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Don’t be stupid with your business

Time and time again, I hear business leaders complaining that their business is barely viable. Typical issues:
  • providing essential attributes of a service for free because the customer refuses to pay for it.
  • allowing arbitrary changes in terms e.g. stretching out payment at no extra charge.
  • giving away customisation for free.
  • agreeing to prices below the true long-run cost (including cost of capital).
  • the list goes on.
Product-bundling and loss leadership may be relevant to your business, but the total deal has to be even more profitable than any deal without it.  If someone comes up with a genuinely smart new way of doing business, and chooses to compete on price, that’s a real challenge. But many businesses - especially those offering similar services - are essentially distinguished not by lower costs or different business models, but by their knowledge, modus operandi, reputation for delivery, and relationships. Getting trapped into a downward price spiral, especially when you’ve got competitors even more stupid than you, is a road to nowhere. Your business becomes a death march.

To get out of this mess, you have to do five things:
  • develop a distinctive market offer which is designed to appeal to the customers you want and who are prepared to pay for it;
  • understand in depth the operating cost model for your business, including the cost of risk and capital, and use that to define your absolute bottom-line on pricing and terms;
  • understand your target customers and develop your business to sell and deliver your market offer to them;
  • don’t sell to people who don’t want your offer;
  • walk away from existing customers with whom you can’t do viable business.
That last one is the hardest to do. Sometimes you have to wean yourself off unprofitable customers over time, so you don’t destroy your business during the change. But be very clear, if you can’t make a decent buck out of what you’re selling to your customers, either change what you sell, change how you make and fulfill your offer, or change your customers. Don’t compete with stupid competitors, and don’t serve customers who don’t value what you have to offer.

First posted 23 September 2007