Why? Because I am not fit enough to run at top speed for five miles, and adrenaline alone can only take one so far before muscles and oxygen give out.

If I was told I had until next week to prepare myself to run five miles at top speed or die, I would pull in every favor I am owed and go into deep hiding. I know for a fact that I could not prepare myself for that in a week. Willingness, optimism, and even deep determination are ultimately no replacement for fitness developed with disciplined practice over time.

If I was told I had until next month to prepare myself to run five miles at top speed or die, I would start to train. I would train as many hours a day as the best trainer I could hire would allow me to train and I would follow his or her every instruction to the letter. I would beg, borrow, and sell my favorite belongings in order to afford that trainer. Yet even as I worked with incredible focus and intent, I would wonder if my muscles, bones, circulation, and respiratory system could possibly strengthen as much as necessary in the very short time I had. And every night before passing out I would curse myself for being so out of shape in the first place.

I don’t particularly expect a death threat any time soon, and if I do experience one, it’s unlikely to come from someone who is angry enough to chase me for five miles. So I probably won’t start training as if my life depends on it. I’ll keep up my somewhat desultory exercise regimen and continue to eat healthy food, but I’m just not motivated to train for a mini-marathon.

But if you are a small business owner, the chances that someone (you, your partner, your unprepared staff, an ill-chosen advisor, or a competitor) will run your business down and kill it are remarkably high. The statistics say your business has more than a 74% chance of being killed within five years of start-up. If statistics showed that I had a 74% or greater chance of having to run five miles for my life in the next five years, there would be nothing desultory about my exercise regimen right now.

It takes time, good training, discipline, and practice practice practice to prepare your business for the run of its life. Trying on various sales strategies for size, dabbling in one technology idea after another, launching a website, deciding to play in social media, sending out an eNewsletter – these are all parts and pieces of a strategy, and then only if the strategy itself warrants those activities. If your business fitness approach is to stick your toe in the water here and there to see if anything works, you’re just delaying the inevitable.

Personally (quite personally – I’m a small business owner just like you), I take these odds very seriously. Though I can be a bit of a slacker on my personal fitness, I started training to beat the business odds from day one. This includes a carefully crafted strategy, a sales and marketing plan designed to achieve the strategy, a talent plan that identified which types of skills we would need at each phase of our growth, a technology plan that included trying to conceive of which technology would make us most competitive five and ten years in the future, and contingency plans for each type of aggressor that might pop out of a dark alley and try to run us down. We follow our training regimen every day, and if we sometimes fall off the wagon, we have metrics and other types of alert in place to sound the alarm and firmly place us back on track.

You don’t have to be a betting man to appreciate these odds, and you won’t want to wait until you feel the breath on your neck. Commit to the strategy, plans, and training regimen your business needs right now; you’ll run faster than ever before, you won’t waste energy looking over your shoulder, and you will be able to sprint –with relative ease – each time conditions tell you it’s time to run.

© 2010. Andrea M. Hill

People who disapprove of experts and intellectuals don’t just disapprove of them in politics (wow, I can’t even write that sentence without reflecting on how deeply strange it is). People who disapprove of experts and intellectuals disapprove of them in general.

I have been collecting a little journal of observations of anti-intellectualism since the ever-so-unimpressive-Sarah-Palin smashed onto the American reality show stage. Of course, I stopped collecting hers because there were just so gosh darned many of them. But here are a few that have managed to stop me in my tracks and make me reconsider the intelligence of people who did not seem to be mentally incapacitated otherwise:

• I would never go to any doctor other than a family medicine guy. Specialists aren’t any more skilled than anyone else, but they’ll cost you an arm and a leg more to go to them (same version of this statement recorded for auto mechanics).
• I don’t trust accountants and I don’t want one nosing in my business. I let a bookkeeper go over everything before tax time and that’s good enough for us.
• What is the point of hiring a lawyer? You still end up paying all the same fines and fees but you’ll have the legal bill tagged on too.
• My son (a primary school teacher) can use a computer as well as anyone else out there, so why would I pay some expert $10,000 to build a website my son can do for free?
• Oh, and my favorite – spouted out during a discussion about the importance of learning to be a critical thinker: “That’s the problem with the universities and all the ideas they use to brainwash children. That’s why they call it a liberal education (insert sneering tone here).”

I’m not suggesting that all experts are preferable to generalists, that experts are inherently better than anyone, or that there aren’t some really sharp generalists out there. I also accept that there are too many highly paid losers masquerading as experts. What I am suggesting is that broad-based bias against expertise and intelligence is inherently bad, because it sets the stage for mediocrity-on-a-pedestal. If this dangerous belief has wormed its way into your psyche even a little bit, and you are a business-owner, you are probably doomed.

