Pricing Strategies

Many small-business owners operate under the delusion that they can be successful by selling their product at a lower price than anyone else. This typically will only work for large companies who dominate a market.

In this analysis, I have demonstrated some advantages of market-driven pricing strategies which focus on maximum profits. The intent was to demonstrate that there is high profit potential for small businesses who differentiate their products and then price accordingly. Once the significance of market driven pricing strategy is more widely understood, pricing strategy will become one of the most important pre-venture considerations.Here are a couple of examples of what typically happens to small business owners when they attempt to meet the challenge of establishing competitive pricing models:The owner of an exclusive women’s clothing boutique was experiencing a financial crisis. Even though her sales were brisk, and all of the six prominent women in the community frequented her shop, the business was not profitable. When the owner asked her local banker for advice, he told her to lower her prices to stimulate sales, and he lent her more money. After two more loans and two more price reductions, her business defaulted. At the time that she closed her business, she was charging prices which earned her minimum wage to create exclusive creations, one of which was worn to a presidential inauguration!Another retailer was puzzled by the fact that his interim reports always showed a profit, while his annual tax return showed huge losses. Initially, this business owner thought that his C.P.A.’s were helping him by saving money on taxes. What was really happening, however, was that his C.P.A. used an estimate of 50 percent for cost of goods sold (or a 100 percent mark up). In reality, the retailer was only marking up 33 percent, so cost of goods were actually 75 percent of sales. Naturally, the annual audit for tax purposes reflected reality. The retailer (who had opened a second location) thought that he had been borrowing money to expand his business, but in reality, the increased loans were used to cover operating losses.How should small-business owners determine the prices of their goods and services?Many people simply do not know, which may explain why pricing problems are so prevalent.
As a business consultant I have worked with the two business owners described above and many others who have experienced great financial losses that were directly related to their pricing strategies. I can understand their situations well because in the 1980s, when I owned a promotional business, my own miscalculation of prices led to my business’s unprofitability and eventual failure.In recent years, I have researched pricing strategies extensively. An increase in my understanding of pricing theory has led to a dramatic improvement in client services at my practice. Today, all of my customers have profitable pricing models and have seized a strong share of their marketplace. My goal is to help other small businesses to avoid financial difficulties caused by improper pricing.In this article, I would like to share my findings with you. First, I will discuss two traditional pricing methods that do not, in my opinion, work well for small businesses. Next, I will present two market-driven strategies that do seem to make sense for small businesses. The first is fairly well-known and has a solid reputation. The second is a new idea that is being presented for the first time in this article.Why “selling it cheaper” doesn’t workThe first of two ineffective strategies that I would like to discuss is the “I can do it cheaper” strategy. Why do so many small-business owners confuse low pricing with proper pricing?Maybe the answer is because it appears as though the easiest way to attract customers is by offering low prices. Perhaps another part of the answer has to do with the fact that low prices often work well for big businesses, and a distinction is not made between big and small businesses.However, we have all seen small retailers go out of business after trying to compete with WalMart or KMart on price. Harvard’s Professor Michael Porter, author of Competitive Strategy, tells us that “The presence of economies of scale always leads to a cost advantage for the large-scale firm … over small-scale firms … (page 15).”So why do so many small businesses charge low prices anyway? Porter says that small business owners “may be satisfied with a subnormal rate of return on their invested capital to maintain the independence of self-ownership, whereas such returns are unacceptable and may appear irrational to a large publicly held competitor (page 19).”I would like to approach the critical question of “Why can’t a small-business compete on the basis of price?” from yet another angle. I would like to look at it from the broader perspective of strategies for managing a successful business. Porter identified three different strategies that successful businesses have used: Offer the lowest price: Be the premier high volume, low-cost producer and underprice everyone else.Offer differentiationBe a high-volume producer, but differentiate your product by quality, design, or brand, and charge a higher price. Offer a sharper focus: Be a specialist who focuses on one segment of the market and caters exclusively to it. These are three examples of what Porter called “generic business strategies” and are market driven pricing strategies. In other words, in each of these cases, the pricing strategy has to fit the market. Before you can determine your price, you have to decide whether you want customers to select your product because you have the cheapest prices, or because you have the best quality, or because you have the best selection.As a small-business owner, which of these three strategies should you select? According to Porter, the first two strategies work only for high-volume businesses. Those who wish to build large volume by predatory pricing must have a bankroll which equals big business. Since it is almost a contradiction for a small business (other than a franchise) to be a high-volume producer who dominates a market, you are left with the third alternative. Your goal, then, should be to focus on a specific market segment and price accordingly.Low prices work for only those who have high sales volumes. The rest of us have to rely on other pricing strategies.Why 33 to 44 percent mark ups do not workOne of the worst collections of advice on pricing is found in some federal government