Chapter 24 How to know what to charge for a bologna sandwich

WHETHER YOU SELL products or services, you undoubtedly have confronted the question of how to price your wares.

Pricing methodology is both an art and a science, with a little bit of good judgment thrown in. Establishing good pricing in the beginning is important, because it is easier to lower prices than to raise them. Some, but not all, of the variables to consider are: costs, customers, competition, quality and profits.

Costs: For starters, you must know your costs, both directly related to producing and selling the product or service and the indirect costs, which are everything else (overhead). Selling a product or service below cost results in a loss. Duh! But how do you know your true costs? With some products, it's easy, with others, not so much. If you have a restaurant, how much does it cost you to make and sell a bologna sandwich?

To have an accurate handle on your costs, create a spreadsheet and include everything. Start with direct costs, the costs of raw materials that make up the product. For that bologna sandwich, you need to know what the two pieces of bread cost, based on what you paid for the loaf of bread. Do the same for all the ingredients.

What are the labor costs involved? Keep track of every task completed for a period of time (a week, perhaps) to figure out exactly what it costs to make X number of sandwiches. Remember to include payroll taxes. This will give you your gross profit (or loss), based on your selling price.

Now, factor in your overhead -- all of it, including debt service! Allocate your overhead to the lowest common denominator: in this case, making a sandwich. For example, if your overhead is $4,000 per month and you make 4,000 sandwiches a month (assuming this is your only product), then $1 of overhead should be considered an indirect cost for each sandwich produced.

Adding up your direct and indirect costs will let you know your true costs, fully loaded.

Customers: Customers are price-conscious. Are you going to have the lowest prices, the highest quality and convenience -- and what about service? Are customers willing to pay your asking price for your products/services? Will they pay more? Is there a line at your door?

Competition: What are your competitors charging for the same or similar products/services? How do you react when a competitor discounts prices? Under-pricing may be devastating to your bottom line; over-pricing may be even worse. Shop your competition, because you need to know what they charge.

Quality: If you charge more, is it because your bologna is really better? Do you want to be known for having superior products? Decide whether quality is your niche or if you are the low-cost provider.

Profits: Remember, you are in business to make a profit. But how much profit? How much should your sandwich sell for? How much is your sandwich selling for now? Are these prices comparable, and are you making a profit? If not, adjust accordingly.

Consider what margins are common to your industry. Are you selling a commodity, something that can be had everywhere? If yes, then you need to price competitively. If your product is unique, or hard to come by, and you have few competitors, you can generally charge more. You can generally raise prices to cover additional costs or in response to increased market demand.

Get customer feedback: Find out where you fit in the positioning continuum. Are you thought of first, last or somewhere in the middle when a customer thinks of your product? Test price to see what works best. If you reduce your price $1, how much more will you sell, and is it worth it? See if it brings you increased market share. If you raise your price $1, how much less will you sell? Is this decrease acceptable?

Avoid price wars: Unless your strategy is to try to knock out a competitor, this is a zero-sum game. Pricing wars benefit the consumer, not you.

Coupons and Groupons: A coupon with a good offer will bring in traffic. But consider whether you are bringing in existing customers who would frequent your establishment anyway, only now at a lower profit. Again, you must know your costs so you will know how much you gave away.

A Groupon or equivalent will pre-sell a fixed number of special discount deals and the Groupon company will keep half of the money. Some people will buy a Groupon and never use it, pure profit for you. Groupons may be a good way to attract new customers and will generate immediate cash flow, as you are paid up front.

Remember that if you are selling a product for $20, it will now cost the customer $10 with the Groupon, and you will get half of that, or $5. This is a 75% discount, less the Groupons bought and not redeemed. However, other items may be purchased from you at regular rates by the Groupon customer.

How much is that bologna sandwich? I'll take two, with mustard please.

Chapter 25

Business negotiations' goal should be win-win

Published: Monday, August 18, 2014 at 1:00 a.m.

If I negotiate a deal that I consider to be favorable for me, does that mean the other party didn't do so well? Not necessarily.

How do I know if I got the best deal possible?

What is the secret to good negotiating? Should I try to get the best deal that I can and the heck with the other party? If our interests are opposed, and there is give and take, should I take as much as possible? If not, why not?

Example: I want to print brochures for my company, so I obtain three quotes. Prices are all over the place.

I select the lowest price. The job is printed on low-grade paper, resulting in poor quality. Consequently, I am unhappy. I don't think I got what I paid for. Maybe I forgot to specify the paper for the job; perhaps I didn't know what to ask for. The printer never asked.

Some things to consider:

Send out an RFP (Request for Proposal) and make sure you are getting an apples-to-apples, exact quote. The devil is in the details, so you need to include the exact parameters for a bid.

