From the Lionesses of Africa Operations Dept
Having received many questions about last week’s blog discussing the value of certain customers and how we seemed to be quite happy to lose customers, we just want to make one point before we move to an unemotional and purely clinical look at your products. The undercurrent of both these letters is Time.
‘Time is money’, it is as simple as that, and a customer takes up far too much of your valuable time by buying low profit items and paying late (and so is in that horrible bottom left quartile).
Here be Dragons!
Your time will be far better spent talking to this customer, pointing out the issue, trying to persuade them to move to a higher quality of item to gain them more ‘value’ (please remember to talk in terms of ‘value’ rather than ‘cheap’ or ‘expensive’) in those extra bells and whistles which you have added to your basic product to give them far more value whilst creating a higher profit margin for you, or for them to pay faster, preferably both and join Anne in the top right quartile.
If you cannot persuade them, then your time would be far better spent looking after customers who do give you that win-win. Remember a win-win will always enable a far longer lasting relationship with your customer, which is ultimately what we all want.
What about those customers who have been with you the entire journey, from when you first started and could (rightly) claim to have been instrumental in your growth, yet are also in that bottom left quartile? Good question. There is no doubt that these loyal customers (who probably accepted a few errors on your part in the early days) should be respected, but still, not at the expense of your time and business.
We are currently at a time in the world where survival of businesses is a real problem. Of course you need empathy when dealing with your customers, suppliers and employees, but you also need to run your business as a business, because quite frankly, if it goes bust then everyone suffers. So, once more, speak to them. Tell them how much you appreciate their support over the years and give them some reason (such as a discount for the first 3 months on purchases for the items you now want to sell them, on condition that they also pay quicker of course), to move up the value curve. Explain that your signature product they have been buying for years is now being discontinued… Ultimately if you cannot persuade them to continue on your journey together, then they will have to go, but at least they cannot blame you for trying.
Hang on - did we say discontinued?
Indeed! There are a number of reasons why everyone should review regularly, adapt and potentially remove their old products - even their ‘signature’ products if necessary.
There is a view (probably Nike) that your best selling product should be discontinued at the top. Leave the customer wanting more!
You want to be known as an innovator or at a minimum show that you investigate all the latest, coolest, advanced products, if only to show your customers that you are thinking of them and the changing world.
If it is too ‘heavy’ in terms of costs vs profit.
We are not an expert on your products, and certainly our inspirational Lionesses are constantly amazing us with new and fabulous designs, so number 1 and 2 seems to be well under control.
What about number 3.
Before we look at costs vs profit, let us look at one major area of difficulty, pricing.
We were listening to a brilliant A16Z podcast earlier this week on SaaS (Software as a Service). A16Z is a huge and highly successful Private Equity firm that does not just purchase companies (usually in the tech space), but guides, assists and educates their new companies to ensure they grow (if Lionesses of Africa were a Private Equity firm, but still with all of our business education, knowledge transfer and community support we like to think this is what we would look like). In that podcast they were discussing where to price one’s products. They said that without fail, entrepreneurs in the early days price their products too low. This not only leaves cash on the table, but impacts their ability to charge higher prices later unless the new products are significantly different.
In the SaaS space, buying these products means that their customers do not need to go through all of the heavy lifting themselves, they do not need to employ a team, there is no need for R&D and therefore the cost savings can be enormous (think $50,000 as a starting point). Yet entrepreneurs badly price their ‘value’ (there’s that word again), thinking that it only cost $100, so perhaps charge $200 per month…
They suggest the following:
Talk to potential customers to see where they would be willing to pay (reverse the question: “If I could bring you a product that does x,y, & z, would you see significant value in that? Due to my high R&D costs, I am thinking of charging $amount (and we shall come to that amount in a moment). Does that seem reasonable to you?”
