Increase Your Bottom Line–Revenues part 2

31 08 2011

In “Increase Your Bottom Line—Revenues part 1” we explained that, generally speaking, the two ways to increase your revenues are:

1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or

2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).

There are important caveats attached to those two, and a good example.  So please read the first post if you haven’t already.

Let’s look at how to increase the number of sales.  Instead of outlining all options, we can simplify this into two broad concepts:

1)  Sell to new customers, or

2)  Sell more to existing customers.

Keeping these two ideas in mind is very important, especially when you are trying to expand.  Let’s look at the same basic scenario as last time to see why:

In any given month, you sell 100 widgets at $2, for revenues of $200/month.  Now, you want to sell more widgets.  We will assume these are the same exact widgets, and you are not introducing a new product.  How do you sell more?

Sell to New Customers

There are people out there that don’t know that your widgets exist and they don’t know that they need the widgets.  So some sort of marketing campaign could work great.

Sell more to existing customers

These are people that know about your product, but aren’t convinced that they need to buy more than they already are buying.  Increase the value that they are getting from the purchase.  You can do this by providing an easier customer experience (maybe do a survey to learn what might be keeping people away or if there is something that can make the purchase of your product more convenient… something as small as where you sell can make a huge difference), a rewards program, or lowering the price (but see “Increase Your Bottom Line—Revenues part 1” for how this may backfire).  Another great way to expand is by expanding your product line, which we will talk about in a future post.

Getting the Most Return on your Investment (ROI)

Before you choose one of those options and a method for implementing that goal, you need to learn what will give you the most ROI.  Read “How to Solve a Problem” for a brief overview.  In short, work from the ground up with research.  For instance, don’t just implement a rewards program because someone else got a great return from a rewards program.  It might not work for your business.  Learn about why rewards programs work.  A marketing campaign will also remind existing customers that you exist.  So you may get a better ROI there.  Look at what your competition does and how long they have been doing it.  Chances are, if they have been doing something for a long time, it works.





How to Solve a Problem

26 08 2011

Too many people try to force their idea of a solution as the only solution to a problem they are facing.  In other words, when faced with a problem, they come up with one solution and try to make that work.  This inevitably fails.  The first step when facing a problem, whether it is in litigation, business, or otherwise, is to explore all possible solutions.  Choose the solution that is most likely to work and bring the best result, not just the solution that you hope will be the best.  Do not blind yourself to other avenues that may work, and may work better.

In other words, when presented with a square hole, do not try to force a round peg into it.





There’s no such thing as a “Missed Opportunity.”

24 08 2011

Many entrepreneurs and investors are approached with business deals which are pitched as a great opportunity.  This is no different than high-pressure sales tactics when shopping for a car, or when sitting through a timeshare presentation.  In all of these, the person doing the pitching (the salesman) is playing off of the other person’s FOMO… Fear Of Missing Out.

FOMO is a mixture of many basic human emotions.  But a sales technique utilizing this can always be spotted with the basic message of “act now or you will regret missing this opportunity.”  As a result, you will be given a tight deadline with consequences if you don’t act.  For instance, if you are running a business distributing widgets and a vendor says “the price is $X if you sign up for a year contract today, otherwise it rises to $Y,” you will not have the time necessary to shop for other widgets and compare price and quality.  If they really have a good product at a good price, they don’t mind you shopping around!

Making matters worse is that once the deal is closed and the money is invested, it is human nature to be blinded to a bad decision, and thus, make similar bad decisions in the future.





Getting the Most Out of Customer Relations

18 08 2011

Receiving a customer complaint about your product is not something you want or expect.  But it happens sometimes.  It is important to accomplish three goals during that contact:

1) Assess liability – did your product harm the customer? Is there a potential that your product will harm people? Do you need to issue a recall? Is it time to call your lawyer?

2) Improve your product if possible.

