitors’ NPS score it is seen in a vacuum. But NPS cannot be considered by itself, simply because no marketplace is a vacuum with only one choice for the buyers. There are always alternatives, and a company that does not know how it compares in satisfaction among those who make choices other than buying from the company are at a great disadvantage to those who are in the “know.”

So while the very basis for NPS is solid, that of a customer who sums up the complex mix of emotions, preferences, and perception that leads up to a single decision, buy or not to buy, the implementation of NPS is not. What then is the remedy?

  • NPS surveys should not be conducted by the company itself but by an independent agency to greatly reduce survey respondents’ bias.
  • The survey should include NPS for both the company and its key competitors.
  • The survey should also include details of the company’s product and/or services and the interaction with the company.
  • All the data then captured in the NPS survey will then need to be segmented. For the company itself and each of the competitors covered in the study. 
    • For NPS to “work” it becomes crucial to know what drives those who are Detractors to become Detractors. To understand exactly what aspects of the product, service, or interaction that makes them unhappy. Only when companies are aware of what drives customers to become Detractors can they take actions to remedy the situation and to minimize the number of Detractors.  
    • Furthermore, it is important to understand precisely what makes Passives to become Passives. Understand what they are missing with a company’s product or service. Understand why they are not enthusiastic about the interaction with the company. In short, why they are lukewarm. And then, of course, take corrective action. Alter products or service, or the way customers interact with the company, to make Passives into Promoters.  
    • It is also essential to know why Promoters are Promoters so that the company does not remove a feature, function, or benefit that Promoters particularly appreciate. Because only with this knowledge can a company view itself from the buyer’s perspective and get to know what aspects of its product or services or customer interactions or activities will affect customer satisfaction to reduce the number of Detractors and Passives.

So now, what will you do? Continue regular NPS surveys or take these to a whole new level of practicality and value for your company? I know what I would do.

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Marketing Personal Development Sales

How to gain Pricing Power

Taste the word “pricing power.” Does it not taste really good? Believe it or not, your pricing gives you power. But what is pricing power? Well, Warren Buffet summarized pricing power very well. He said:

“Pricing power is the most important criterion for investing in a business. Pricing power is the ability to increase prices and not lose sales volume.”

Pretty powerful stuff, don’t you think? When one of the world’s most famous investor and self-made multi-billionaire, says that pricing and, in particular, pricing power is essential, then these are words we need to take on board for our businesses. If Warren Buffet made his money (current net worth $82 billion) from zero, by finding and investing in companies who did not realize their pricing power, we should take notice, and executives should carefully examine whether in their company, in fact, does have pricing power for its products or services. As the consequence of having unrealized pricing power is the same as leaving money on the table, and in some cases, a lot of money is left on the table unnecessarily. 

Almost all companies, especially if they have been in business for some time, have products or services that have some kind of uniqueness, have some products or services that are entirely commodities, and some products that are in-between unique and a commodity. Many companies, for most of the time, have a pricing strategy that deals with these three categories of products or services in the same way. It can be that they use the same markup from cost, or that they try to find comparable products or services from the competition (hard to do when a product or service is unique!) and set the same price as them. This often leads to a situation where the unique products are underpriced, and the commodity products are overpriced, and the company ends up leaving money on the table for the unique products or services and do not have enough sales volume of the commodity products. This is not a good situation to find yourself in!

But the solution to this problem is often quite simple. The first steps are just to identify what products or services are unique, what products or services are commodities, and what products or services are somewhere in-between. Meaning they may have some aspects that are unique but may also have elements that are more of a commodity. 

Once this categorization is done, the time has come to implement a different pricing strategy for the various categories of products or services that you offer to your customers. 

Products or services that are unique have, by definition, tangible pricing power. Customers have no or few alternatives to the unique products or services in the marketplace. Therefore, discounting on those unique products and services should stop, or at least be reduced to the bare minimum. Discounting to close sales is merely unnecessary – albeit some salespeople want to give discounts because they feel good doing so and because the customer feels good receiving it. But it may not be necessary at all to close a deal for a unique product or service. 