information packages where retail examples use mark ups of 33 to 44 percent. It is true that many of the largest American retailers average a 37 percent mark up on cost. However, half of American retail establishments in 1987 were trying to survive on gross receipts of less than $150,000. (Statistics of Income, IRS).If a retailer with sales of $100,000 followed this advice, he or she would have only $25,000 to $30,000 to cover rent, taxes, utilities, phone, fax, computers, employee wages, owner’s salary, employee overhead, advertising and profit (assuming there are no stock losses, pilferage, mark downs or discounts).Does that mean that we should respond by saying, “Obviously, this retailer should increase sales”? No. We can’t deny the fact that $100,000 in gross sales is fairly realistic for many shops, when you examine the size of the facility, the location, the product line and the clientele.Rather, I would say that the problem is caused by the one-size-fits-all pricing formula, not by the sales revenues. Big business pricing strategies are not suited for small businesses. I would also like to argue that any pricing strategy that ignores market forces is incomplete. In other words, we need to ask: What will the market bear?Why and when you should “ride the price-volume curve”This pricing strategy works especially well for the small businesses that produce unique durable goods. (Durable goods are products that you don’t consume often, as opposed to non-durable goods, such as milk, shoes and paper. “Unique” goods are products that may be protected by a patent or a copyright, such as computer software, compact discs, art work, and “how to” video tapes. Often, academics use the term “monopolistic” instead of “unique,” which means that the product is so unique that it has a monopoly on a certain quality or feature.) Often, unique durable goods have a relatively short marketing life.Either the information is timely and/or the objects may be perishable or subject to fads. Basically, the idea is this: Start with a high price, and gradually decrease the price by calculated increments. Here’s an example which will illustrate exactly how to do it. Harry Hypothetical of Hypothetical, Inc. has developed a new product, called Dubegude. The Dubegude has a variable cost of $30 and Harry is in the process of trying to price the product.But first, let’s come to an agreement on our definitions of “fixed” and “variable” costs because they are an important part of this formula. Fixed costs are constant regardless of the volume sold. Rent is a good example of a fixed cost. To a certain extent, product liability insurance depends on sales volume so it is not constant at all sales levels. Variable costs increase in proportion to the number of units sold. Raw materials and direct labor are obvious examples. If a business must borrow money to build inventory to increase sales, interest could be a variable cost.Let’s say that Harry Hypothetical hired a marketing firm that takes into consideration market forces. First, the marketing firm developed a best guess at the price-volume relationship. Price volume relationships can be developed by surveying the prices of potential competitors and estimating their volume or, in the case of a new product, test marketing in various locations at various prices and noting customer response.As expected, the highest volume is at the lowest price and the lowest volume is at the highest price. Based on fixed costs of $250,000 and variable costs of $30, the marketing firm calculates the profit at various prices and the corresponding sales volume. The maximum profit is $130,000 at a price of $125 and a sales volume of 4,000 units.This method yields higher profits than those derived from mark up calculations, but it does not yield the maximum profits – yet – because you haven’t taken full advantage of the price volume curve developed in the market survey.What if we sold 2,000 units at $150, and then lowered the price to $125? We would expect to sell 2,000 additional units. (It would be 2,000 units instead of the 4,000 because we can assume that 2,000 units had already been sold.) As we continue to lower the lower the price to sell more units, we can accumulate profit from higher priced sales.Cumulative sales volume rises as we lower the price and the calculated profits. This is called “Riding the Price-Volume Curve.” The profits are 154 percent higher from this method. If we had simply charged $125, and never altered the price, profits would be $130,000. But, by starting with $150, and lowering the price by increments to $60, our total profits would be $330,000.In addition to higher profits, “Riding the Price-Volume Curve” has several other advantages. Because sales volume will be lower at the start of the campaign, time and personnel are available to insure high product quality and to resolve all customer complaints. For a new product introduction, this method of pricing also allows accelerated recovery of research costs before competitors enter the market and prices are driven to unreasonably low levels.Also, keep in mind that consumers are much more amenable to a price reduction than to a price increase. If they are already attracted to the product because of product features or promotional activity, a price decrease might stimulate a purchase decision. A price increase, on the other hand, in the absence of excessive inflation will usually force consumers to re-evaluate their purchase intention. For consumer durable goods where the price volume relationship is well-defined, market driven pricing can be an exact science that maximizes profits for the business.Does this strategy work for consumable goods (in other words, products that you need to purchase often)? The answer is no. Pricing consumable goods is not as simple. The objective is to develop a loyal customer who will purchase the product on a frequent basis. A high price may give people negative feelings about a new product, particularly if the price is only slightly high. Consumers will rarely admit that they hate a price which is only slightly high. They focus discontent on other product features, such as color, style, flavor, etc. Volume developed with a low introductory price can also be misleading. Consumers may purchase the product when the price is low and switch brands when the price is increased. In high-level decisions of consumer durable goods, price is only one of many product attributes considered: in low-level decisions such as milk, butter, beef or eggs, price may be the only consideration.