Because at the same time that this strange idea that mediocrity, home-grown-ness, and average-Joe-ness are preferable to education, expertise, and intellectual rigor, the world has become a more competitive, more complex place – a place where people slow-on-their-feet or lacking in the abstract thinking skills necessary to grasp multi-level problems are being left behind. Fast.

If you own a business and you are counting on that business for your future wealth and retirement income, you will undermine your future if you do not seek the most talented, most intelligent, most not-average people you can find to fill critical positions and provide you with the business support and advice you require. Yes, it costs. It costs to hire talented people, it costs to go the extra-mile to sift out the good-on-paper from the good-in-reality, it costs to keep talented people, and it costs to pay for genuinely good advice and support.

It also costs a business owner to never have enough cash to pay the bills, to lose out on business opportunities because he can’t afford them, to lose customers because he’s not taking good enough care of them, to lose money because he made poor-but-avoidable choices, and to lose all that sleep and quality of life worrying about how his business is doing. Am I painting an overly bleak picture? I don’t think so. The business failure rate has accelerated from its already high rate of over 70% failures over five years. That’s a lot of lost money and lost time, not to mention ulcers and failed marriages. Want to blame it on the economy? OK, but what’s to explain the fact that that the over 70% failure rate has been documented for over a decade?

As a strategy consultant I analyze a lot of businesses. The one common thread between businesses that are thriving and growing and ones that are struggling? Quality of employees. I don’t mean just “nice” people – though that’s very important (check out the sidebar). I mean clear-thinking, intelligent, trained, intellectually competitive people who want to be mentally challenged and rewarded for great performance. The most successful business owners worry about paying the amount necessary to hire talented people in key positions, then pay it anyway because they see the long-term value. The most successful business owners work hard to understand their personal shortcomings, then bolster the business with people who possess the offsetting strengths. Just like it’s difficult to stay in tip-top health if a quiet cancer is worming its way through your body, it’s difficult to run a highly competitive business if you subconsciously have reservations about the value of talent.

But what about all those people who are just average? Don’t they deserve to work too? Well of course they do. I firmly believe that there is good, rewarding, skills-appropriate work for every willing worker. You don’t have to be a rocket scientist to work as a retail sales person – and most rocket scientists couldn’t succeed in that role anyway. You do, however, have to be a rocket scientist to be a rocket scientist. And your marketing professionals should have experience and training in the theory and practicum of marketing, your managers should have formal knowledge and experience in the disciplines and practices of management, the best tool & die workers have had the opportunity to work for real masters, and a copy writer is much more than a person with good grammar and spelling. Whatever your critical roles, it’s your job to seek (and seek, and seek, and seek if necessary) the absolute best people for those jobs.

As I said earlier, people who disapprove of experts and intellectuals disapprove of them in general. What I didn’t say is, except when it’s deeply personal. The guy who disapproved of medical specialists? Someone he loves deeply was diagnosed with a very rare illness, one that only the top specialist in the world could hope to cure. At first he struggled with his bias against expertise, but ultimately he moved heaven and earth to get to that specialist. The result? Life for his loved one.

Your business is deeply personal. It’s life for yourself and your loved ones. When you think about it that way, doesn’t it make sense to find and keep the experts that will help you compete and profit? Don’t put mediocrity on a pedestal, not in your personal life, and not in your business. Mediocrity is not profitable. It’s not socially beneficial. Hell, it’s not even fun.

© 2010. Andrea M. Hill

We ignore connections, even when they are obvious.

But sometimes we don’t understand the connections in the first place. For instance, until recently the average medical doctor only received the equivalent of two hours of instruction in nutrition during his entire medical training, even though our bodies are chemical factories that are completely at the mercy of the chemicals (food) we put in them. Without deep knowledge of the basic chemistry and mechanics of food production and nutrition, most doctors do not understand the connections to health and prevention. Does this make them stupid? Of course not. Uninformed, leading to reduced ability to problem-solve, yes. But stupid? No.

This failure to make connections is not isolated to the medical community. Business owners regularly fail to make the connections necessary to ensure the health of their businesses. The problem is that most business education does a pretty decent job of teaching each of the elements – disciplines – of business, but does not do such a good job of teaching the connections.

Inputs and Outputs

But it’s quite simple really. And once you start thinking about business in the way I’m about to describe, you won’t be able to stop. How easy? Well, consider this.