Secondly, prices on those unique products or services should increase. The amount of the increase should preferably come from a measurement and model how price affects sales volume so that the price that yields the higher sales volume and the price that generates the highest revenue can be identified and then set for each unique product or service. It is also very important to determine at what price there are price walls (psychological price points where small changes in price cause substantial changes in sales volume). Armed with this information, companies can set the right price for these unique products or services. The “right” price may differ based on the company’s strategic goals – it may be set for maximum revenue, maximum profits, or for maximum sales volume. Or for a combination of all of these. 

A completely different strategy needs to be used when it comes to commodity products or services. Commodities are sold by price alone, (i.e., there is nothing that differentiates those products or services compared with the competition). Commodities are lacking any kind of pricing power, except for price and brand. 

The first thing that needs to happen when commodity products or services have been identified is for the company to ask itself a few measured questions. Such questions that need to be asked for each individual product or service, like the following:

Is this a product or service that generates any kind of contribution margin? If not, is this a product or service that we really need to sell? Does it add value to unique products or services? Do we have to sell this in order to deliver a complete product or service to our clients? Do our clients expect to buy this from us? 

If the answers to any of these questions are “no,” discontinue the product or service. It is a distraction for your company. If the answers to any of these questions are “yes,” there are two possible actions to take. First, work relentlessly taking cost out of the product or service – but be incredibly careful not to reduce the quality or the benefit it provides your customers. Secondly, strengthening the brand as a stronger brand will lead to a higher sales volume of commodity products or services. A strong brand leads to some level of pricing power, even for commodity products and services. Thus, a strong brand allows companies to increase the price even for those, even if it is just by a little. 

So, now we come to the strategy for those products or services that are classed as “in-between.” These are the products or services that are not truly unique but may have some unique aspects to them. You have the options to either make the product or service unique, or increase its “uniqueness.” At the same time, the questions mentioned earlier are highly applicable again to be answered. 

In closing – do I say that gaining pricing power is easy? Not at all. But what I’m saying is that executives need to be fully aware that there is something called “pricing power.” The fact that it exists, means that you can, relatively easily, put in place the process I suggest above. If your company has a dozen, or so of products or services, this is a quick process. If it has 10,000 SKUs and dozens of services, this, however, is a process that will take a long time, but the earlier you start, the earlier you will reap the benefits of gaining “pricing power” for your products or services. Since the market is in constant change, this is an ongoing process, not a “set and forget.” It is a process that needs to be regularly evaluated and re-evaluated according to the climate in the marketplace, sales volume targets, the competitions’ products and services, etc. 

So, now it is up to you, the reader, to gain pricing power. Be confident; you can do it!

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Best Practices Entrepreneurship Investing Personal Development

Your price defines the customers you get

Have you ever thought that the price of your product or service selects what customers you get? Your price will differentiate how the market perceives your company, and by what kind of customers are attracted to your products or services.

In short, you need to consider that your customers will fall into three categories:

  • The price-sensitive customer
  • The neutral customer 
  • The loyal customer

Let us start examining the price-sensitive customer. The main (and possibly only) reason why this type of customer decided to buy your product or service was because it was the cheapest. They care very little, if at all, about the features and functions and benefits of your products or services that makes it different from the competitions’ products or services. They do not value the extra work and resources your company has spent to develop a better product or service. Moreover, because they don’t really care about the product or service, they are also less likely to learn about how to use it (for a product) or understand it (for a service). The result of this is that they will clog your customer service lines with question after question on the most basic functions. They need a lot of “handholding,” and despite all the effort your company puts into meeting their ever-demanding needs, they will still be somewhat dissatisfied with your company, products, or services. So, to be clear, the price-sensitive customer is an expensive customer in two ways: they cost more to support in cash, and they are likely to express their dissatisfaction with your product or service to their friends, family, and anyone else who cares to listen to them. 

Then also, there is the “ticker” to consider – you spent lots of time and effort supporting the price-sensitive customer, and you finally think you’ve got the customer on your side. You think the customer finally understands why your product or service is not only cheap but it is better, too. But wait a minute. As soon as a cheaper alternative to your product or service shows up in the market they will switch as quickly as a flash. The alternative may not be nearly as good as your product or service, but it has one thing going for it – it is more affordable. So, all your hard work and effort to keep your price-sensitive customer happy and loyal will be for nothing – as they will disappear in a flash! You’ve been unceremoniously dumped – for a “cheaper model.” So, you are lucky if you ever made a profit from that price-sensitive customer in the first place. A lot of time and effort for little, if any reward. 