Basic Pricing Rule: For a small business, the price that maximizes profits is the average of the company’s variable cost and the ceiling price of the object or service.Decreases in price (in the interest of expanding sales volume) will not contribute to increased profitability, unless the original price was incorrect. My rule is built upon the assumption that small businesses cannot get rich by simply selling at the lowest price. Rather, I believe that the two most important factors are: the company’s variable cost and the ceiling price of the object or service.We have already discussed and defined variable cost, so now I’d like to turn to the term “ceiling price.” The ceiling price of an object or service is the highest price that is currently being paid for an equivalent product by an equivalent consumer with equivalent needs.Let’s look at an example. Let’s take a small winery bottling and selling wine through a merchant network. The ceiling price for a regional winery was established by a survey to be about five dollars. It’s very important, when determining the ceiling price of your product or service, to record the going rates of products or services that are truly equivalent. My wine was clearly not in the same price class as the wine that was being sold for $50 or $150 per bottle in the “Wines of the World” store just a few miles away. (If you define your product or service too broadly, you may make a mistake when determining the ceiling price. Ask yourself, ‘Is this equivalent product or service meeting equivalent needs of an equivalent consumer?”)As we discussed earlier, the variable costs of the wine were originally estimated to be $35 and later re-calculated to be $1.00.
Now, to put this Rule into motion:
$1.00 (variable cost) + $5.00 (ceiling Price) / 2
= $3.00 (Price which maximizes profit)Even if we use the erroneous variable cost of $0.35, the calculated price to maximize profit would have been $2.68. At the same time that my winery was getting into trouble, three other wineries opened in the area, and priced their wine at $2.50 to $3.50. All three survived and eventually prospered.Pricing services is another problem for small businesses, and the Rule can be helpful in this area. Take for example, a retired teacher who wants to counsel students in career choices, college selection, and scholarship information. He wanted to know how to price this service in a poor community where the median family income was $16,000. He is retired and has an office on his porch and will incur no additional expenses by running this business. However, he will have to pass up outside employment that pays about $10 per hour. What is the variable cost in this case? It would have to be the opportunity cost – the fact that he has the opportunity to earn $10.00 elsewhere. Thus, we will set the variable cost at $10.00 per hour.The consultation takes about one hour, and we were able to identify small segments of the community that would pay up to $ 1 00 for his services. So, $100 is the ceiling price. Using our Rule: ($10 + $100)/2 = $55 per hour. Since his output is limited in this case to about 2,000 hours per year, his prices can be raised when the work load reaches 40 hours per week. Starting below the $55/hour level provides no benefit and might send a false signal about the quality of the output.The client thought that this seemed a little high for the poor youth he was hoping to reach, yet he had enough math background to understand the theory. As a solution, he accepted the $55 price and planned to freely distribute discount coupons to church groups and other civic organizations who reach out to the poor.Let’s turn to a situation where an extensive capital investment is required for the delivery of a service. Jim Smith is considering purchasing Reliable Auto Repairs, which would require a large investment in a garage and tools. He would like to earn a living and get a reasonable return on his investment. What would his variable costs be based on? Once again, it would be the replacement costs on his labor because once Jim spends the money, it becomes a “sunk cost” which he cannot expect to recover by altering prices. The public does not care if Jim spent $5,000 or $5 million on his garage; they are buying a service and expect a certain amount of quality and technical competence. They also have an expected price for the service. If Jim’s price is high because he is trying to recover a big investment, people will not use his service. Also, once the investment is made, debt service or expected return on investment is fixed and will not vary if Jim works one hour or two thousand hours per year. Thus the initial investment is not a variable cost and has no impact on the price which maximizes profit. This concept Is consistent with results obtained by marginal analysis.The ceiling price would be determined by the results of a survey of similar auto repair shops in the region. Assuming that at least one shop in the area charges a high price and is under utilized, the survey should indicate what the highest going rates would be. Jim Smith would then add his variable costs to the ceiling price and divide by two to see what his maximum prices would be. If the rates allow a decent living and a good return on his investment, then purchasing the business may be a good idea. We should note that the optimum price that we have just calculated does not guarantee that Jim Smith will work 2,000 hours per year at that price. It does, however, mean that any attempt to lower the price to increase volume will result in a lower contribution to overhead and an effort to increase the rate will result in fewer hours worked.Let’s take a look at another example. An owner of a local video store asked me to examine his pricing strategy. The major studios are publicly stating that home viewers will pay more than current prices for the big hits and therefore they are charging shop owners more for the big movies. In our local market, there are nine stores serving 18,000 households and all but one charge $3.00 for a first run video and $2.00 for older titles. The one other store charges $1.50 for all movies.What would the ceiling price be? You may be tempted to think that the price would be $3.00, which is the highest going rate. And, it’s true that most stores do charge $3.00 while the title is on the Billboard Top 40 Rental List – even if the tape is 60 or 90 days old. However, real movie buffs would pay more than $3.00 – if the tape could be reserved for them and if the tape really was brand new. It is conceivable that the movie buffs would pay $4.00. However, it is improbable that very many would pay more than $5.00. In this case, I would say that the ceiling price is $5.00 – even though no one is currently charging it.The wholesale price of a major hit is about $70 and at the end of a month it can be sold for $20. Thus, the cost is around $50 for the first month, which is $1.67 per day. The average of the cost ($1.67) and the ceiling price ($5.00) is $3.33. In this case, there is not a sufficient difference to alter the price from the prevailing custom.However, you might point out that a new smash hit video is a lot like the unique durable goods that we discussed earlier. You’re right. If you use the strategy of “riding the price-volume curve,” it may be possible to charge $4.00 for the first two weeks that a tape is in the store if you cater to those who would pay more for new tapes (and especially if you added the service of reserving the tapes.)The only time the combination of riding the price-volume curve and our Rule will work is when you are dealing with a unique durable good like a video. The objective from riding the curve is to maximize cash flow for the product as quickly as possible, and the final price selected by the Rule yields the maximum long-term profit.It should be obvious from the previous examples that this Rule can be used to price durable goods, non-durable goods and services. However, perhaps another example of a mixed pricing strategy is in order. Let us consider an obvious innovation of the next generation, three dimensional holographic video. Homeowners have a track record of what they are willing to pay for home-entertainment centers. When VCRs were introduced to the public, homeowners willingly paid over $1,500 in current dollars. Also, they paid as much as $5,000 for a big screen TV, but sales were not significant until the price dropped below $3,000. Hence, it would appear that the ceiling price for a home-entertainment center is around $5,000 and if we assume a variable cost around $1,000, the Rule price for maximum profit is around $3,000. What then should be the introductory price? Consider all of the possibilities for such an item. Bars, meeting and seminar centers and businesses paid much higher prices for big screen TVs. Perhaps the market would support an initial price of $20,000 to $50,000. However, at least one market could absorb a price above $1 million. That is for major medical centers and research institutions.I would like my doctors to have observed and to be refreshed on rare or unusual procedures, particularly if they are operating on me. A library of three dimensional procedures would allow the doctor to view the procedure from any angle. Major medical centers are already paying million dollar prices for critical equipment, so the price is not out of line. Sales to this industry would be slow and allow further development of the technology before it hits the mass market. Meanwhile, the cash flow would allow rapid recovery of the development costs. Also, limited sales allow time for dedicated customer service to debug the system.As sales to major medical centers dry up, the price could be reduced to stimulate other hospitals or industries to purchase the equipment. So long as patent protection keeps a monopoly, the price reduction phase could take 17 years. This business would be among the most economically strong companies in the nation. In this example, it does not matter that the variable costs are $1,000 or the ceiling price for consumers is $5,000. The product has so much potential with business customers, that the ceiling price should be tested at almost every level. To see real life parallels of this example, explore the origins of Microsoft, Lotus and WordPerfect who sold programs for several hundreds of dollars despite the fact that the variable cost to reproduce (pirate) a copy was less than a dollar. This is approximately the same ratio of selling price to cost used in the example just covered.The Pricing Rule we discussed is applicable in pricing nondurable goods and services. One very important feature is that the optimum price only depends on variable costs and the ceiling price for an object. Destructive competition may reduce the ceiling price, and variable costs may change, but the optimum is not changed by fixed costs or any other factors. Decreases in price will never contribute to increased profitability from expanding volume unless the original price was incorrect. Once the optimum price has been selected, the only way to increase profitability is to concentrate on marketing and promotion and maximize sales at that price. If a company is truly successful in their marketing, it is theoretically possible that the ceiling price will rise and therefore, price increases will lead to increased profitability.ConclusionTwo specific market-driven pricing strategies were discussed in this paper. Both of them can be used to develop the actual price for an item even in the absence of market information on the price-volume relationship. In the case of a monopolistic durable good, it is possible to maximize profits by starting high and then reducing the price even in the absence of cost reductions and competition.