We all know that the desired output of a lamp is light. If I asked you which element provided the actual light, you would say it was the light bulb. And then you could elaborate and say that the electronics inside the lamp provide energy to the light bulb, that the power cord is what delivers energy to the electronics, and that the power cord must be plugged into the power grid of the house through a power outlet.

The only output in that analogy is the light from the light bulb. Every other element is an input. Business is the same.

Outputs are the things your customers experience as a direct result of their awareness of, or relationship with, your company: The products and services you offer, the environments within which the products and services are delivered, the messages the company conveys, the discussions consumers have about the company either face-to-face or through social media, and the reactions they get – both good and bad – to the products and services they have purchased from you.

Inputs are all the things you do to deliver those products, services, messages, and post-sales support and to influence or respond to consumer-driven communication about your products and services.

Have you ever wondered which elements of your business you should prioritize for investment and development? I just gave you the answer. Well OK, maybe there’s a little more to it than that.

Imagine that you own a business that designs shoes. No, that’s too broad. Imagine that you have a business that designs orthotic shoes. Your desired output is a shoe that a podiatrist can recommend, and that a consumer is willing to wear, both because it performs as expected and because it looks like an attractive shoe and not a medical device. Your target consumer is a woman who works full time on her feet in an indoor, non-industrial profession – like a nurse, medical technician, or retail sales professional. Everything else you do must enhance and protect these outputs.

So what are your inputs? To figure that out, work backward from the ‘light bulbs’.

In this diagram, the outputs are the products, marketing, sales, service, and public discussion as perceived by the customer. Everything below the red line is an input. Each input necessary to achieve a desired output represents an important investment. You make your decisions from the top down.

• If you decide that your customer is female, that dictates which type of shoe designers you will hire.
• If you decide that your sales method will be through orthopedic and podiatric offices, that determines which type of sales people you will hire.
• If you decide that your sales effort will be using the internet, that dictates which types of technology you will invest in.

Failure to invest in your critical inputs will guarantee failure of your outputs.

So here’s where we return to the concept of cause and effect. Because if your business strategy is built on weak inputs, it’s just a house of cards, and the lowest layers must be built and strengthened before the upper layers can produce economic value.

Simple, right? Now if I could just get that stupid song out of my head.

The shin bone’s connected to the . . . knee bone. The knee bone’s connected to the . . .

© 2010. Andrea M. Hill

Balance of power. This is the thing that determines the difference between an off-color joke and a sexual harassment. Balance of power differentiates between a fist-fight and an assault, an argument and an attack, a gamble and a fraud. Every business owner, manager, and supervisor must be acutely aware of the balance of power between them and their subordinates.

My particular reason for thinking about this issue now is that this super-heated political season has brought to my attention numerous instances of employees feeling discomfort and dismay over the political climate at their places of work. After spending many years as the only center-left member of an organization with far-right ownership, I can certainly relate to the tip-toeing and side-stepping one must do to avoid an argument that has no value to the business at hand. But for people reporting to a supervisor, manager, or worse – business owner – who holds political opinions significantly different from their own, the discomfort goes beyond the desire to avoid fruitless discussion. It touches on their fears about keeping their job or being considered viable for promotion. The imbalance of power can turn political discussion and pressure into a form of abuse.

The same is true for holding forth on religious beliefs, divisive social issues, or any other non-business – and therefore unnecessary – topic. Even if you would never discriminate against someone because their belief system is different than your own, it is the mere perception of threat – due to imbalance of power – that causes employees to feel threatened or uncomfortable.

The primary goal of a business is to create value for its customers, and each business relies on its employees to deliver that value. Employees who feel respected, safe, and appreciated do a much better job of delivering customer value than employees who feel compelled to put up self-protective walls. One way to cultivate happy, confident employees is to tell them to leave the political buttons, cause t-shirts, religious missives, and other non-business messages and opinions at home. Let them know you respect and honor each member of your organization, and part of that respect means allowing them to feel safe and harmonious at work so they have energy and motivation to pursue their individual interests and causes when they are off the clock.

Beyond avoiding unnecessary conflict at work, keeping divisive topics out of the workplace will yield one other essential benefit: Creativity. The more commonality a community enjoys the less creativity that community puts out, so the more diversity you can encourage in your people the more that creative sparks are likely to fly.

Which only sort of explains why Diane Keaton’s character in the movie would ultimately choose Jack Nicholson over Keanu Reeves. That part of the movie just didn’t make sense to me. But hey, the point is, to each her own, right?

(c) 2010. Andrea M. Hill

It may seem surprising, but small manufacturing business owners often do not know how much it costs to produce their products.  Not knowing how much things cost, they are left with disappointing results at the end of each accounting period and in need of cash to finance upcoming projects. The two biggest costs most companies incur are the costs of production and the costs of labor, so lack of clarity and control in these areas can be devastating.

