Do you really need a Marketing Strategy?

Potential clients constantly ask me to develop a marketing plan for them that will really work and deliver more customers.  So, I ask them to describe their marketing strategy.  Mostly they cannot do this.  They just want more of any type of customers.  Just bring them in.  So I ask them what is unique about what they sell/do or unique about the way they do it?  After some discussion, they can usually tell me.  Often though, it is not very compelling.  So finally, I ask them who their customers are now?  Are they middle income or affluent?  Where do they live, why are they their customers?

Marketing is going to be ineffective until it is possible to describe a target set of customers, understand what they need and can delivery it in the way they want.  In short, that is what a marketing strategy is.

A marketing strategy is the framework by which a company increases sales and achieves a sustainable competitive advantage.  It is based on a company’s Unique Selling Proposition (USP) which requires a review of customer needs, competitors, opportunities, consideration of all of the internal and external environmental factors, identification of constraints (resource and other) and the evaluation of other factors including technological, economic, legal or political.

When you figure out what you are really selling, (e.g. convenience?), have a unique twist to doing it, and know who your target customer is, you have the outline of a marketing strategy.  Your special sauce, if you will, is best if it is difficult to imitate or it won’t work for long.  This is where the evaluation of your competitors and potential competitors come in.  It is also the place to understand what you do really well so you are building on your strengths not your aspirations.  This is where something like a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis comes in.  This helps you figure this out.

In any case, taking the time to develop a well thought out marketing strategy is time and money well spent, because without one, you will be wasting your money on developing and executing a marketing plan that just won’t work.

Getting More Customers

Every business owner wants to get more customers.  The question is how to get them.  Assuming that you already have both a marketing strategy and a unique selling proposition (i.e. the reason someone should buy from you), then the next step is to have a solid marketing plan.  A marketing plan lays out the actions to be taken to get more customers and more sales.  Of course, every company today needs a web site so customers can find them online and most companies need a presence on social media.  Both should offer compelling reasons why a prospective customer should want to do business with you.  If you are a company selling to consumers, you need to get customers’ attention and drive them to action.  This can be accomplished by a combination of online and offline activities. For companies selling to other businesses, I will cover this topic in another post.

Online activities can include running paid ads, search engine optimization, social media campaigns, email campaigns, text messages, etc.  Paid ads are ads that come up when a consumer takes a specific action on the web such as searches for something.  Search engine optimization strives to get your company to come up on the first page of Google (and other search engines) in the organic listings.  Organic listings are listings that are not paid for when customers search.  Social media campaigns can range from efforts to keep your brand top of mind, to company pages, other paid advertising, the use of influencers, etc.

Offline activities can include paid print, television, and radio advertising, direct mail, networking, expos, the use of a direct sales force, etc.  You are no doubt familiar with these.

To be most effective, you will need to coordinate these and have a comprehensive marketing plan.  Unfortunately, each of these methods is complicated and most require specialized skills.  I have seen companies spend a small fortune on both online and offline marketing with little or no return.  So be smart and understand each method or if you don’t have enough time available, get some help.

Pricing Changes Lead to Increased Profits for Small Business

 

In a previous post, I provided an overview of the role of business modeling in improving profitability.  So in posts for the next several weeks, I will be providing examples of the kinds of insights business modeling provided and their impact on increasing profitability.

 

For a multi-location day care provider, the model showed that the key to profitability was to increase capacity utilization.  When running the day care, almost all of the costs were fixed no matter how many customers they had on any given day.  If a lot of people came in, it was highly profitable because the revenue was much higher but the costs were almost level.  If they had few customers, the location lost money that day.  This led to pricing changes so that customers had a significant incentive to sign up for a monthly service rather than a day at a time.  Even though the monthly service was discounted, and provided the lowest cost per day to the customer if used for each weekday, it provided much greater revenue.  In addition, the daily price was raised to discourage drop-ins. In this way the pricing was set up to incent customer behavior to be consistent with the cost of doing business.

Small Business Estimating, Estimating, Estimating!

I can’t tell you how many contractors, plumbers, painters, electricians, woodworkers, cabinet makers, flooring contractors and specialty manufacturers I have worked with who leave a lot of money on the table because they don’t engage in formal estimating.  So much money, that many of these business owners were either living hand to mouth or flat out losing money.  Of course, when they called me in they thought they were making money but somehow never had any cash to pay bills or themselves.