You will then get the discussion going. Remember, it is extremely difficult to move up the price scale once you have mispriced it - it is not an easy conversation: “Yesterday I charged you $100, today I shall charge you $200 for the same product…”, doesn’t really work! But it is extremely easy to move down if the potential customer can’t stop laughing when you mention the price (usually if you price too low, they just bite your arm off in their eagerness to sign).
So how do you calculate the price to charge?
Sadly this is an art, not a science - why? Surely price is based on what it cost you to produce this product. Partly, yes, but mainly price is based not on what you want to sell it for, but where your customers are willing to pay…the main reason why there has been a rush to the bottom from major manufacturers to find cheaper and cheaper labour in developing countries to feed the ever increasing appetite in the western world for cheaper products…
So:
You must know where your competitors are charging - that is always the starting point. Please do your homework on your competition. If they are charging $100 per month, you had better have a very good reason why your’s is far better value at $200.
In manufacturing the equation from which all others flow in one form or another is as follows:
Factory Price = ‘x’
Wholesaler buys at ‘x’ from factory and sells on at 2‘x’ (B2B)
Retailer buys at 2‘x’ and sells on at 4‘x’ (B2C)
… and this is why so many factory owners are now going straight to the B2C deal, cutting out those two extra mouths to feed (the Wholesaler and Retailer) who have to add on their own costs. Although the factory initially loses market share (because they cannot ‘touch’ the same number of ultimate customers), they make significantly increased profits. This obviously impacts the prices that the wholesaler can charge and ultimately why we are now seeing so many retailers going out of business.
This really is a spiral from which there is no winner.
Please think long and hard before joining this race to the bottom. No one wins in the race to be cheaper because there is always a Walmart type that can just blow you out of the water with ever cheaper pricing (and that’s before the factory itself joins in the game!). Please try to ignore the “pile ‘em high and sell ‘em low” and stay on the ‘Value’ path where you can create longer lasting relationships with your customers.
There is no loyalty in a ‘race to the bottom’ pricing war.
In the service industry it is far more complicated. In this podcast they suggest that when the subject of a price comes up during your conversation with your customers, you must double your initial pricing (remember, you can always lower your pricing, never raise it!)
If you are offering a service, that means your customer does not need a team of employees and large R&D costs, the value to your customer is far higher than the mere cost of production for you. Try to work out the value of your product for them. If they then ask why you are charging $200 per month, then you can show them where they are saving due to your incredible product.
One other great thing to think about when considering pricing of a service is that a smart way to gain maximum value for you and at the same time to provide increased value to your customers is to offer tiered pricing packages.
One of our recent discussions was with a brilliant business speaker who is using Patreon to keep in touch with his clients and grow his business during lockdown. He offers 3 packages: £5; £10 and £80 per month.
Doing a quick poll we discovered that everyone assumed that his biggest seller would be the £5 per month and although the speaker offered a large amount of extra value for the top package, he was surprised to find that only a few had taken him up on that offer. We turned to our Head of Finance as to what he thought.
“The biggest seller will be the £10 because the value increase is enough for people to make that jump which seems small in price vs the extra value they gain.
The speaker will earn far more from the £10 package exactly because he is offering enough value for that jump to £10 and what is an extra bonus for him is that people will forget what they paid, continue to enjoy the monthly value they receive and the monthly £10’s will just flow and flow…(the holy grail of recurring revenue).
The £80 level is simply there to show just how serious he is on the global stage, because he does charge across the world huge amounts for his brilliant speaking, knowledge and advice and this encourages those buying the £10 package to think that they are close enough to touch, feel and engage with that brilliance. Those that do pay the £80 per month will indeed get great value (because this is the only package that provides a personal 1-1 hour with the great man himself), but he will sell only a few.”
Knowing this brilliant speaker, we called him again and indeed, he confirmed that £10 was his best seller (by far). Our Head of Finance smiled annoyingly and went back to reading the newspaper…
’Til next time, stay safe…and especially from Dragons!