The key to knowing product costs is to use a sound costing method. There is no magically easy way to manage costing – it is a demanding task that requires intelligence and discipline. But if you manage costing effectively, you will find profits increasing within a year as you refine your production, merchandising, pricing, and marketing strategies based on the insights you gain.

Your goal in costing is to understand both the overall profit of the company and also the individual profitability of items. As a business manager you must do bottom up and top down analysis at all times. In this case, the top down (macro) analysis is the overall corporate profitability, and the bottom up (micro) analysis is the performance of individual items. Imagine for a moment that you are experiencing a 1% decline in your profit margin. How do you begin to understand what is causing it? If you only understand your profit margin at a macro level, you will not have the insight you need to tweak profit margin at the micro level.

The simplest way to set product costs is to average overhead and salaries by adding them together and then dividing to come up with a production-cost-per-minute. You then multiply this cost by the amount of time required to produce a particular item. This is a fairly common approach, particularly for companies new to manufacturing, but it is fraught with risk. This approach will only work if:

1. All the people in your production environment have the same skills and productivity
2. All the people in your production environment are paid the same amount of money (now and in the future)
3. You are not doing any process batching that can be performed by lower-salaried laborers

If all three of the above conditions exist, then presumably each minute of production time for each product is worth the same thing. In that case, a production labor rate that is averaged across all production workers will work for you.

If, on the other hand, you have variability in pay, skill, and type of process, you must approach costing in a more sophisticated manner. The approach I am about to describe is a derivative of Activity Based Costing (ABC). It’s important to note that it’s a derivative, because if you study ABC you will discover a nearly molecular approach to costing that is time consuming and suffers badly from point-of-diminishing-returns. This derivative approach takes into account variability in skills, pay, and tasks without the expensive granularity.

Let’s use a jewelry example to illustrate. Imagine that you are making two rings, both of 18k gold, both requiring setting three stones. But Ring #1 involves very careful finishing to preserve detail in the band, and it requires channel setting. Ring #2 has a simple band and does not require special attention in the finishing step, and the stones are prong-set. Does Ring #1 take longer to make than Ring #2? Obviously. But what isn’t so obvious if labor costs are being averaged and divided by the minute is that Ring #1 may require a $70,000/year production worker for 90% of its minutes, and Ring #2 may require a $35,000/year production worker for 100% of its minutes. In this case the averaging of production time over minutes no longer works, because it understates the cost of Ring #1 and overstates the costs of Ring #2.

The way to manage costing in this environment is to benchmark and test. The benchmark is set at the beginning of production for a given item. Not the first time it’s made or even the second – those production times will always be longer and are likely set by a much higher paid person proving the production approach for a new design. You will keep careful track of the total (not elapsed) time of production for new items, and up to the point that an item is released for actual production, you can allocate those times to R&D rather than cost of goods. Do you have to do that? Not necessarily. Companies that are doing a lot of new production that is very similar to previous production may opt not to do that just because they have standardized and minimized the amount of time spent proving a new item. But companies that spend a lot of time in the pre-release-for-production phase may want to consider this.

Once the item is released for production, a cost estimate (based on pre-production activities) is set in the system for the first run. You will likely run slow on the first production run, but you need a cost in the system. Then, on the second run of the new item, you carefully benchmark the time spent  - the time spent in production and the cost of labor for the various steps of the process. That becomes the standard cost for the item. After this, you don’t measure each time you run the item (this is where the departure from ABC comes in – ABC would require careful measurement every time. But the time spent doing this costs more than its ultimate value in knowledge). Rather, you set each item to be re-benchmarked on a 2X or 1X annual basis. When you run the re-benchmark, you will typically find some improvement in the production time, but sometimes you will discover drift in process, shift upward in salaries, or shifting of labor types, and these changes will either be reflected in the new cost of the item or will give you the opportunity to correct undesirable drifts and shifts. The only time you should have to analyze items off their typical 1X – 2X/year schedule is if something major occurs, such as when an urban manufacturing  company’s entire production group fled to a competitor and he had to start from scratch with new employees.

The downside of this approach is that it requires careful management of costs. When you are benchmarking a new item, you need to consider the averaged salaries of the type of potential labor at each step, you must remember to schedule each item for periodic review, and you must remember to do the scheduled reviews. The other downside is that it is not perfect, but neither is averaging all salaries across minutes. The only near-perfect approach is ABC, and like I said, that involves so much extra work that the knowledge gained isn’t important enough to justify the cost of gaining it.