How Cheap is Cheap?

As a marketer I have found that many businesses operate under the delusion that they can be successful by selling their products or services at the cheapest price. It has become almost universally acceptable that this pricing strategy will only work for large companies who dominate a marketplace. If you think about this, it does make sense. These companies call the shots. They typically create demand. They possess some proprietary product, specialized service or technology that allows them to establish the market value of any particular product or service. As such they set the acceptable consumer price and ultimately capture the largest segment of the market. Think about the airline industry or Intel or in the past, Big Mama Bell.

What I find most fascinating is when applying this universal economic principal to some industries, the opposite seems to be true. In many industries it is the smaller players that seem to be focusing most on low cost solutions. It is my hope that some of these marketers can begin to recognize that there is a better strategy than merely offering a low cost option. My intent is NOT to suggest collusion or price fixing in any way. It is to demonstrate that there is high profit potential for small businesses that differentiate their products and then price accordingly.

Let’s look at some examples of what typically happens to businesses when they attempt to meet the challenge of establishing competitive pricing models.

The owner of an exclusive clothing salon was experiencing a financial crisis. Even though sales were brisk, and many of the prominent men in the community were frequenting his shop, the business was not profitable. When the owner asked his local banker for advice, he was told to lower his prices to stimulate sales, and the helpful banker lent him more money. After two more loans and two more price reductions, the business defaulted. At the time that he closed the business, he was charging prices that earned him minimum wage to create exclusive creations, one of which was worn to a presidential inauguration!

Another retailer was puzzled by the fact that his interim reports always showed a profit, while his annual tax return showed huge losses. Initially, this business owner thought that his C.P.A. was helping him by saving money on taxes. What was really happening, however, was that his C.P.A. used an estimate of 50 percent for cost of goods sold (or a 100 percent mark up which he had suggested in the past). In reality, the retailer was afraid of price competition and was only marking up 33 percent, so his cost of goods were actually 75 percent of sales. Naturally, the annual audit for tax purposes reflected reality. The owner (who had opened a second location) thought that he had been borrowing money to expand his business, but the increased loans were used to cover operating losses.

Why do so many business owners confuse low pricing with proper pricing? One reason is that some owners actually believe the: “I can do it cheaper” precept. This may be true under the best of economic conditions. With the best deals from suppliers, the best terms, the highest level of sales, the most experienced staff, the most vibrant economy and so on. But in reality no business can plan to operate under the best of circumstances at all times. There are simply too many variables that are out of our control. And unfortunately consumers have memories like elephants. Once you lower your price it is very difficult to raise it again. You set your own market value and have to live with the consequences.

Perhaps another reason for this confusion is simply that fact that low prices often work well for big businesses, and a distinction is not made between big and small businesses. However, we have all seen small retailers go out of business after trying to compete with Wal-Mart or Kmart on price. Harvard’s Professor Michael Porter, author of Competitive Strategy, tells us “The presence of economies of scale always leads to a cost advantage for the large-scale firm … over small-scale firms.”

So what can the small to mid-size business owner do in lieu of offering a lower price?

Offer something different. Differentiate your product by quality, design, or brand, and charge a slightly higher price. Offer a sharper focus. Be a specialist who focuses on one segment of the market and caters exclusively to it. Focus on branding. Branding is not merely for the BIG players. Entrepreneurs and small business owners can also differentiate themselves with a unique branding strategy. In fact it is even MORE important for smaller organizations to set themselves apart, particularly if they are competing with the BIG GUYS! Remember, your customer’s perceptions of WHO you are is all the matters to them. Often times your reputation is wrapped up in what advertising guru, Bill Bernbach called the Unique Selling Proposition (USP). What sets you apart from the crowd? What do you do that no one else does? This is far more important than the price of your product or service. Everything that we do or say both internally and externally should revolve around this.

Smart pricing is good for the small business owner, large dominant businesses and for the industry as a whole. But it’s especially good for the consumer because they are ensured a product or service that is built around providing quality and performance rather than meeting a perceived market price.

In this economy so many consumers are having reservations about getting a good value on whatever product or service they are buying. We owe it to them and to ourselves to prove that our solutions really are better than ever. That today’s solutions are in fact revolutionary! Let’s act like it, rather than trying to beat the guy next door out of a dime. If we act like we are offering a cheap solution, then consumers will believe that we have a cheap solution. And we will all be facing the same problem of: how really cheap is cheap?

Your Employees and Your Bottom Line: Getting the Most Return From Your Workforce Investment

It’s more important than ever to get maximum return from your employees. Change-management expert Morris Shechtman tells you how…and it has little to do with increasing salaries.

