Monday, August 31, 2009

Cannibalization of Existing Sales

The question on long term strategy is not if it is successful, but if you are still alive.
~Ron de Jonge

I was meeting with the owner of a company who sold levels of services priced from $20 to $50. While the price was low, he typically sold 50,000 services a year from a very small location that was almost labor-free. In an effort to increase his customer base, he shifted many of his services into the quieter hours from 8-10 AM and 6-8 PM by lowering the price of the low-end service, setting it at $15 during those time periods. He felt very strongly that this was a great plan since the number of services sold was up but his revenue was down slightly. He also said that a few customers liked this low price so much that they had this service two or three times a week.
Cannibalization is a business concept where you devour your own sales to preserve or increase market share. BlackBerry is a firm that really understands this concept. They continue to roll out new BlackBerries knowing that by offering new products, some of their existing phones are going to suffer losses in sales. However, by offering new products in new markets, they cover the cost of this cannibalization with the new sales and they stop competition from entering the market.
It is vital that you understand that you must run the numbers to determine whether cannibalization or market expansion makes sense. For example, if you are going to offer a new product and you know that you are going to lose 50 percent of your revenue on an existing product line, the new product must be able to generate a return high enough to cover the cannibalization cost.
The one exception to this rule, however, is that sometimes you just have to eat the cost of cannibalization simply to maintain market share. For instance, BlackBerry came out with the Storm, a touch sensitive phone, to compete with the iPhone. They knew that they just could not afford to let Apple keep grabbing up market share, and they were not worried about the cannibalization cost. In this case, maintaining market share and market presence was the goal.
When considering cannibalization, ask yourself whether it is actually necessary. With the service example at the beginning of the column, it turned out that this entrepreneur was not really bringing in more customers by offering the lower price at certain times. Instead, he was just shifting customers to an earlier time for a significant drop in price and margins. Customers would have come in anyway and paid $20 for the service, but for the lower price, it was worth it to them to come in during the specified hours. Bottom line, the reduced price was not serving this entrepreneur at all.
Cannibalization is an important business concept to understand when you are introducing new products or services. You must recognize this as a cost you incur with new product or service offerings. Now go out and make sure you have a way to evaluate this cost in any product line expansion.

You can do this!

Wednesday, August 26, 2009

Do not focus on too many areas in your business.

The man who succeeds above his fellows is the one who early in life, clearly discerns his object, and towards that object habitually directs his powers. Even genius itself is but fine observation strengthened by fixity of purpose. Every man who observes vigilantly and resolves steadfastly grows unconsciously into genius.
-Edward George Bulwer-Lytton

We are helping an entrepreneur who has been in business for over 15 years, but whose revenues have lately been on a free fall. I asked him to develop a marketing plan, and he had so many problems doing so. It just baffled me that this intelligent, bright man was having so much difficulty writing a marketing plan.

Given the difficulty he was having with the marketing plan, I went back to ground zero and asked him what his mission and vision statements were. Both turned out to be so general that they were of no value. During these conversations, he showed me the company brochure, which listed ten different, unrelated services that his company provided. I then understood why the marketing plan and other core statements were impossible for him to complete. There was no hope of having a focused message or a focused business while providing so many different services.

I asked him how he managed to get involved in all of these different areas, and he said that his clients had asked him to do additional work outside of his core strengths. In response, he went ahead and did these things and developed an expertise. He just thought the more services he offered his clients, the more business he would generate. Unfortunately, he just neglected to consider how trying to do too many things for too many different types of clients would dilute his efforts.

We spent one meeting just discussing which of the areas he was passionate about and which there was a market for. He decided to focus on business coaching. From this, it was easy for him to develop succinct vision and mission statements as well as a very good marketing plan. Once he was able to focus, the rest was simple. Without this focus, everything was just too scattered.

Now there is nothing wrong with having multiple product lines, but having too many will cause you to lose focus. The more you lose focus, the less control you have on your business.

Most entrepreneurs are great at spotting opportunities, and their natural reaction is to go after them as these windows may not be open forever. However, what each and every entrepreneur needs to remember and understand is that each new market thrust leaves less time to manage and run existing product or service lines. So instead of asking what the returns from the expansion are, the question should ask what the returns from the expansion are less the losses brought about by reduced effort on existing products or services.

Now go out and make sure that you have not over-expanded your offerings so that you can stay focused on your core product or service lines.

You can do this!

How to prepare for the ending of the recesssion

The rung of a ladder was never meant to rest upon, but only to hold a man's foot long enough to enable him to put the other somewhat higher.
~Thomas Henry Huxley, Life and Letters of Thomas Huxley