The upside of this approach is that it gives you excellent visibility to the actual productivity of your line. When you are trying to solve a problem, you can drill down into items and groups of items and see where your profitability is slipping. You may realize that you want to raise the price on just one category or subcategory of products, or that you can modify the design of an item or small group of items to reduce the cost, or that you can afford to hire a few more $35k/year employees and shift tasks into batches, or (the list goes on). Using this approach, small manufacturers gain insight into very interesting things. Some of the things my clients have been able to see using this approach include:

1. One client found that customers had a distinct preference for the more complex items in his line. The more complex items weren’t always obvious from the price point, but they were obvious in the costing. So he selectively raised prices on the complex items to increase margin, because the lower margin of those items – plus their comparatively higher volume – was having a disproportionate negative effect on profitability.
2. One client needed to reduce her price points but had to be very careful how she did it because she had just started seeing the profitability she needed and didn’t want to reverse it. By analyzing costs, she saw that she had the opportunity to put her lowest price production workers on a whole category of items that enjoyed good sales. She reduced those product costs and selling prices proportionately – thereby maintaining the overall margin (though not the dollars, of course), and was able to promote this new lower-priced line to counter the competitive pressure she was feeling.

These are just two examples, but they illustrate the type of knowledge this approach can bring. I rarely see conditions (no variability) that would make averaging all production salaries the most prudent approach to costing. The benchmark and test approach is the one I prefer, because even though it requires more work to accomplish, it is one of the most important functions of business. The resulting knowledge will help you manage not only the pricing of your line, but also generate better design and development ideas for future products and the evolution of the company.

(c) 2010. Andrea M. Hill

Designer and brand jewelry lines must be very careful to avoid commoditization. Whereas non-differentiated manufacturing concerns price based on the current precious metal market, to do so as a brand or designer will reduce the design aspect of the jewelry to the equivalent of ‘labor’, which can only precipitate a race to the bottom. This is tantamount to saying that two paintings that required 22 hours, oil paints, and 17 brushes to produce hold the same value, though one was painted by Gustav Klimt and the other by a technically competent reproducer of others’ original works.

Designer and brand jewelry executives must consider a number of concerns – some of them conflicting – when establishing pricing strategy. This topic can hardly be covered in the space of a blog, but I will address the high points in the hopes of launching a meaningful discussion within the jewelry design community.

On Avoiding Commoditization

The only defense against price competition is differentiation. Though it is difficult to differentiate on design – and I strongly encourage designers to include elements of differentiation in addition to design – differentiate you must. Let Cindy Edelstein’s be the voice in your head on this point: Cindy preaches that all the designers in an aisle at a tradeshow should be able to commingle their jewelry in the aisle, and she should be able to tell from design characteristics alone to which designer each item belongs. Without a distinctive voice the buyer will ultimately force you to differentiate on price because you will have given them nothing else to work with.

At the risk of seeming like I am downplaying the difficulty of finding good retail accounts, remember that you don’t need all the customers, you need the right customers. A retailer who only focuses on the price of your product based on the metal and gemstone content is not an ideal target. If he can’t see the design value for himself, what is the likelihood he has trained store staff to see and sell design to jewelry consumers? But once you are pulled into the retailer’s non-design-focused pricing strategy, it is nearly impossible to charge the right price when you encounter the right sort of retailer. You will do better working your tail off to find designer-focused retailers than to try to convince generic jewelry retailers to pay the right price. Sound difficult? It most certainly is. But that is the challenge of going into a designer business. If you had decided to be a high-volume producing manufacturing business, your big need would be the capital to invest in the production techniques and technologies necessary to produce in volume. The challenge for a designer business is the creative strategy, brand identity, intensive marketing research and analysis, promotion, and sales activities necessary to find the right customers.

On Variable Costs

You must know your variable costs to protect your margins. Variable costs include the raw materials and labor to produce each piece. Obviously, the first time you produce an item will take longer than subsequent production efforts, so you want base the labor on standard production. Estimating variable costs is, well, a big no-no. If your estimates are off and you negotiate a large order at the wrong price, you may run completely out of cash before you discover your error. Know your exact variable costs.

Metals are the big worry right now. Should you price gold at a $1300 market or $1500? Everyone has heard a horror story of $2000 or worse. Here are a few thoughts to consider when deciding what market to base your pricing strategy on:

• Investment demand for gold continues to hold at fairly high levels, bolstered by concerns about inflation and investor worries about the European economy. On 5/17/10 Kitco projected that gold could go up to $1700 this year, and most forecasts are eyeing the $1350 – $1500 range.
• Johnson Matthey is projecting platinum prices in the $1600 – $2000 range for the balance of the year.
• Silver has been experiencing market resistance in the $19 range, but if it manages to break through that resistance it could track up sharply and take many people by surprise.
• You must be aware of how other designers are pricing their lines. If you are at an $1800 gold market and everyone else is at $1300, you’ll likely be priced out of the market. Watch Cindy Edelstein’s blog this week for her report regarding current designer market bets.

