Businesses asleep at the wheel?
Business Week's May 15 issue features an article called "Why Profits Will Stay Pleasingly Plump." It sounded like a really upbeat story to read. It makes some exciting macroeconomic points about profits being up -- at least they seem to be exciting at first blush. But it was pretty easy to scratch the surface to find out that being "pleasingly plump" is just the calm before the macroeconomic storm. And such news, taken at face value, could even make some businesses complacent. But this is no time to be asleep at the wheel.
Here's why I say this: Take the top three points made.
First BW Point: The economy grew from increased consumer demand, exports and new capital investments. Should you feel good about this? Two reasons at least you shouldn't. This kind of growth tends to lift all boats -- including those of your competitors. And, considering that rising fuel costs will in fact impact the cost of goods sold, a rise in consumer demand may generate inflation. And this kind of squeeze tends to sink all boats. I think the bad news may be lagging behind this point.
Looking just at economic trends is like driving your business with one eye shut.
Second BW Point: Businesses have been experiencing wider margins, indicating stronger pricing power. Why? In part because interest rates have been low. Hmmm. That's sure to last -- not. Interest rates are going up consistently.
Third BW Point: Labor costs are staying down. Why is that? It's not because salaries are coming down, or even holding steady. The reason is that benefits programs are now being funded more by employees and not by employers. Now, consider that many companies will be competing for great workers (this is why salaries are going up). Don't you think they can grab more of the best workers by offering them nice benefits packages?
This brings us to our point. You've got to compete with companies by offering better value: to employees and to your markets (=customers, prospects). This doesn't mean you need to drop your prices. It means you must aggressively understand the needs of your different markets and differentiate yourself. This is how real pricing power is created. Everything that's happening at the macro level will either give you a windfall (thanks to no additional discipline on your part), or make your company tank (through no direct fault of your own). Don't rely on the macro news to affect your strategy. Rely on the news your customes and prospects give you.
The reason that differentiation gives you pricing power is that you make it difficult for prospects and customers to compare apples to apples -- and if you rmake your differentiation actually relevant to your prospects and customers, they will really want what you have to offer. And they will be willing to pay.
Once you have a customer, your differentiation serves an additional, bonus, purpose. It can help you retain your customers, building "loyalty" (as some marketing gurus incorrectly call it), or "perceived switching costs" (as other marketing gurus also incorrectly call it). In either case, the effect is that customers will have a harder time switching away from you.
You can look at this from various perspectives. Consider at least two models of how people make a buying choice. One starts with the core idea that people choose from a short list of choices selected because each choice satisfies basic the person's basic requirements. There is no huge effort to scan the market for the best list. The first short list created is "good enough".
The second core idea is that people will eventually come to a very good idea of how choices provide them utility -- or, in the larger sense, perceived value.
So, in each case, if a person puts you on the short list, they've done it because they found your first, or you provide something that gives them high perceived value. (Or both.) If your offering then provides the most relevant, differentiated value, you stand a good chance of being selected at a price you set.
Neither of these have anything to do with the macro trends defined in the Business Week article.
The moral of the story is as always: Businesses have a strong desire to believe their own information, and usually have an astonishing lack of real customer insight. You have to organize your innovation, processes, HR and investments around this customer insight.
Luckily, that's pretty straightforward to fix. (Not always easy. But straightforward.) You start by being committed to being more customer-centric, and you have to be alert to data beyond macroeconomic trends that can lull you into a sense of security. You can't be asleep at the wheel.
Here's why I say this: Take the top three points made.
First BW Point: The economy grew from increased consumer demand, exports and new capital investments. Should you feel good about this? Two reasons at least you shouldn't. This kind of growth tends to lift all boats -- including those of your competitors. And, considering that rising fuel costs will in fact impact the cost of goods sold, a rise in consumer demand may generate inflation. And this kind of squeeze tends to sink all boats. I think the bad news may be lagging behind this point.
Looking just at economic trends is like driving your business with one eye shut.
Second BW Point: Businesses have been experiencing wider margins, indicating stronger pricing power. Why? In part because interest rates have been low. Hmmm. That's sure to last -- not. Interest rates are going up consistently.
Third BW Point: Labor costs are staying down. Why is that? It's not because salaries are coming down, or even holding steady. The reason is that benefits programs are now being funded more by employees and not by employers. Now, consider that many companies will be competing for great workers (this is why salaries are going up). Don't you think they can grab more of the best workers by offering them nice benefits packages?
This brings us to our point. You've got to compete with companies by offering better value: to employees and to your markets (=customers, prospects). This doesn't mean you need to drop your prices. It means you must aggressively understand the needs of your different markets and differentiate yourself. This is how real pricing power is created. Everything that's happening at the macro level will either give you a windfall (thanks to no additional discipline on your part), or make your company tank (through no direct fault of your own). Don't rely on the macro news to affect your strategy. Rely on the news your customes and prospects give you.
The reason that differentiation gives you pricing power is that you make it difficult for prospects and customers to compare apples to apples -- and if you rmake your differentiation actually relevant to your prospects and customers, they will really want what you have to offer. And they will be willing to pay.
Once you have a customer, your differentiation serves an additional, bonus, purpose. It can help you retain your customers, building "loyalty" (as some marketing gurus incorrectly call it), or "perceived switching costs" (as other marketing gurus also incorrectly call it). In either case, the effect is that customers will have a harder time switching away from you.
You can look at this from various perspectives. Consider at least two models of how people make a buying choice. One starts with the core idea that people choose from a short list of choices selected because each choice satisfies basic the person's basic requirements. There is no huge effort to scan the market for the best list. The first short list created is "good enough".
The second core idea is that people will eventually come to a very good idea of how choices provide them utility -- or, in the larger sense, perceived value.
So, in each case, if a person puts you on the short list, they've done it because they found your first, or you provide something that gives them high perceived value. (Or both.) If your offering then provides the most relevant, differentiated value, you stand a good chance of being selected at a price you set.
Neither of these have anything to do with the macro trends defined in the Business Week article.
The moral of the story is as always: Businesses have a strong desire to believe their own information, and usually have an astonishing lack of real customer insight. You have to organize your innovation, processes, HR and investments around this customer insight.
Luckily, that's pretty straightforward to fix. (Not always easy. But straightforward.) You start by being committed to being more customer-centric, and you have to be alert to data beyond macroeconomic trends that can lull you into a sense of security. You can't be asleep at the wheel.
posted by Paul Ward at 6:26 AM
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