3) Turn the upset customer into an advertiser for you – if the customer is misinformed about the product (perhaps the customer misused it or the inquiry was based on a rumor), then walking the customer through its proper use, or explaining the truth about your product, will save you that customer.  More importantly, if you provide the customer with excellent service, and maybe a free sample or two, then the customer will tell everyone what a good company you are.

Today, before you get that phone call, is the perfect time for you to write the questions that you plan to ask and outline the information you need to get.





Increase Your Bottom Line–Revenues part 1

16 08 2011

A couple of weeks ago, we wrote a primer into increasing your bottom line.  As a reminder, there are two basic items of focus:

(1) Increase your revenue,

(2) Decrease your costs.

As the title above implies (not so subtly), this post is part 1 in answering the question: How do you increase revenue?

First, it is important to understand the question.  The question focuses on revenue and revenue only.  That is, the total amount (the “gross”) of money flowing into the business. This is not your “profit margin,” or your profit, or your bottom line.  In fact, many businesses suffer the problem of increasing revenue, but decreasing their bottom line.  This can even lead to a loss!

You might be skeptical about this last point.  If a business is bringing in more money, how can it be losing money?  You will just have to trust us.  It happens more often than you think.  This is because there are hidden costs to increasing sales – you might spend more on advertising, shipping, employees, etc.  Each of these expenses might decrease your per item profit margin until some, or all, of your items are actually selling at a negative profit margin and you don’t even realize it!  But that will have to wait for a different post.

So, how do you increase revenues?  Like our last post, it may seem obvious, but it’s more complicated than it sounds.  Here are your two options, stated a little inaccurately (you will understand why a little later):

1) Increase the number of sales (i.e. if you sell 100 widgets a month, sell 200 a month), or

2) Increase the price per sale (i.e. if you sell your widgets at $1 per widget, sell them instead at $2 per widget).

Here is a basic idea of how these two interplay with each other.  But since this is just an overview, we are not going to touch upon the intricacies such as marketing (which targets (1)) and how that might lead you to change your price (either up or down).

In the second example above, note that this would double your revenues, all things being equal. This is an important caveat – if we double the price, we would expect the number of sales to fall.  That is, it would directly affect number 1 (how much depends on the elasticity of demand.  Different items have different rates of change).  If sales fall, then revenues decrease.  At some point, the sales will fall so much that your revenues actually decrease.  So, it is absolutely critical to know whether your price increase will lead to lower revenue.

This works in the inverse as well – decreasing price per sale can increase revenue by increasing sales.  The increase in sales may (or may not) offset the decrease in price.

For example:

In any given month, you sell 100 widgets at $2, for revenues of $200/month.  Let’s say you raise your price to $3.  Now you find that you only sell 20 widgets/month, for revenues of $60/month, a big decrease.

So, you decide to lower your price to $1.50 and find that you now sell 200 widgets, for revenues of $300/month, a big increase.

It can work the other way as well: maybe when you lower your price to $1.50, you only increase to 125/month, for revenues of $187.50 per month, a DECREASE in revenues from your original price.  Now, lets say you increase your price to $3 and find that sales only drop to 75/month, for revenues of $225/month.

So you can see that an increase in revenues don’t always come from an “increase” of sales or price, rather it is a “change” in sales, price, or (usually) both.





The Arbitration Clause

11 08 2011

Arbitration, as we explained in our last post, is a more adversarial process than mediation. In a typical arbitration, a sole arbitrator or a panel of three arbitrators listen to each party present his or her side of the case, and then make a decision, which may or may not be binding on the parties. You have probably, at some time in your life, agreed to settle a dispute through arbitration. Many, if not most, contracts with big companies (credit card companies, etc.) include an arbitration clause.

Because an arbitration clause requires your dispute to be settled outside of court, you may think it is in your best interest. After all, litigation is expensive, time consuming, and stressful, so an alternative procedure must be better for you, as a consumer or small business. However, when you sign a contract with an arbitration clause, you are giving up (or at least delaying), your right to take the other party to court, and this may put you at a disadvantage.