Some will argue that it is better to be safe than sorry, and will price their lines at a specific market and tell retailers that orders will ship at the actual metal market the day of shipment. This may be fine for commodity-level manufacturers and distributors, but I advise against it for designers. As I said before, once you train the retailer to think about your line as a commodity + labor offering, you have thrown your design value out the window. I recommend a harder – but ultimately more sustainable – road for brands and designer lines.

Pricing for Margin and Value

So what’s a non-financial-analyst designer to do? Start by considering what price your target consumer is willing to pay for your line, and what margin your target (i.e., ideal) retailer wants to get. This involves market research. Trade shows are a terrible place to do consumer market research, because you can’t assume your competitors have done their consumer research. Pay attention to what your competitors are doing, but don’t fool yourself into thinking this is a replacement for consumer awareness. Listen to actual consumers, study what they are buying, find comparable items to your designer line, and learn what consumers are willing to support with their debit cards. This is where the real value of social media exists by the way. At any given moment hundreds of thousands of conversations are taking place, and many of those people are talking about what they buy, how much they spent, and where they bought it. These conversations are yours for the eavesdropping. Learn to listen in and you’ll begin to understand what consumers really think.

Once you have a sense of what consumers are willing to pay for jewelry like yours, subtract the target margin of the retailer. Now cost your line at a $1350, $1500, and $1700 gold market. Answer the following questions:

1. Can you meet your financial obligations and generate organic cash flow to cover your growth requirements at each of those margins?
2. If the answer to #1 is ‘no’, do you have outside financing available (already committed) to you?
3. If the answer to #2 is ‘no’, how will you fund the metal purchases, labor, and operational costs necessary to keep filling orders?

To generate organic cash flow, you must have margin. If you give up significant margin, you must generate so much additional volume that you can produce the number of dollars necessary to fund growth. If you can’t support the demand operationally once you get those additional orders – or if the number of dollars you need remains persistently out of reach – you’re out of business. Landing a few choice accounts won’t keep you in business. The key to remaining in business is producing more dollars. So giving up margin to snag a few choice accounts is rarely the road to success.

Look, if you’re going to put yourself out of business anyway, it’s probably worth your time and effort to get on the phone and call every retailer in the country yourself, just to find the 15 or 20 retailers who get it about designer jewelry and understand that it is not a commodity. There are more than 20,000 retail doors in this country, and most of them (sadly) are treating jewelry as a commodity these days. But not all.

Enlightened retailers exist. There are (dare I say it) more than 15 or 20 of them. There are at least several hundred retailers who understand that the key to turning consumers on about jewelry is being turned on about jewelry themselves, and training their sales and purchasing staff to be turned on about jewelry. They are using this advantage (yes, differentiation) to put their retail competition out of business, and because they understand love-of-margin, they are charging the right prices and doing the hard work necessary to find the right customers and encourage those customers to pay those prices.

Does this mean that when you find those retailers you will automatically solve your price problems? No, it doesn’t. You still must have tremendous control over your production, you need to know – not estimate – your variable costs, and you need to do everything in your control to keep your costs down so you can enjoy healthy margins after some reasonable negotiation with your retail partners.

You already know being in business for yourself is hard work. But working this hard for no money? That’s just not worth it. So don’t take your need for margin off the table. Differentiate. Do your variable cost homework. Do your consumer research. Price according to consumer demand and make sure you turn a profit. Strategize, brand, market, promote. Find the right retail partners. Sell your intrinsic value and differentiation (not your materials + labor!).

Make some money. You’re worth it.

(c) 2010. Andrea M. Hill

Of course, consumers do care about price. Ask them what influences their buying behavior, and they’ll tell you that price is the thing they care about most. Follow them around and study what they do, however, and you’ll discover that price is just one decision-driver, and generally not the most important. Why do consumers say price matters most when their buying behavior does not support this? No one is quite sure, but market research professionals suspect two factors: 1) consumers feel guilty about the amount of money they spend, and so report heightened virtuousness relative to price consciousness; and 2) faced with a sea of sameness across all consumer product categories, the only differentiator consumers experience in most cases is price, so price stands out.

