Entrepid

I had a conversation the other day with a client in which he was lamenting his difficulty in securing supply. This client takes a partially manufactured item and processes it into a completed specialty item for sale.

Making the partially completed part takes millions of dollars in equipment and the industry is dominated by large ($100+ million ) organizations. The specialty business my client is in consists of small companies with annual revenues between $500,000 and $1,500,000. Since the large suppliers are going after mass markets, supply for the specialty items has been problematic since the beginning of time.

My client has done a better job than his competition at securing supply, but he still spends a great deal of his time on the effort. As we were talking, it hit me that THIS is his competitive advantage. Doing the difficult thing – the thing nobody else can do.

It made me think that just about every business has something difficult, something that can be marketed and delivered, that can separate them from the competition.

The software company that spends the time to make the interface intuitive.

The landscaper who sweeps up the clippings instead of spreading them around with a blower.

The appliance repairman who shows up at a specific time, not within a 4-hour window.

The blogger who posts something worthwhile every day. (I’m not above preaching to myself.)

What difficult thing can you do to distinguish your company in the marketplace?

The folks over at FreelanceSwitch have a slick Freelance Hourly Rate Calculator. I say slick, because it’s a nice piece of software, but I think it gets the order of things backwards.

It’s actually pretty common for small businesses (and consultants and freelancers) to attempt a cost-plus approach to setting prices. It’s easy to add up all your costs, put in a profit percentage, and voila!, you have the price you want to charge. Unfortunately, the real world doesn’t always co-operate.

The price you can charge your customers is limited on the upside by “value” and competition.

Value is a slippery concept, but even if your customer doesn’t have a firm number in mind, they do have some notion of what your product, service or time is worth. Whether or not this is enough to cover your costs is of no concern to them.

Think of it this way: if a prospective client approached me to do several months’ worth of backlogged bank reconciliations and I quoted them a rate of $175 an hour, I doubt very much they’d engage me. Bank reconciliations don’t have a “value” of $175 an hour.

Which brings up the second price limitation: competition. The prospective client could certainly find someone else to do bank reconciliations at a much lower hourly rate – maybe $20 or $25 an hour. Even if they’re not as efficient at bank recs as I am, their total cost will still be much lower.

So, your price is limited by both the value of the product or service AND by your competition – you get the lower of the two.

But, maybe your value is very high and you either don’t have much competition or they charge high prices. Why would you want to limit your income to some cost + profit level when you could possibly charge more?

I can see two bad results from using the cost-plus approach. Either you price yourself out of the market and don’t get enough business, or you underprice yourself and leave money on the table. Neither one is a good result.

That doesn’t mean I think the calculator is a bad thing. It’s a useful tool to see if the prices you plan on charging are enough to cover your expenses. If not, you need to rethink your business.

Hat Tip: Lifehack.org

New articles for the May edition of SCFO Monthly are posted. You might find either OODA Loops Don’t Get Soggy In Milk or Somtimes You Have To Fire A Customer of interest.

Every month I’ll write two or three articles of interest to small business owners and the people who advise them. If you’d like to receive the newsletter via email, here is the link to sign up.

Rob at Business Pundit has an interview with Laurence Haughton, co-author of It’s Not The Big That Eat The Small…It’s The Fast That Eat The Slow.

You should read the whole interview, but here’s a taste:

Speed just keeps gaining momentum (as a competitive advantage). Why? Because:

1. Slow costs more. Every minute we can take out of manufacturing time, stocking time, get-to-market time, and customer response time saves us money and makes us money.

2. Speed is the ultimate customer turn on. Everyone is short of time. We hate delays, long lines, out-of-stocks. We love finding what we want and getting back to work (or play) fast. And we’ll pay for speed.

3. Speed is the one advantage that the big competition can’t duplicate easily. Big companies are bureaucratic, dysfunctional, and self-absorbed. They don’t listen, they are slow to change, and they kill momentum and initiative. Don’t copy them.

Rob also has a link to a free webinar that Haughton will be giving on speed as a competitive advantage.

Lagging Indicators are those pieces of data that tell us what happened. They’re history.

The most common collection of lagging indicators that business owners are familiar with are the financial statements – Balance Sheet, Income Statement and Cash Flow Statement – along with the other management and financial reports pouring forth from the accounting department.

If you’re like a lot of companies I come across that are transitioning from small business to small enterprise, you get your financial statements for the previous year in April July. So not only are your indicators history, they’re ancient history. That’s a tough way to manage a business. Read the rest of this entry »