The lowest price isn't necessarily the best price.

Penny wise, pound foolish.

There are some areas where you don't want to compromise, especially when safety is concerned. If you don't believe me, just ask Mary Barra, CEO of GM, about its massive recall, costing more than $3 billion, caused by using inexpensive but faulty ignition switches.

All small businesses have limited funds, some more limited than others, but limited, nonetheless. How you allocate those funds can make the difference between success and failure. Without deep pockets, a critical mistake can be your last.

Compare with other businesses similar to yours.

One of the best ways to determine if your spending is in line with other, similarly sized companies in your industry is to look at a breakdown of your expenses as a ratio.

Using data from Risk Management Associates, formerly known as Robert Morris Associates, you can look up your industry and compare your ratios to the sample data ranges. To do this, you need to know your industry's NAICS (North American Industry Classification System) code.

All banks have access to this information, as does our local SCORE chapter. This comparison will enable you to see how you stack up in relation to other similarly sized businesses in your field. Trade association data might also be available to provide comparative metrics. If your numbers are out of whack for businesses similar to yours, the strategy is to make meaningful adjustments that bring your company back in line within the average range.

Win-win. It makes sense to pay a fair price and have both parties involved in the transaction satisfied that they got a good deal. Often known as win-win, this mature thinking promotes complementary, sustainable relationships where each side gains value.

Win-lose. This is often short-term and not sustainable. Yes, you might get a great deal once or twice, but if your vendor goes out of business, is that really going to help you? It certainly did not help them. If this happens, you'll have to find replacement vendors, and you may pay more in the long run for that privilege. And this doesn't even begin to consider any qualitative factors.

Lose-lose. Time to walk away.

My price, your terms, or your price, my terms. The relationship of price and terms can be an effective tool for negotiating and developing a win-win relationship. If the most important variable for your business is cash flow, perhaps you are willing to pay a little more for better payment terms.

Give and take is the key. This is often true in a lease contract in which you are looking for a fixed payment amount and might be less interested in the length of the agreement.

Ask the right questions and you'll get the right answers. If you ask good questions to better understand the other party, you will be in a better position to create options that are specific to the other party's needs. These options will enhance deal appeal.

Anchoring. This is what happens when the other party says you will pay $12 to $15 for that widget, and you focused on the $12 and never heard the $15 mentioned. The best place for anchoring is overboard. Be open-minded and flexible. Perhaps the $15 will get you a better product with the bells and whistles that will work best for your business.

Favorable outcome. In the end, it is the favorable outcome you are seeking. There is nothing wrong with this outcome being favorable for both sides.

Be willing to compromise and make strategic trade-offs. Don't be afraid to walk away from a bad deal. Always know what your alternatives are.

Happy negotiating!

WHILE HAVING LUNCH, a friend suggested that I write about using Linked-In as a business tool. Though I'm not an expert on LinkedIn, I have increased my usage and my connections have grown from about 57 to more than 500 in a little over a year.

LinkedIn is the largest professional social network in the world, with more than 300 million connections, and it is great for building relationships and marketing a business.

There are many books on using LinkedIn, but I will cover tips I have learned through personal experience, things that most people probably don't know that can be helpful to you for your business.

My comments are applicable to the free version only. Professional recruiters may pay thousands annually for various upgrades. These comments focus first on what you should do, then on how to search, on LinkedIn.

In online searches for your name, your LinkedIn profile will usually rank at the top of search results. Create and maintain a LinkedIn Profile.

Showcase your skills and experience -- think in terms of branding yourself.

Use a professional photo for your profile.

Use strategic keywords in your headline.

Complete your profile to build a strong professional identity.

Keep your profile current and update it as changes occur.

Change your LinkedIn Web address to: LinkedIn.com/in/YOURNAME/ by going to your Profile page, choosing to "Edit" the page and then "Edit" the Web page name (below your image).

Include your email address under Contact Info.

Add connections liberally, by extending and accepting invitations to connect. You will benefit by connecting to your connections' contacts.

Endorse and recommend others.

Ask people you have worked with for recommendations.

Add links to relevant articles and blogs you have written.

Join user groups, up to 50.

Join your customers' user groups.

Start your own group, in which you control the discussion.

Participate in discussion threads in areas that interest you.

LinkedIn is not a résumé. Treat your profile like an ad. Highlight your work.

Have five or more endorsements for your skill sets.

Create a business page and own the domain name.

Do not sell, do not promote.

How to search on LinkedIn:

By clicking on the dropdown box with 3 horizontal bars to the left of the main search box at the top of the page, you can focus a search on: people, jobs, companies, groups, universities, posts or your inbox.