They say that time is money. And while that old adage still rings true, in today’s business environment it might be more accurate to say that people are money, or rather, that the time and resources put into recruiting and training your employees takes money. And don’t forget that there is a direct correlation between employee productivity and your organization’s bottom line. So how do you get the best return possible on the investment you make in your workforce?According to Morris Shechtman, change management expert and author of the book, Fifth Wave Leadership: The Internal Frontier, you need to focus on internal issues and develop the workforce you have. Just because the current state of the economy means that more people are looking for work doesn’t mean that they are the right people for your company. Instead of viewing employees as expendable, Shechtman insists that you should be deliberately creating an environment where they can thrive.”Employee retention is still a very big issue,” says Shechtman. “It always will be, regardless of the state of the economy. After all, the key to long-term growth and productivity is a workforce that’s familiar with your company and in sync with your business goals. Your workplace should excite and motivate your employees, so they’ll want to stay around. And that means creating an environment that challenges people and helps them grow not just as employees, but as people,” he adds.”Most employees if given the choice between a nominal raise and a great work environment, will choose the latter. After all, so much of our lives are spent at our jobs. And making the job site an emotionally challenging and motivating environment is key to retention and productivity.”This theme – fostering what Shechtman refers to as “self-information” – is thoroughly explored in Fifth Wave Leadership. It essentially means that people want their jobs to teach them about themselves, to provide valuable information that not only makes them more marketable in today’s marketplace, but that also helps them become better spouses, better friends, better people.So how do you foster a growth-oriented workplace? Shechtman offers the following insights and tips:Forget monetary incentives: focus on relationships. Fat salaries and bonuses, more vacation time, and other such perks will not increase employee loyalty. All they do is create a bigger sense of entitlement. They tend to tie people to your company in the same manner that one trains a dog to stay in the yard – until that is, the company across the street offers a bigger, juicier bone. But creating a culture in which better relationships are valued gives employees a more profound and rewarding reason to come to work every day. Only through relationships can people change and grow…and personal growth is a requirement for survival in our increasingly complex world.Help your employees find their familiars.What is a familiar? Simply put, it’s a feeling state we return to again and again. It is an emotional pattern that holds tremendous power over our choices, our relationships and our careers. Rooted in our families and our upbringing, the familiar is a feeling that we unconsciously reproduce, sometimes to our benefit, but often to our detriment.For instance, the eldest child of a large family might have grown up having to subrogate her needs for the needs of the younger children. Perhaps she was told she was selfish for asking for things for herself. It is no mystery that as an adult she is frustrated at work and has trouble communicating her needs to her boss. Her familiar (the feeling that she doesn’t really deserve to ask for anything) is reproduced in her work environment, where she is unable to assert herself.You can help your employees tremendously by learning about familiars and encouraging your employees to identify (and subsequently diminish) their own.Question employees relentlessly.A big part of creating a growth-oriented workplace is to constantly question your employees. “Did you notice what you did there?” “Why do you think you said that?” “I noticed that when your position was challenged in the meeting, you didn’t defend it; why do you think you backed down?” Creating a “question culture” will help employees ferret out their familiars. It will raise performance expectations throughout the company. It will train employees to think carefully about how they do their jobs and ensure that they have sound reasons for every decision they make.Encourage conflict and confrontation.Yes, you read that right. The purpose of the workplace is not to make everyone happy; it is to grow people to their maximum potential. As Shechtman writes: “The enormous popularity of consensus decision-making/negotiation, participatory management, and self-directed work teams is a sign of the times that is validating our unhealthy quest for comfort above all.”Conflict and confrontation are rarely pleasant, but they are the very definition of teamwork. They are also necessary to growth relationships.Provide honest, caring feedback.You should constantly tell your employees how they are coming across, or how they are doing. It goes without saying that sometimes this feedback will be negative in nature. Honest feedback can be painful for both parties, but it is the backbone of a growth organization. A relationship without honest feedback is what Shechtman calls a “mutual toleration society.” He maintains that unconditional acceptance “in both personal and professional relationships” is a form of abandonment, robbing the other party of the most important catalysts for growth and change. (Hence the reason the feedback is labeled “caring.”)Practice the art of self-disclosure.Of course, feedback cuts both ways. You want your employees to provide it to you as well. One way to do so is through self-disclosure. If you want to turn a stagnant employee relationship into a growth-oriented one – or start a new relationship out on the right foot – share your feelings first. This is a big risk because you don’t know how the other person will respond; you must be prepared to deal with any type of reaction you receive. But it’s a risk worth taking because you can learn a lot from your employees. Self-disclose often and you teach by example the kind of relationships you expect to flourish in your company.Form an accountability group.Many people fear receiving or giving feedback; they don’t want to show others a weakness or make someone else uncomfortable. Put them in the right setting, however, and they may be willing to provide others with clear and compelling feedback. Accountability groups are one way to foster such feedback. In these groups, people give and receive feedback, create action plans based on that feedback, and hold group members accountable for implementing their plans.”I have found accountability groups to be amazingly effective in helping clients overcome their debilitating work and personal problems,” says Shechtman, who writes at length about these groups in his book. “Done correctly, they really can lead individuals and organizations to transform themselves from the inside out.”It’s worth adding that the actions detailed above are almost certain to increase your company’s productivity. After all, people who are personally and professionally fulfilled are better employees. This alone is enough reason to foster a growth-oriented workplace, especially given our current economy. But the big reason has more to do with tomorrow than today.”Creating a work environment rich with opportunities for self-discovery is an investment in the future of your company,” Shechtman concludes. “It’s seldom an easy journey, but it’s one you must undertake if you want to attract and retain talented employees. Begin it now, and when the economy rebounds, your employees won’t leave you for greener pastures. Why would they? Your company will be meeting needs far more important and compelling than a biweekly paycheck.”This article was written by Morrie Shechtman of Fifth Wave Leadership, who will be presenting on March 15th, 2007 at the C-Suite Briefing in Long Beach, CA. Click here to find out more.

What are your People Doing?

From time to time I ask other members of our network to submit an article that is valuable to entrepreneurs seeking to improve their performance. This week David Shechtman, one of our SBA Network consultants, talks about how to ensure that our staff are in alignment with our company’s strategic goals. Also listen to Matt, Cory and I as we interview David Shectman this Friday at 4pm LIVE. Go to: www.markdeo.com to listen live.

Well, they’re probably doing what you hired them to do or what they were trained to do. But why aren’t things working?Because the world around them is changing and your business is probably following suit.So, what does this mean? It means that your people – a critical resource that 43% of CEOs say finding and retaining is their greatest challenge1 – aren’t engaged in processes and activities that support your company’s strategy.The reality is that your company may be evolving into a completely new type of organization with a totally new set of strategic objectives. But do your people even know about it; let alone what to do about it?Product Leadership, Operational Effectiveness, and Customer Intimacy have been identified as three main strategic objectives in today’s marketplace2. Each of these objectives, consequently, requires a set of developed employee competencies. For example, in a Product Leadership company, employees need to share information, group problem-solve, and think creatively while in a Customer Intimacy company employees need to build deep relationships, focus on quality, and act independently.What’s happening nowadays is that companies are moving from one strategic intent to another without developing the employee competencies to match. And worst of all, when some managers or employees try to change, their efforts are ignored or punished because the system doesn’t reward it. Think about it, some companies used to be clear product leaders. They had a technology or process that set them apart from the competition. Then came globalization, and away went their competitive advantage. So, how do they now compete? By deliver a unique customer experience through customer intimacy. But do their people have the competencies developed to do this. Good question.As you now try to sort out this potentially complex situation, ask yourself a few questions:1. Do we as a company see fast and effective change as an important competitive advantage?2. Do we let employees (or even managers) know what they need to do to make the business strategy successful?3. Do we support individuals in developing new knowledge and skills?If you answered yes to all three questions, you’re poised for success. If you answered yes to two questions, you’re in pretty good shape. You may want to sharpen some skills. If you answered yes to none of the questions – or you don’t know – you definitely need to seek help. Adapting to change is not simply a luxury anymore, it’s a survival technique.1 Survey conducted by the American Society for Training & Development2 The Disciplines of Market Leaders, Michael Treacy & Fred WiersemaWe’ll be discussing this on our weekly radio show at 4PM Pacific Time this Friday. To tune in, simply go to our website at www.markdeo.com. We will also be taking calls from our listeners to help with any problems you may be experiencing in your business. Call in to speak with us at: 1-323-443-6878; then enter code: 226287 to get on the air!Have a great week!

Rally Toward the Future

More than 64% of the working population is bored with their jobs!