I won’t even attempt to address consumer guilt, but I find the second issue to be of significant importance to small business owners – particularly those competing in luxury markets.

When a company fails to establish compelling reasons to buy its products, it is reduced to competing on price. This is market reactivity as a form of strategy, and it’s an excellent formula for going out of business. The only time competing on price is effective occurs when competing on price is the strategy. Wal-Mart’s strategy is price. Part 1 of the price game looks at all product competitors within a particular market and prices against them. That’s the easy part. Part 2 of the price game develops strategies for reducing the costs of operations and products to protect margins once prices are dropped. To build an organization that can successfully compete on price, a company must focus all energy, resources, and capital on creating systems and supply chains with maximum efficiency – all costs must be rigorously controlled and the rate at which products and cash move through the system must be very high. This strategy is out of reach for most – if not all – small business owners. Unfortunately, most small business owners play Part 1 of the price game, but lack knowledge or capital to play Part 2. The result is reduced cash flow and a fight for survival. So what’s a small business owner to do?

Consider playing a new game, a game that also has two parts.

Part 1: Develop a strategy that does not depend on price to attract customers. A good strategy considers multiple elements. Most business owners focus on the what I have to sell element exclusively, but that element is too limiting. What other compelling reasons to buy can you offer?

• Do you have specific knowledge of your customers, knowledge that significantly improves the customer experience?
• Do you eliminate any undesirable effects, making your company or product perform better than competitors?
• Does your product or shopping experience save your customer time, improve his or her ability to make a decision, reduce your customer’s risk, or contribute positively to his or her self-image?
• Can you sell your product in a way that solves a problem, creates new opportunities, or improves the shopping experience for your customers?
• Can you offer any exclusive benefits?
• Do you offer complementary products or services that enhance your overall value?

The process of determining three or four distinct strategic elements around which you will build your brand, on which you will base your selling and marketing strategy, and through which you will differentiate your company in the mind of your customer is the process of strategy. Good strategy is the first defense against mindless price competition.

Part 2: Look beyond the usual competitors. Business owners tend to assume that consumers are choosing between two similar products from two direct competitors. Let’s meddle with the sacred cow of the jewelry industry for a moment – the diamond engagement ring. When a young man prices a diamond engagement ring at Blue Nile, JC Penney, and the local independent jewelry store, is he creating a competitive space among diamond engagement ring sellers? Yes, he is. But are Blue Nile, JC Penney, and the independent retailer the only competitors in the arena? Definitely not. The other competitors are the florist, the cake baker, the wedding dress maker, the travel agent, the tourism promoters of a variety of potentially interesting honeymoon destinations, and (perhaps most important) the buyer’s self-image.

But wait! That’s not all! The diamond engagement ring seller is also competing against the restaurants the young man may choose not to eat at, the movies he may choose not to go to, the stereo equipment he will defer, the real estate agent showing him apartments or houses, and the iPad he wanted for his birthday. Most independent jewelers accept that selling on service is the alternative to selling on price, but after that, they run out of creative ideas for how to sell that idea. Part 2 of this game is NOT about trying to compete against all of these interests with every sale because that will just drive you crazy. Part 2 is about recognizing the full range of potential competitors, then crafting a compelling offer and image that sets your business apart in the mind of your potential customers.

This new game requires creative thinking, knowledge of strategic planning, the ability to project how various ideas will play out in the market, and ultimately, the willingness to make a choice about strategy and brand and then stick with it. The reward for a well-managed strategic process is the ability to run a business that is largely impervious to price competition. You’ll still have to price for value because consumers will always care about whether or not they are getting good value for their money. But pricing for value is a game you can win. And ultimately, that’s the only kind of game you really want to play.

© 2010. Andrea M. Hill

In 1975, 19 years after Pollack’s death, Benoit Mandelbrot coined the word fractal, which is an irregular geometric pattern that repeats itself at many degrees of magnification. A snowflake is a fractal – its smallest element is roughly the same shape as the finished snowflake. It turns out that nature’s patterns are largely fractals and that the human eye is finely tuned to fractal patterns. This idea was – and continues to be – tested heavily by Richard Taylor, a physicist at the University of Oregon. In 1995 Taylor produced a painting using wind, rain, and tree limbs, which unexpectedly led to something that looked remarkably like a Pollack painting. Intrigued, he scanned Pollack prints into his computer and analyzed the patterns. It turns out that Pollack was painting within nature’s most common fractal range (this story and much more can be found in Matthew E. May’s In Pursuit of Elegance: Why the Best Ideas Have Something Missing).

It took nearly 40 years for someone to articulate the reason that Pollack’s work is so gripping, but the patterns were there all along.