If you search universities, for example, without putting in a specific name, your results will yield 25,162 universities. If you refine by selecting Harvard Business School, you can explore the careers of 69,728+ alumni. You can see where they work, what they do and where they live. You can select "More" to expand the details and view photos. Pretty neat!

Another way to search is by selecting the "Advanced" tab to the right of the main search box. For example, if I want to find CEOs to invite to my CEO Roundtable, I can de-select first connections and search on my second and group connections. On the left side of the page, I click on the "Title" input box and type in CEO, and then I select "Current" from the box that shows up below the Title box. I can scroll down to "Postal Code" and input my zip. A new input box labeled "Within" pops up, and I can select within 10 miles. Now I click on 'Search.'

This search resulted in identifying 648 CEOs within 10 miles of my zip code. If I want second connections only, the return is 595 CEOs. First connections only reveals 26 results.

I can send a message to my first connections, and I can contact second connections and seek to establish them as first connections. I can then email or call them to invite them to the CEO Roundtable.

Using referrals:

From my search results, I may decide to consider Mary X. I've never met Mary, but LinkedIn indicates we share 13 connections. Before I communicate with Mary, I will look at her LinkedIn profile and decide whether I want to contact her as a prospect to join my CEO group. I select the highlighted "13 shared connections" link to see who we both know among my first connections.

If I decide that I do want to contact Mary, when I talk to her, I will mention that she may know Sara H and Andy F, my first-level contacts. She may or may not. The reason for this is that Mary might have received a business card at a meeting a year ago and can't recall Andy but she does remember Sara.

LinkedIn is a powerful business tool that has caught on for good reasons. Take the time to create your comprehensive profile and then experiment with the search capabilities.

You'll be glad you LinkedIn!

– Wimpy from the "Popeye" comic

Wimpy was using credit before credit cards were around.

Cash flow represents the movement of money into and out of your business. The sources can be from operations, investments and financing. This is often considered the most important metric, because a business without cash is simply out of business!

There are only two ways to improve cash flow: more inflow and less outflow. Cash flow analysis (projections) can be used to determine the amount of start-up capital needed for a new business. Compute monthly, at a minimum, until positive cash flow is achieved.

There is often confusion about cash flow projections and budgeting; they are not the same thing.

A budget emphasizes what you expect to spend over a specific period of time (usually one year). Cash flow emphasizes when you expect to spend the money and is a real-world number.

A budget can be compared to a traffic light with clear signals such as stop, caution and go. A budget doesn't represent real-world numbers (only estimates) of what is expected to happen. Cash flow, however, is like a stop sign: You have to decide when to go, based on traffic, and the traffic is always changing.

Run the stop sign and the results can be catastrophic. Let's examine cash flow in more detail.

Cash in -- Any money that comes into the business checking account, whether derived from cash received, accounts receivable collected, advances from a credit line, borrowed money (a loan), equity or owner invested funds into the business.

Cash out -- All business expenses paid out, including payroll, draws by owner, etc...

Change in cash position -- Essentially, your checking account at month's end, adding inflows and subtracting outflows to get an ending balance. This amount becomes your beginning balance for the following month.

It may be helpful to classify entries with labels such as cash from operations (either from sales or accounts receivable); and cash from equity, bank or other loans, or owner investments. This enables you to more easily track changes in different categories and make adjustments.

If you are fortunate enough to have a "cash-rich" business, as few do, then you have several options: You could pay down debt (if any), you could invest a portion of the excess cash and earn interest on these funds, you could pre-pay invoices requesting greater discounts from vendors, you could give employees raises, or maybe you could take more for yourself. How about a 401K plan?

If cash is tight in your business and you are experiencing a "cash crunch," you may want to do a cash-flow analysis more frequently, perhaps weekly.

Improving cash flow

So how can you improve your cash flow? Here are 22 ways.

1. Sell more products or services. One of my favorite sayings is, "Sales cure all problems." This assumes that your margins are sufficient.

2. Be cautious when extending credit.

3. Accelerate accounts-receivable collections. Get on the phone, if necessary.

4. Charge interest for late payments.

5. Seek up-front payments or deposits, if possible.

6. Accept credit cards to get paid sooner.

7. Take vendor discounts if your cash flow is strong.

8. Delay payments to creditors or align payments with receipts.

9. Negotiate favorable payment terms, such as 60 or 90 days or more.

10. Use alternate financing, such as factoring receivables.

11. Lease equipment instead of purchasing.

12. Establish and use credit lines from financial institutions.

13. Finance purchases.

14. Arrange private loans.

15. Sell an equitable interest in your business.

16. Optimize inventory levels. Use JIT (just in time) where possible.

17. Operate more efficiently.

18. Acquire goods less expensively.

19. Sell assets.

20. Cut workers' hours.

21. Outsource select business activities requiring less cash.

22. Get your billings out promptly.

Many years ago, I remember having to sell my Mercedes Benz to make payroll. Fortunately, I owned the car and was able to get $17,000. I then leased a new car. Can you guess what happened? My employees saw that I had a new car and all wanted raises. Of course they had no clue what happened!