That’s not my statistic. Blame the American Institute of Management. But why? We have it pretty good in this country, despite all the bad press. Yet workers in just about every field drag themselves through their day looking forward only to the weekend. How could this be when we spend greater than two thirds of our waking hours at work? Could it be the fault of our leaders?Remember Rudy Giuliani? After 9/11 he became a hero. He was Time Magazine’s Man of the Year, knighted by the Queen and one of the most respected politicians of our time. But what most don’t realize was that on September 10th he was anathema. New Yorker’s wanted to run him out of town! At the time his approval rate was the lowest of any mayor ever to take residence at Gracie Mansion. His eye was off the New York ball since he was immersed in his run for the Senate, he was in the midst of an acrimonious divorce and his relationship with city officials was strained.Then came September 11. On one of the most horrific days in history Rudy managed to win back the support of the city with just 8 words. What did he say? How could just one sentence transform the attitudes of twelve million people?Not long after the second tower fell, Giuliani was asked what the final body count was. His response was astounding. Any politician might have said, “We do not have that information at this time,” or “Our sources are still tabulating the results,” or any number of other dispassionate replies. But what Giuliani said aligned him to the people, won back their trust and demonstrated his understanding and commitment. This is what he said: “I do not know what the final number will be, but I know it will be more than we can bear.”By uttering those words Giuliani demonstrated that he understood what every New Yorker was going through. At that moment the sentiment toward the mayor turned. At some level, maybe instinctual or visceral, Giuliani knew that his job was to connect with the emotions of the people and rally them toward a better future.As Marcus Buckingham, author of Break All the Rules says, “Great managers discover what is unique about individuals and capitalize on it, great leaders discover what is universal and capitalize on that.”No matter how impressive a leader’s experience and accomplishments if they lack empathy they will be unable to instigate change. A great leader must speak constantly of the future in a sincere and passionate way. They must paint vivid pictures of the future coming to pass. This is what will motivate the workforce. This is what will transform the drudgery of their workday into an extraordinary journey toward the achievement of worthwhile goals.How can you connect with the “universal sentiment” of those within your organization? What can you do, say or demonstrate to make them see the FUTURE that you see? What is your plan for motivating your troops to visualize a better and brighter future? I hope that this inspires you to take action. Webster’s defines leader as “a person who goes in advance, showing the way.” I encourage you to show your people the way and rally them to a better future.Care to submit an article or just have a comment? Email me at mark@markdeo.com

Money Won’t Motivate Your Team!

It’s more important than ever to get maximum return from your employees. Change-management expert Morris Shechtman tells you how… and it has little to do with increasing compensation.

We’re almost sold out!

Enjoy a fabulous lunch with Mark Deo and Morrie Schectman TOGETHER on March 15 at the Queen Mary in Long Beach. Morrie will be speaking about accountability and Mark will be showing you examples of how he has used viral marketing to create extradinary results for all kinds of businesses without spending a dime on advertising!To register for the C-Suite Briefing go to: www.revolutioninandout.com–Mark Deo

Emotional Quotient

He was considered to be “somewhat arrogant.” Many felt he “over-reacted” and was too “emotional” about issues. He was often accused of being “too personally involved” in the details of his business. He took “too much ownership” for decisions, his superiors and colleagues often said. Who was he? Jack Welch, CEO of GE for twenty years and one of our century’s foremost business management gurus.

Many people believe that business should be fee of emotions. Business performance often centers on strategic choices, individual and group competencies, work and business processes, technological support, information systems, and so on. There seems to be no place for emotions in all of this. Most would agree that success in business is a result of improved productivity, greater profitability, increased market share, and other hard, quantifiable disciplines. There’s not much place for emotions here, either. The fact is that most leaders try to keep emotions out of business. After all, emotions running rampant make things difficult.

Why? Emotional team members can have a significant negative impact on performance. Emotional people can perform erratically, engage in arguments and refuse to work together. The result is generally a clash of egos and the loss of productivity. When speaking of management many believe that “a good manager must never show his emotions!” But is that valid? I would contend that without emotions in business any venture is doomed for failure.The issue is not emotions in business for the sake of emotions themselves. But emotions in the business environment can and need to be managed. Emotional states can and do influence action and support productivity. Passion is the driving force behind any idea or initiative. All businesses want motivated team members. They spend time and money pumping up and motivating staff. They want to build passion, and what is passion but emotion. So on one hand company’s work to create feelings (when it serves them) and on the other they attempt to suppress them. You can’t have one without the other. But you can balance emotions and maintain a healthy emotional environment. In other words, you can develop a healthy E.Q. or “Emotional Quotient.” Here’s how:1. “Care for people” rather than “take care of them.” If we care for people we tell them NOT what they WANT to hear, but rather what they NEED to hear. If we withhold that, then we’re not doing them any favors. In fact we are damaging our relationship with them and impeding their success and growth.2. Encourage open communication and feedback. Don’t allow an undercurrent of gossip to permeate the team. Get things out in the open. People who don’t intend to change typically complain about the amount of feedback they receive. Those that are open to change, welcome feedback.3. Connect with how people FEEL, rather than merely what they THINK. Focusing on how people feel about information unlocks their potential to use it in a constructive way. It opens discussions and leads to stronger relationships. Stronger relationships lead to better decisions, and better decisions lead to more profit.4. STOP avoiding conflict. Success comes through innovation, and innovation comes through discomfort, which is a need to change or improve something. Yet if these forces of innovation are stifled, because of reluctance to deal with conflict and confrontation, your organization may become stagnant and quickly fall prey to the competition. Conflict and confrontation strengthen relationships and improves quality.5. Make it OK to talk about emotion within the organization. Expressing emotion helps diffuse potential problems. Feelings will seek an outlet one way or another: Either through a direct, productive articulation, or an indirect, destructive behavior that undermines relationships, teamwork and goal achievement. Knowing up front how people feel about issues clarifies direction and focus, and gives individuals the chance to be heard, thereby freeing up energy to grow and develop.6. Encourage people to be passionate about what they believe. The opposite of passion is mediocrity. Those organizations that succumb to mediocrity will cease to exist in the new economy. Passion incites positive change and positive change is the foundation for business growth. When people are able to share their passion and express disagreement in an open forum, quality is improved. I encourage every business leader to create an environment in which emotions and passion will surface.Emotions are seldom arbitrary or inconsequential. So we should both recognize emotions and allow them to be experienced. I am not saying that a manager can fully control people’s emotions. Nor am I arguing that all negative emotions are necessarily bad. On the contrary, if we were not able to feel unsatisfied, we would not learn, nor could we develop or make progress. Conversely, if we CAN feel satisfied, it is because we have experienced dissatisfaction. Emotions will always be an important part of working and living together. Strong leadership can change the emotional conditions that limit what is possible in a business.While I.Q. (Intelligence Quotient) may need to be considered for some roles, E.Q. (Emotional Quotient), on the other hand, is far more important in winning support, motivating performance and achieving excellence. In essence, it is our “Emotional Quotient” that may have the largest influence over making the impossible, possible.