Next, let’s examine the loyal customer. This customer is the polar opposite of your price-sensitive customer. The loyal customer loves your product or service. The loyal customer does not care much about price. That’s a good thing! But they do care genuinely about the value they receive from your product or service. You need to hear that – it’s important! 

They are unlikely to use your customer support. Another good thing. In the rare occasion, the loyal customer will contact the company’s customer support function, it is more than likely to tell them they have figured out something about the company’s product or service the company itself did not know, or that they have figured out ways to use the product or service in ways that were never really intended for in the first place, or in ways to add even more value than its original design or definition had initially intended.

Whenever possible, the loyal customer talks about your company to everybody and anybody they meet. They are your most dedicated evangelist. This is worth remembering, too!

The loyal customer did not buy your product or service because of low prices but instead because it has some unique feature, function, or benefit that is particularly valuable for them. For consumer goods or services, this includes a wish to be associated with the brand’s messages and positioning.

Next, we have the neutral customer. Alternatively, maybe we should call them the “pragmatic customer.” Obviously, in their behavior, the pragmatic customer is somewhere in between the price-sensitive customer and the loyal customer. The pragmatic customer does care about the price, but price alone is not the reason for their purchasing decisions. For the pragmatic customer, it is essential that they receive what they would consider good value for money. Again, this is worth noting. 

So, of these three types of customers, which customer do you prefer, and is your pricing aligned with your preference? 

Let me review some examples:

Consider this cloud-based telco, focusing on customers in the B2B space. They started out very small and grew slowly. They decided to price very low to capture market share from potential customers. So low, that profitability became an issue. Willingness to pay research showed them there was room in the market for a substantial price increase. In fact, the company was able to, over some time, to quadruple its prices. The aforementioned price increases in itself generated to a 25% increase in sales volume which, in itself, is interesting, but even more interesting, is that with these new higher prices the company attracted a whole different set of customers. Customers the CEO described as “professional” and as a consequence, led to a significant decrease in customer support costs that further led to about a ten times increase in profit margin. 

But not all companies are so lucky as this telephone company. Consider this national seller of home-improvement products. Profit margins were slim, and the company wanted to increase prices to boost its profit margin. Their business model was in-homes sales, and they advertised heavily on TV with the central message of deep discounts. Willingness to pay research showed them that the general consumer population was not very price sensitive. With one exception, those customers who had a preference for buying this kind of home-improvement product by in-homes sales were extraordinary price sensitive. This meant that the company’s ongoing low-price marketing only attracted those customers for which price was the most import decision-driver. This led to a “big” problem for the company. They could not increase prices, because that would severally affect the sales volume among those highly price-sensitive customers. They could not change their TV advertising to a value or benefit message, as this would severely impact the number of sales leads the company received – as those customers who want to buy in an in-home sales model are those that are the most price-sensitive. The company had painted itself into a corner from which there was only one way out – start a new brand, which turned out to be an expensive and involved proposition!

So, think about this the next time you are considering your pricing strategy. The last thing you want to do is cater to the least favorable customer at the expense of your most valuable customer. Your sales volume, profit margin, and revenue depend on you getting your pricing strategy right. 

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com

Categories
Best Practices Entrepreneurship Investing Marketing Personal Development

Behavioral science puts old price theories to an end

Low prices gets more customers, high prices gets fewer customers. This is an “old” truth that the business economy has lived by for a very long time. In reality, our buying behavior is considerably more complicated than that, and a higher price can on the contrary increase sales volume. 

Traditional knowledge in business economics follows that price and demand have a linear relationship. The management’s marketing strategy in terms of pricing is then simplified to the practice of setting the price so that the total earnings are optimized.

However, modern research complicates this well-known business practice. We humans tend to allow psychology and other non-rational factors influence our behavior and that includes our buying behavior. This strict economic theory does not give the whole picture, though.

When people make decisions in purchasing situations, it is based on an estimate of the product or service value. Of course, that valuation may differ across various situations. For example, an umbrella is much more worthwhile to the buyer when it rains. Still, you see shops that sell umbrellas when it is not raining.

However, the estimated value correlates not only with the personal and current needs, but also on its relation to other products or services of the same kind. Is this product or service of good quality? Is it worth its price? If the answer is “Yes,” the consumer will purchase the product or service and on the contrary, if the product or service is not considered worth its price, then a purchase is unlikely to occur.