It is critical to know your cash position now as well as projections into the future. Develop a strategy to meet your short-term and long-term cash needs. For example, what will you do when business slows down? If you have a seasonal business, have you prepared for the lean months? Timing is critical to cash flow.

Whatever you do, do not run out of cash. Cash may be king, but cash flow is the queen. If you play chess and you lose your queen, it is usually game over.

Checkmate!

Chapter 28

Why 'Don't reinvent the wheel' is bad advice

Published: Monday, September 8, 2014 at 1:00 a.m.

The wheel has been around for 9,000 years, give or take a millennium. According to Wikipedia, wheels are used in conjunction with axles; either the wheel turns on the axle, or the axle turns in the object body. The mechanics are the same in either case. To reinvent the wheel is to duplicate a basic method that has already been created or optimized by others. An attempt to reinvent it would be pointless and add no value to the object, and would be a waste of time, right?

I disagree!

Whether used for moving giant stones to build pyramids or using the trackwheel to make music louder on an iPod, wheels serve many functions and have no doubt improved countless lives over the years.

The famous saying, "don't reinvent the wheel" conjures up the very basics of the simplest of products, the wheel that cannot be improved and should not be reinvented. While the very basics of a wheel depict its structure and its strength, a reinvented wheel can be a good thing. Due to the many uses a wheel can have, improvement is something that can and should take place for a wheel with a specific purpose in mind,

Consider the oval-shaped cams on an engine's cam shaft, an adaptation of a wheel. Now think about trying to harness the power of pistons with round cams on the shaft.

So, reinventing the wheel can and should be done continuously, with varying degrees of modification. As I like to say, "just change the spokes," to improve a product or method.

Can you imagine a life devoid of watches, whirring computer drives, Hula-hoops, gyroscopes, bicycles and cars? Countless improvements stem from reinventing the wheel.

Such reinvention relates directly to your business, to your products, and to your success.

Can you genuinely improve any aspects of your business by reinvention, change, addition or deletion? Apple's reinvention of the cell phone made its own signature product, the iPod, obsolete. In 2005, the iPod accounted for 45 percent of Apple's revenue. The decision to combine the iPod and a digital camera into a cell phone made the iPhone one of the most successful products of all time.

With innovation after innovation, Apple figured out ways to simplify what others made complicated.

Another good example of this reinvention is evident with automobile tires. Tire evolution has produced tall tires, fat tires, tubeless tires, wide-oval tires, radial tires, low-profile tires, safe tires, rain effusing tires, long-wear tires, high-performance tires, racing tires, slick tires and low-rolling-resistance tires, to name a few.

Each change sought to improve upon the basic design to achieve greater speed, better cornering, blowout resistance, better looks and longer life. How about sustainable, recyclable tires? Perhaps tire-disposal fees will be eliminated in the future.

Now, doesn't this wheel-reinvention thing create a need for better brakes? How about rims made out of aluminum, steel or titanium, or fancy reverse spinners. Do you remember mirrored half-moons?

Donut spare tires for short distances, run-flats and cigarette- lighter air pumps to temporarily re-inflate flat tires often replace regular spare tires.

Apply this reinvention thinking to your business processes, products -- everything you do.

Will product changes create new business opportunities (spinoffs) or will they disrupt or kill existing categories? Can you connect dots of existing technologies, perhaps with a twist? Think creatively, think strategically. Consult a patent attorney if you think you have something unique.

If you don't reinvent, your competition will surely surpass you. Experiment, make mistakes, test, test, test. But R&D should be done as inexpensively as affordable.

Think of reinvention as improving, though sometimes you may take a step backward. The important thing is to recognize your direction, forward, backward or sideways. Are you improving your product, method or services, or are you taking a step backward or sideways? Ask what else your product can be. Will your reinvention create a new paradigm, kill a category or is it simply an iterative improvement?

Everyone knows Post-it Notes, but not necessarily the story behind its success.

Initially, this product was a failure by 3M to develop a stronger adhesive. The product adhesive stuck but could easily be removed without damage to pages or to the note. Today Post-It Notes are one of the most successful office products of all time.

Do reinvent the wheel. Change the spokes!