While the economy has not been doing great, there is no question in my mind that signs are pointing towards positive economic growth. The Consumer Confidence Index and the stock market are beginning to show some positive signs. Additionally, the Fed is talking about raising interest rates and other country’s economies are turning around. All of these factors indicate that we are starting to bottom out of this nasty recession.
Like most things, the spoils go to the person or business that prepares for these changes, and we need to start preparing for the uptick in business that is right around the corner. Jim Moran’s (founder of the Jim Moran Institute) favorite quote was, “The future belongs to those who prepare for it!”
One of the things that each business needs to do is revisit its strategic plan. I do a lot of strategic planning for companies, and I have yet to see a business preparing for recovery with a viable plan. These business owners have been occupied coping with this recession for the last 18 months; however now, each and every business should be planning for the turn-around. Bottom line, every business needs have a recovery plan incorporated into their strategic plan.
A recovery plan is the necessary preparation for the increase in demand and revenue that will accompany an economic turn-around. As part of this plan, there are two critical tasks that I think you need to start doing now: investing in technology and acquiring staff.
You have to be able to service your clients very efficiently as we progress, and you must have the IT infrastructure in place before the economic activity really takes off. Now is the time to verify that you have a plan to acquire the technology needed to deal with this increased demand? While you may not be able to afford all of this now, you can put a plan in place to add these necessities as quickly as possible once the funds start rolling in.
From a technology perspective, you should ensure that your server is capable of handling the additional demand, that you have software for customer relationship management (CRM), and that you have enough computers to accommodate a much larger staff. To weather the recession, I have seen many businesses reduce their IT expenditures by cutting back on adequate backups and current versions of new software. Now is the time to think about the areas that you have cut back and figure out how you are going to bring them up to speed, if not right away, sometime in the near future.
The second critical part of your recovery plan is the addition of staff, be it now or in the near future. Currently, potential employees are readily available and are willing to work at very reasonable rates. If you wait to hire staff until you need them – a recipe for disaster – your customer service is going to suffer. Hiring later will also mean paying a much higher price for new staff members, not to mention that the quality is not going to be as good as it is now.
With any staffing increase, training is a necessity. During the recession, you may have slowed training activities, but as you hire on new employees, you will need to ensure that these programs are put back in action.
Now go out and make sure you have a recovery plan in place that incorporates additions to both technology and human resources.
You can do this!


Monday, August 10, 2009

Is multi-tasking over rated?

“A hidden energy crisis threatens our world. Society throws people into chronic physical, emotional, and spiritual depletion. Multi-tasking lets us manage a deluge of very real duties, but it also jeopardizes the now.”
Judith Orloff

So many times I see multi-tasking listed among job requirements. Generation Y (roughly those born after 1980) prides itself on its ability to multi-task. How many times have you driven down the highway talking on the phone or even worse, texting?

This has always bothered me. I tend to want to want to multi-task all the time too, and yes, I have sent text messages while driving. I am not particularly proud of this, but in those moments, it seemed that it saved me time and made me more efficient. However, lately I have noticed that the more I multi-task, the less fulfilled and more stressed I feel.

There have been many research studies on this subject, and the classic example was done by Rubinstein, Evans and Meyer in 2001. They did an empirical study comparing how long it took to solve various types of problems (e.g., math problems) when participants switched from one task to another. They then compared this to the time that elapsed when participants stayed on one task until completion.

They found that multi-tasking was just not as efficient as doing one job until completion, the reason being that each time they moved from task to task, they had to catch up to where they left off. Interruptions and multi-tasking have a similar effect in that before you can resume the task, your mind has to return to where you left off, and this takes time.

Additionally, the study found that people who multi-task could lose 40 percent of their time. Although less time was lost when people multi-tasked between familiar things like driving and talking on the phone, the time escalated when they had to multi-task between complex problems.

I tried an experiment, and for one day, I did not allow myself to multi-task no matter how much I wanted to take that call or check my emails while I was driving. Later in the day, I pulled over (I spend most of my days in my car) and responded to my phone calls and then my emails.

At the beginning of the day, I felt very frustrated as I thought I was falling behind. However, as the day went on, I started to feel less stress, and a sense of peace just seemed to envelope me. On top of this, I was able to accomplish all I needed, and it even seemed as if I was able to get more done than I would have while multi-tasking.

This little experiment has confirmed for me that multi-tasking has a high cost both in terms of stress and productivity. From now on, I am going to minimize how much multi-tasking that I do. I know now that, for me, it is not efficient and it makes me feel like “crap.”

Now go out and try a day without multi-tasking. See how you feel and how much you have accomplished. If this one day is successful, then try to apply it to your every day. While clearly some degree of multi-tasking is always going to be necessary, the more you reduce it, the better and more productive your life will become.

You can do this!

Tweaking your website!

You ask about the important things to keep in mind: same as ever, with a task-based twist: what are the users trying to accomplish, what does the business need them to successfully accomplish, and what will the technology allow? If you can balance these three forces, you'll have a solid product.
-Christina Wodtke

There is no question that each and every business needs a website, but to get the most out of it, the site has to be periodically re-evaluated – annually at the very least, but quarterly is best. The web is changing so fast, and it is critical that websites be thought of as dynamic entities that must be changed and tweaked, rather than static elements.

Some neat eye tracking studies have shown that most people scan a page in an “F” shape pattern. They typically move their eyes horizontally across the upper part of the page and then move down a little bit and do another horizontal sweep. The last eye movement is a vertical scan down the left-hand column of the page.

Take a look at or for examples of website that take advantage of this “F” shape pattern. Both sites have great menu pull-downs across the top of the page as well on the left vertical column.

Probably the best website feature that is being used more and more lately is built-in video. HSN and QVC post the video of the product’s airing right next to the product description.

One of the things that each website designer must remember is that most people just skim websites and do not look for sentences but for critical words. Too much narrative is the kiss of death for a website. Viewers will not stay at your site. People do not want to spend their time and energy reading prose on websites. After all, how many times have we all selected “accept” to legal disclaimers without having a clue what we have accepted? Apple and AT&T Wireless have built their sites with this in mind. Go back and look at their sites, and you will have a hard time finding a complete sentence on their opening pages.

If you have to have narrative on your website, the best rule of thumb is to cut the wording by half. Use half as many words in each paragraph as you would use in conventional writing. For example, AT&T Wireless explains unlimited texting by simply saying, “Your Apple iPhone changed everything. Why limit yourself now? Text as much as you want- no overage, no worries.” They keep it simple and to the point.

Some of the things that you can do to improve the user-friendliness of your website are highlighting words that you want to call attention to and using hypertext links directing viewers to other parts of your site. Both AT&T and Apple make great use of these hypertext links. Because of these links, they are able to keep their homepages very clean while still giving the user access to so much information.

Now go out and make sure you have an effective website and plan to re-evaluate it every quarter.

You can do this!