Since the consumer often does not know how good the quality of a particular product or service is, the price itself is a quality indicator. The value thus rises in the consumer’s eyes as the price rises. This is not about status or a desire to show off wealth. Of course, this can have a determining effect, but the principle applies in a general sense and also to products that do not have “status” attached to them.

An everyday example can be a pair of winter shoes. In the shoe store, it is difficult for the consumer who is not able to look at the shoes in-depth, to see if they are of high quality or not. If, on the other hand, the price is high, we assume that the quality and thus the value are higher. Buying low-quality shoes for the winter season, which may start leaking or quickly lose their freshness, is a huge miss, even if they only cost a fraction of the more expensive shoes.

The problem is that you as a consumer do not know this in advance. The cheap shoes can keep the moisture out as well as the expensive ones, but it is uncertain factor, that only time will tell whether your purchase gave you good value or not. However, price is a factor – perhaps the only one – that the consumer has in assessing the (perceived) value of the shoes.

As a company or trader, this becomes an important thing to consider, especially with regard to pricing strategies. A low price means that people also perceive the value as being lower. Therefore, a low price does not, of course, mean higher sales in number. In fact, in some contexts it can be just the opposite. Too low a price can lead to reduced sales as “cheap” signals poor quality and value to the (potential) customer.

Price is therefore important in itself. Companies need to understand that a correctly set price is not about placement on a linear graph, but about finding the point where consumers’ perceived value is the greatest.

The next question then helps to know how this value can be found, where is the optimal price? The answer is perhaps obvious: You ask the consumers. By asking consumers to value different products and indicate what they would be willing to pay, you get results for price indicators for a specific product or service. You can then see the true balance between price and sales volume. This can be refined through a number of variables and it is also possible to work across different markets.

The results are analyzed and processed and at the other end, there is a graph that looks very different from a “standard” graph analysis. Instead of just a linear relationship, it becomes a two-way staircase where different price plateaus and price walls appear in the data.

So, we humans do not act according to the classical and traditional economic theory mentioned earlier. Psychologically, we perceive a low price as lower quality and thus of lower value. The price we as consumers are prepared to pay is about what we perceive as “worth the money.” In this situation, a higher price can be a sales advantage too good an opportunity to pass up on.

An estimated 95% of companies today use a simplified model for pricing their products and services. You guess, use cost-based pricing or predetermined marginal goals. However, if the actual willingness to pay is included in the calculation, the profit margin can often increase by 25–40%. Sometimes even more!

This means that the price of the products can be significantly improved. Businesses and traders, many perhaps pressed under small margins, can, through such an analysis, have a more stable basis for their pricing. Profitability is increased and they have better opportunities to develop their business.

Of course, this is based on the fact that the products or services are genuine. Trying to bluff consumers by setting a high price on a substandard product or service is not going to be a success. This will quickly have a detrimental effect and damage the brand significantly.

The importance of consumers’ perceived value may not be revolutionary. However, it is a new process how this value can be investigated and analyzed. In this, behavioral science and psychology play a greater role than the classical and traditional economic theory. Pricing strategy becomes a whole new ball game, once you know what the consumer is willing to pay for a product or service.

Per Sjöfors
Founder
Sjofors & Partners
www.sjofors.com

Categories
Growth Investing Personal Development

The Sweet Spot of Pricing

Expectation bias is a term used in behavioral economics; the academic field that covers how we as humans make our decisions, and in particular, how we make our purchase decisions. Expectation bias is a human trait and something that is innate within all of us. I have it. You have it, and most importantly, all your customers have it, too. Expectation bias works in a couple of ways; here is how.

If the price the buyer is presented with, at the point of purchase, is (substantially) higher than the buyer initially expected, then no purchase will occur. Conversely, if the price is (much) lower than the buyer initially expected, then the buyer will have doubts as to whether the product or service will provide sufficient benefit to justify the (low) price. This means that setting the right price for your product(s) or service(s) is a balancing act; not too high and not too low, but just right. It is important to hit the “sweet spot” with your pricing strategy. These price points where the price is deemed to be too high or too low is based on every individual buyers’ circumstances; everything from access to sufficient funds to prior experience with the brand (as a purchaser and user), to how badly the buyer desires your product(s) or service(s). However, since many of today’s buyers have shared experiences, have similar circumstances, and are influenced by the same type of sources of influence, then there will be a price point where most buyers will congregate around—that is the “sweet spot” that you are aiming for. This is the price where the maximum number of potential buyers say that the price itself becomes a message of adequate quality and/or benefit to the buyer, and the minimum number of buyers say that the price is too high. This is the price that will generate the highest sales volume for you. 