Dream Big

Today there’s a lot of discussion about vision, mission and goals. In fact I see many companies investing loads of time, money and effort in coming up with their “mission statement.” Usually this is a few inspiring sentences that are placed on plaques to hang on the wall or printed on the back of business cards or put on the company web site. Yet I’ve got to say with few exceptions this often amounts to a big waste of time!

The fact is few of these mission statements accomplish what they were intended to do. That is “motivate employees to perform at a higher level.” Ironically, however, after a month or so not even the CEO, let alone the employees can even remember one word of the mission statement. So does this mean establishing a mission for your company is a useless task? Not necessarily. Yet in order to understand how to make mission planning a valuable tool we must first understand WHAT a “mission” is. In short a mission is a course of action that a company decides to pursue. It is the road they will travel in order to ensure they arrive at their ultimate destination. It is their plan for achieving their vision. A mission is not something we say, it is something we do. Leaders of companies often make the mistake of developing their mission in the wrong way. They try to figure out what their mission is before they decide WHERE it is they want to go. Imagine trying to do this when going on a trip. Can you really plan HOW you’re going to get somewhere if you don’t know WHERE it is you want to end up? Remember the Cheshire cat in Lewis Carroll’s Alice in Wonderland? Alice came to a fork in the road and asked the cat for his help. “Would you tell me, please, which way I ought to go from here?” asked Alice. “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where,” said Alice. “Then it doesn’t matter which way you go,” said the Cat. Isn’t the same true for us? As leaders we see our employees going in different directions or we’re just not able to maintain that consistent level of performance that others are achieving. Could it be because we are just a little unsure of precisely WHERE it is we want to get? Developing a mission is quite impossible until we establish a vision. A destination. We must be able to see it, feel it, smell it and taste it. This can NOT be accomplished by the employees or a consulting firm. While the vision should be shared by many, it MUST be totally owned by and burning in the heart of the leader of the company. Unless the CEO or UBC as I call them (Ultimate Big Cheese) is totally driven by their vision it will be meaningless in the arms of their employees. On the positive side however, I have noticed one thing that all great leaders seem to have in common. That is the ability to dream big dreams and create a powerful vision of the future. They seem to have the ability to imagine an ideal future well in advance of creating it. Your vision is an imaginary creation of the ideal life you would like to live, in every respect. You create it as an expression of the values you hold most dear. Brian Tracy says, “From the very day that you develop a clear vision for whom you are and where you are going in life, you begin to become a superior person, and soon you begin to accomplish superior results.” Here’s some advice on how you can develop vision for your company that will help to drive a sense of mission, improve performance and 1. Let your mind float freely – One of the great secrets of success is to “dream big dreams.” It is to let your mind float freely into the future and imagine that you have no limitations on what you can be, have or do. Imagine for the moment that you have all of the resources that you would ever need to achieve the highest goals to which you could ever aspire. Imagine you have all the time, money, people, contacts and intelligence that you could ask for to become everything that you could ever become. Martin Luther King, Jr. said, “I have a dream,” and what followed was a vision that changed a nation. That famous speech is a dramatic example of the power that can be generated by a person who communicates a compelling vision of the future. 2. Create your ideal future – Make a dream list. Let yourself fantasize. What would you like to do? Where would you like to go? What would you like to accomplish? And most of all, what kind of a person would you like to become? Since you attract into your life people and situations that are in harmony with the person you really are, what kind of attributes and qualities would you like to develop in yourself so that you can life the very best life you can imagine, surrounded by the kind of people you would most enjoy? John F. Kennedy did not live to see the achievement of his vision for NASA, but he set it in motion when he said, “By the end of the decade, we will put a man on the moon.” That night, when the moon came out, we could all look out the window and imagine. And when it came time to appropriate the enormous funds necessary to accomplish this vision, Congress did not hesitate. Why? Because this vision spoke powerfully to values Americans held dear: America as a pioneer and America as world leader. 3. Create a “shared vision” – I like to recommend a practical exercise to develop your organizational vision. By following this plan you may be better assured that the vision statement that is developed is a shared vision. Plan an uninterrupted time to work on the vision with your most key team members. At this meeting, take an hour to explore your vision. Agree on a rough time frame, say five to ten years. Ask people to think about the following questions: How do you want your community to be different? What role do you want your organization to play in your community? What will success look like? Then ask each group to come up with a metaphor for your organization, and to draw a picture of success: “Our organization is like: a mariachi band – all playing the same music together, or like a train – pulling important cargo and laying the track as we go, or “The value of metaphors is that people get to stretch their minds and experiment with different ways of thinking about what success means to them.” Finally, have everyone share their pictures of success with each other. One person should facilitate the discussion and help the group discuss what they mean and what they hope for. Look for areas of agreement, as well as different ideas that emerge. The goal is to find language and imagery that your organization’s members can relate to as their vision for success. 4. Caution: Do not try to write a vision statement with a group. (Groups are great for many things, but writing is not one of them!). Ask one or two people to try drafting a vision statement based on the group’s discussion, bring it back to the group, and revise it until you have something that your members can agree on and that your leaders share with enthusiasm. Only when you have a clear vision of the future that everyone is excited about can you begin working on the mission or path that you will take. Following this will be the goals or steps along the way. A clear vision will allow you as a leader to propel your company forward. It will make daily decision making far easier for every member of the organization. It will allow the organization to move initiatives forward with greater speed and agility. It will motivate a higher level of performance and commitment among your team. So don’t be afraid to DREAM BIG because no big thing was ever accomplished without some small person dreaming it first!

Do You Mean:?

The young mother was waiting anxiously for her 12 year-old son to come home from school.

As the boy burst into the front door and leaped up the stairs, taking them two at a time, he gave his mother only the most cursory glance.

“I’m getting my glove and going to the park to play ball.”