The Internet presents a similar problem today. It feels like a lot of noise. It’s difficult to sort the valuable information from the muck. At the low end of participation, small business owners and corporate communications staff monitor Internet conversations about their companies, celebrating the endorsements and dreading the oh-so-public complaints. At the broad-sourcing end of the spectrum, companies collect customer feedback on social media sites, ask the masses to participate in product naming and design, and put software development bids out to the public.

What are businesses doing with all that data? Data isn’t information. As a high school debater, I quickly learned that one could find a fact – complete with citations – to support any position one wished to argue. Later I worked with a woman who would regularly mobilize entire corporate departments to make sweeping changes because of a single customer complaint. “Ah,” you say, “but we’re turning that data into information.” But as I’ve mentioned before, if indeed information is power, librarians should be the most powerful people in the world.

Never before have so many conversations taken place in one forum. So much information is startlingly present at our fingertips, and there is significant temptation to read too shallowly, give credence too readily, and draw conclusions too quickly.

The actual value of all that data, the beneficial information that could be gleaned from it, is presenting itself to a select few individuals and companies who examine the conversations on the Internet in the way Taylor examined Pollack’s paintings.

Perhaps we would all be wise to view the Internet as a new kind of fractal. Step very close and observe only an inch of it. Back across the room and take in again. Business must develop the ability to recognize complex patterns in broad conversations, to comprehend their meaning, and to develop appropriate responses. The value is in the patterns.

People who know to look for the common threads, who have trained themselves to read a little deeper, listen a little harder, who have honed a skill for seeing patterns, these are the people who are figuring out why the Internet is beautiful. Do you know who these people are? Probably not the guy with the degree in statistics or the young lady with a PhD in computer science. Not unless they also spent considerable time learning to interpret literature and poetry, studying art and art history, or have deep knowledge about history, anthropology, or psychology. In this new renaissance that is the Internet, only the richest collaboration of arts and science will yield its ultimate benefit.

Do you know it when you see it? Only time will tell I guess.

© 2010, Andrea M. Hill

Distilling customer relationship publishing into one simple blog post

One good example of this is found in the literature related to customer relevance, relationship marketing, and customer loyalty. Every B-school has at least one professor publishing on the newest, greatest, latest methods for building customer relationships. Those ideas are then adopted by every POP and CRM software vendor eager to sell customer management tools, repackaged as gotta-have-it-or-risk-your-business enterprise solutions. No wonder business owners are perplexed.

Most of the information and solutions are quite good. Put them all together to gain insight across the spectrum of customer relationship management. The one remaining weakness is that business owners are frequently offered solutions for which they have not yet defined the problems. Problems are defined by asking questions. So let’s start there. The answers to customer relevance are found by asking these simple questions:

1. Why do my customers purchase my products or services?
2. Which features and benefits of my products are meaningful to customers?
3. How do my products stand out in customers’ minds?
4. How do my customers use my products?
5. Are any of my customers using my products in a manner that surprises me?
6. What are the biggest hassles my customers encounter when buying from me, and what could I do to eliminate those hassles?
7. Are there any specific barriers to being my customer? If so, how can I remove them?
8. Which of my customers require substantially more or less sales attention than the others? Why? What insights can I glean from this? How can I find/develop more of this type of customer?
9. If my business were shuttered, to whom would it matter, and why? Which of my customers would miss me the most? How long would it take another business to fill the void?
10. If I were just launching my company today, would I sell the same things? What would I do differently?
11. What experience does my customer associate with my products, and how can I create an experience that adds value beyond the inherent value of the product/service?
12. Which methods of communication are most relevant to my customers?
13. How do those methods affect the messages?

Developing the answers to these questions is not difficult. It requires research, compiling existing customer data, and analysis. Some of the answers may require expertise you do not personally possess, but which you can access in your employees or business advisors.

It doesn’t matter if it takes a while to answer these questions – if you didn’t answer them, the time would go by anyway, right? And it doesn’t matter if you don’t know precisely how you will go about answering them, because just knowing they must be answered will lead you to methods for finding the answers. What matters is that you ask the questions, chip away at assembling the data, and start to make better decisions. Because when it comes to relationships, it’s best to work on them a little bit every day.

These questions were first posed in an article written by Andrea Hill in MultiChannel Merchant magazine, May 2008.

© 2009. Andrea M. Hill

Note to my regular readers: My apologies for the long delays between posts! The challenge of keeping my arms around a rapidly growing business seems to push blogging to the bottom of the priority pile too often. I’ll try to be a little more consistent now that my most recent staffing challenges have been addressed. Thanks for sticking with me!