The price we pay for a product or service will also affect the benefit we expect to receive from the product or service; if the price is low, then we do not expect such a high-quality product or service and we will view the product or service has having little potential benefit; if the price is high, we automatically expect a very high-quality product or service as well as numerous benefits attached to that product or service. Although, the benefit we expect is often firmly established in our heads, but does not always match the reality of the product or service in question. A common experiment within behavioral economics is to have consumers that are in some kind of pain purchase pain medication. The effectiveness of the pain medication they purchase is then directly correlated to the price that these people pay. Or to summarize this type of behavioral experiment: a 5-cent aspirin is not nearly as effective as a 50-cent aspirin, as the 5-cent aspirin would be seen as having inferior quality and effectiveness compared to the 50-cent aspirin. Similar experiments have been done with wine; researchers put individuals in an MRI machine and examined how the brain’s pleasure center lights up, or not, based on what the subjects were told about the price of each bottle of wine that they sampled. They were served two different kinds of wine. One was a $6-bottle of wine and the other a $60-bottle of wine. When the subjects drank the $6-bottle of wine and were then told that it was a $6-bottle of wine, the brain’s pleasure centers did not light up. On the other hand, when they were told the wine they had just drunk was a $60-bottle of wine, the brain’s pleasure center lit up consistently! Conversely, when subjects drank from a $60-bottle of wine and were then told that it was a $6-bottle of wine, no pleasure was registered. Overall, the conclusions taken from these experiments is that the benefits we receive from a product or a service are directly correlated to the price that we paid for it. 

Companies who sell a product or service where the resulting benefit cannot, with 100% certainty, be measured, can then leverage expectation bias to gain much higher sales, often at higher prices at the same time as their customers’ satisfaction level is increased. (If you think about it, there are many products or services where the benefit the buyer gets cannot be directly measured.) In order to achieve this multipronged goal, it becomes paramount for you to be able to fully understand the willingness to pay among your buyers in a specific market. This can be done through price-specific, online market research that specifically measures the monetary value customers associate with your company’s product(s) or service(s). In such market research, respondents during an online survey will be asked a series of questions that, when the answers are subjected to statistical analysis, will accurately provide you with important and highly relevant information pertaining to what your buyers are willing to pay for your product or service, within a specified market that your business is engaged in. 

This, however, is just the first step. A very important step none the less. 

To further understand how it is possible to increase your sales at higher prices, the willingness to pay measurement must in turn be segmented. In great detail. What this means is that the willingness to pay data from respondents with the same preferences for your product or service features, benefits, or even marketing message preferences are grouped together and then willingness to pay for each (segmented) group is analyzed and contrasted with the other groups from the survey. The results taken from this in-depth analysis will mean that your business will be further enlightened and will better understand what features, functions, and benefits that generates a higher willingness to pay compared to other features, functions and benefits that your business offers. Also, you will see what specific marketing messages and sales channels will drive a higher willingness to pay for your product or service. These results will also show you what kind of buyer and what circumstance around them will affect their willingness to pay, which they take into consideration before potentially purchasing your product or service. As a further example, think about how a different circumstance may affect willingness to pay, consider a commodity like gas, for instance. If your gas tank is nearly empty and you are on the way to the hospital with your sick child, your willingness to pay to fill up with gas is likely higher than if you were visiting your in-laws, with a fully-healthy family!

So, in closing, in-depth understanding of a market’s willingness to pay and being segmented both by-product or service features and also taking into account the unique variables attached to each buyers’ profiles will enables your business to target potential buyers better, to optimize your market strategy better and to get your pricing strategy better, so that you hit the “sweet spot” for yourself and your customers. Having done all this, it will all lead to your ability to increase sales at higher prices for your products and services. 

Per Sjöfors
Founder
Sjofors & Partners
www.sjofors.com