You don’t have to be a management consultant to think that something was wrong.  One of the things that I did for each of them was to institute a formal estimating process.  This may have taken the form of making up a set of Excel estimating templates that covered a range of situations or setting up more formal estimating software and creating the processes around it.

Of course, getting all of the costs for estimating took some detective work.  Some of the obvious things like labor and cost of materials were not too hard to figure out (as long as you don’t forget payroll taxes, fringe, an allocation for paid time off including vacations and holidays, etc.).  Next, we have the proper allocation of space to work in, and money to maintain and replace tools.  Then we have trucks that have to be insured, paid for, maintained, fuel, etc. worked out to a per job cost.  Don’t forget overhead, advertising (the cost of getting that customer), and so on.  If you leave something out or your estimates understate certain costs, you may not see the full improvement that you want.

And don’t tell me you have been doing since the invention of the wheel and you have it covered.  I have not had a single client yet that did not see big improvements in profit with the methodical approach to estimating that I helped them with.

Once you have worked all of this out, the next challenge is to properly estimate how much of each resource you need for a specific job or order when estimating a new job.

Now, here is the biggest tip in this whole article: You must then track the actual hours used by sub-activity (e.g. prepping a room for painting) and the actual cost of materials and use of major equipment for each and every job.  Enter this info at the completion of each job and compare it to what you estimated.  Account for any change orders.  USE THIS INFORMATION TO BETTER ESTIMATE THE NEXT JOB.  After all, if you price too much, you will lose out to competitors when bidding.  If you don’t charge enough, you won’t cover all your costs and make as good a living as you deserve.

 

The Role of Business Modeling in Improving Profitability

Most business owners believe that raising sales or lowering costs will lead to increased profits.  The reality is that it depends on many factors such as the cost of raising sales, the cost of providing additional units of a product or hours of a service, etc.

Relationship Between Sales and Profits in Increasing Profitability

For example, in manufacturing, the incremental cost of producing additional units of a product might be lower than their average existing cost in which case as long as the cost of acquiring additional sales was not higher than the acquisition cost per unit today, the result would be increased profits.  Of course, the reverse might also be true.

In a service business that depends on people to deliver a service, the cost of additional hours/workers might be higher than the cost of the existing staff.  It might require more office space, trucks or other equipment.  Let’s not forget the cost of acquiring the new sales.  Advertising, discounts, sales people, new locations, etc. all cost money.

If you are able to increase the perceived value of your product and can increase prices, all other things the same, this will increase profits.  However, if it is achieved by celebrity endorsements or extensive advertising to establish a brand name, the situation presents trade-offs.

So while increasing sales often will increase profits, there are many situations where this is not true.  But more than these simplified examples, it is the interaction of all of the moving parts of a company and its customers changing at the same time that determines the outcome.

Focus

A key factor in efforts to increase profitability is that the business owner can only focus on a finite number of profit improvement initiatives at a time.  So understanding which actions they can take that will have the greatest effect on profitability and how realistic it is to carry out those actions with the financial resources and staff available to them is critical.

Business Modeling

This is where business modeling comes in.  A business model is a mathematical representation of a business and captures all of the relationships of pricing, marketing, cost of production, servicing customers, etc.  It is NOT a set of projected financial statements though the model contains enough information to produce these.  Much analysis is required to derive the relationships that make up the model.

Once a model is constructed, the next step is to validate that with inputs that reflect current conditions, the model produces results that approximate current results.  Additional tests to verify that past results can also be reproduced can be valuable.

Then what-if scenarios can be run to determine which factors most affect profitability.  As someone who has be building and using business models on and off for thirty years, I can tell you that predicting which factors are most important before constructing the model is not that easy.  While I can make a list of the ten most likely factors that will affecting profitability before the model is constructed, it is often the case that at least one more factor emerges from the sensitivity analysis.  In addition, it is difficult to predict which of the ten will be most impactful.

Planning and Execution of Profit Improvement Initiatives

Once the key factors which affect profitability are identified, they need to be vetted to figure out which are feasible within the resources available, the likelihood of success of each, the sequencing and timing.  The last steps are to craft plans (marketing plans, process improvements, pricing strategies, etc.), begin execution and monitor the results.

As you can see, business modeling is a valuable tool in improving a company’s profitability.

I will be exploring many topics that affect a company’s profitability in this column such as pricing, promotions, cost savings and efficiencies, capacity constraints, product or service quality, support services, marketing effectiveness, etc.