“Not until we talk,” his mom cautioned.

“Aww, about what mom?”

“How was school today?”

“Okay.”

“What did you learn?”

“Nothing.”

“What did you talk about?”

“Nothing.”

“Do you have any homework?”

“No…Can I go Mom?”

“Okay, just be back in time for supper”

After her boy left the mom felt poorly about her inability to engage her son in a meaningful dialog about school. While she was truly interested in his schoolwork and felt she was asking the right questions, she wasn’t getting the answers that she hoped for. Yet, if he didn’t have any homework, there didn’t seem to be a problem in letting him go out and play. Still there was a nagging feeling that something was unsaid or unfinished.

How many managers have had that same feeling when talking to an employee or team member about the status of a project? How many salespeople have felt that way after talking with a client? Often times in business we seek to have a meaningful conversation with a customer or employee and get “stonewalled.” Is this because they are unwilling to put the time into communicating with us? Is it because they are uncommitted? How can we deal with this? How can we build enough value in our communication that people WANT to listen and engage in conversation with us? In order to understand this we need to look at the way we think when listening to others speak.

Thinking is inspired by questions. Einstein himself said, “It is important that we never stop asking questions.” Consider this: the average child asks 125 questions per day. The average adult asks six! But after a short time children learn to stop asking questions. Mom and Dad just don’t want to answer them anymore and the same thing happens in school. Teachers talk AT kids more often than with them.

Yet questions are the primary way that we learn. The great thinker and philosopher, Socrates taught his students by asking questions. He made them think in order to come up with the right answers. We now call this method of communication the Socratic Method.

Good questions take time and if asked incorrectly they can be an irritant and shut down communication rather than open it. In the dialog above the mother was getting nowhere with her questions. Yet imagine if she could have changed her questions to prompt a more meaningful response. She could have asked:

“Do you mean:..?”

Followed by:

“Tell me more.”

For example when her son said school was okay she could have said: “Do you mean it was okay meaning you’re glad it’s over or okay you’re looking forward to going back tomorrow?” This would open the lines of communication and give mom the ability to draw out her son’s thoughts and feelings about school.

In business we can use the same principle to elicit a more detailed response. For example if employees tell us that the project is going okay then we can say: “Do you mean that it’s almost finished or that you are on schedule? Tell me more about that.”

This works well with customers also. If a customer or client says: “we are not ready to move forward yet,” you can say, “I understand. Do you mean that something is preventing you from doing so or that there will be a better time to do so? Thank you for sharing. That’s interesting, tell me more about that.” Again this opens the lines of communication and gets us the valuable information that we need in order to customize the right solution for the customer.

This technique forces the person to take a stand on one of two options and give us more information. So the next time you get stonewalled either by a customer or team member try this technique. I have found it can work wonders on getting even the most tight-lipped people to open-up.

Build A Winning Team

Recently, I was listening to the Tom Leykis show. I am a fan of Tom Leykis. He always has stimulating, shall we say, discussions that really get you thinking. And that’s what I like about the show. He was talking about the question, “Why should employees be loyal to their companies?” And, “Why should you be loyal to a company that makes you give them 2 week’s notice if you’re quitting, yet if they want get rid of you – your butts on the street tomorrow? Why should you be loyal to a company that you work for 10, 15, or 20 years, and then they just decided to down size one day, and you’re holding the bag. Why should you do your job better than the next person, when all they’re going to do is give you more work?”

Now I can really relate to this and maybe you can too. Let’s face it, a lot of us are in business for ourselves today because that’s the kind of thing we got sick of. We wanted to our own thing. Because we had a better idea. Like Ford. We wanted to do it “Our Way.” Like Frank Sinatra.But I began to think about the other side. Have you ever hired somebody, with all the good intentions in the world and then found out that they weren’t loyal to you at all? They were consistently late. They didn’t care about your business or your customers. All they cared about was their paycheck. They just took a day off, because, they felt like it.Or maybe you put a tremendous amount of time into training this person on your business, and they ended up stealing your clients? Many customer’s have come to me, as their consultant and ask me how to deal with a specific employee issue. They say, “Mark, I don’t know what I’m going to do with this person. I can’t get through to them. They’re constantly making mistakes, their slow as molasses, they have no sense of priority, their poor attitude is dragging the entire office down.”So I ask them, why don’t you fire them? They say, “Are you kidding, if I fire them, they’re going to take me to court and I know I’ll lose. Because it’s happened before. So I just live with it. But it’s costing me money, it’s costing me customers and it’s driving me crazy!”Listen folks, you can’t live with it anymore. We small business people can’t afford to make very many mistakes. We make a mistake and the big guys will chew us up and spit us out – lickety split. And you’re going to find yourself working for the MAN again. So “How Do You Build and Maintain a Winning Team.”If you have an employee problem, are looking for ways to get your staff to be more productive, or wondering how you can get your employees to get stuff done BEFORE you tell them to, then you will be interested in what I have to say.With the help of several member consultants of Virtual Consulting Net.com, we have prepared a “How To – White Paper” on developing and maintaining a winning team. It has been designed specifically for small business managers and provides specific step-by-step instructions for building a strong, loyal team. The good news is that it is now available FREE just for the asking. That’s right FREE!It provides detailed answers to the following questions:Recruitment

What are the main factors in selecting the right person for the job?
Isn’t it a crap shoot? How do you know if someone will work out?
What can you do to find out about a candidates character?
I often hear people say, “Uhhhg newspapers, I get such poor quality there.”
Where do you look to find the right person?
How do you get the right person for the right job?
What are your legal rights?

Retention

What can we do to keep good people?
How can we hold them accountable to get their job done properly and timely?
What if they don’t? What kind of things can we do to motivate people to be more timely, accurate and team oriented?
How can I make my goals, THEIR goals?
How do I get them to care about my company and customers?
What if the positive things don’t work?

Legal Issues

How do we let people go without risking a lawsuit?
Do’s and don’ts when recruiting.
When and how should I conduct exit and entrance interviews?
How to ensure that your employees do NOT have legal recourse.

AND MUCH MORE. The program also includes the necessary forms for interviews, performance tracking, meeting logs and more. It also provides the names, telephone numbers and web sites for many employee related resources, including governmental agencies, FREE help lines, and small business consultants.Just so to www.smallbusinesshour.com and ask for the “Build a Winning Team” White Paper and we will rush it right on out to you.