An arbitration clause often specifies that the arbitrators will be associated with a specific organization or industry that is likely to favor, or at least understand, the other party’s position. If you and the other party to your contract work in the same industry and would be more comfortable settling a dispute in front of experts, this may be an advantage for you. If you are not working within a specialized industry, but contracting with one who is, you may not want to settle your dispute in front of a panel of experts who may already know and respect your adversary.

An arbitration procedure is likely to be more private than a lawsuit. This may benefit both parties, or it may put one at a disadvantage by removing the incentive of bad publicity. If you are a consumer or small business entering into a contract with a big company, you might find yourself wishing you didn’t sign that contract.

An arbitration clause may also subject you to unexpected costs. For example, it could require that your arbitration take place out of state, although a lawsuit could have been filed in the state where you live and work. It may also specify an arbitration procedure with significant, up front costs. These costs will still be lower than those associated with litigation. However, some types of litigation are commonly taken on contingency, and a contingency case often costs the client little or nothing up front.





Alternative Dispute Resolution

9 08 2011

Most people have heard of two types of Alternative Dispute Resolution: mediation and arbitration. Both are used to resolve disputes before or during litigation. Some mediations and arbitrations are required, either by the court, as part of the settlement process, or by the terms of a contract. Alternative dispute resolution processes are also chosen by parties to a dispute as an alternative to litigation, because they believe it will save money, result in a quicker resolution, preserve business or personal relationships, or be less stressful than a lawsuit.

WHAT IS MEDIATION?

A simple definition of mediation is a form of dispute resolution where a neutral third party (a mediator), helps the parties to the dispute reach a resolution. A mediator may take a very active role in the mediation, making suggestions and offering his or her own ideas as the mediation progresses, or a mediator might take a less active role, asking questions in order to help the parties come to their own decision. The parties might be together for the entire mediation, or the mediator might speak to each party individually. Sometimes, attorneys participate in the mediation, and sometimes mediation occurs without the involvement of attorneys.

Generally, a mediation will begin with an introduction by the mediator, followed by opening statements by each party. After the opening statements, the mediator asks questions in order to gather all the information, identifies the issues that need to be resolved, and assists the parties in negotiating an acceptable settlement. A mediation may last for several hours, several days, or several weeks. If an agreement is reached, the mediator will usually draft a document outlining the settlement.

Courts often require parties to go to mediation before a case goes to trial. Mediation is frequently used in highly emotional conflicts, such as divorce and custody disputes, where ongoing relationships make an amicable settlement crucial. Mediation may be used to resolve disputes between family, friends, or neighbors, even where legal action isn’t contemplated. Mediation may be used to resolve a dispute within a community. Some mediators specialize in corporate negotiations and disputes, resolving conflicts where millions of dollars are at stake.

WHAT IS ARBITRATION?

Arbitration is usually a more adversarial process than mediation. In a typical arbitration, a sole arbitrator or a panel of three arbitrators listen to each party present his or her side of the case. Attorneys are often involved, witnesses may testify, and evidence might be submitted. At the end of the process, the arbitrators deliberate and render a decision.

Arbitrators, while not bound by traditional court rules, are often governed by arbitration rules. Arbitration may be used to resolve a dispute because an arbitration clause was included in a contract between the parties, because the parties agreed to participate in arbitration in order to achieve a quicker, less expensive result, or because a mandatory court arbitration program is in place.

Arbitration awards are often, but not always, binding, and while there may be a right to appeal, it is usually limited. It is important to note that where arbitration is mandated by a court, the arbitration award is of an advisory nature only.

Arbitration is especially effective when the matter of the dispute is very complex or technical, and an expert is needed to render a decision. Arbitrators often have expertise in the subject matter of the arbitration, making them better able to understand complicated technical issues. Arbitration is also very effective in situations where the dispute is entirely monetary.