Small Business Issues – Part IV

Since I have covered this business in three posts already it would have been worth it to post an update as events unfold. If you’ve missed it here’s the required reading – Part 1, Part 2 and Part 3 respectively.

The way thing were unfolding the business was supposed to crumble in 6 to 7 months. At least that was the term I have predicted based on all the issues I had uncovered back in March. So overall-  from my point of view at the moment – this company has got until about August to shut its doors. When I communicated this to the business’ manager he, obviously, didn’t quite trust me. We haven’t built that trust yet, as I was only doing initial assessment. Turned out I should have been paying more attention to the depth of the problems. But before we get to the conclusion – here’s issue #4 – problems with sales and marketing.

Although I’ve covered marketing somewhat in previous posts, I completely skipped on the way the pricing was made. As you may already know (and if you don’t – read on with more attention) the initial pricing is build based upon your cost of running business plus the margin. In other words, if the cost of doing business (CODB) per client is $100 and your margin is 20% (all numbers are not real and are just for example’s sake) then your minimum price of service per client should be $120. If you go lower than that then there is no point to be in business at all. You may slightly deviate in one way or another, based on market conditions, your own value proposition and competitive advantages you possess, but that’s how you determine the initial pricing. Once you’re ON the market – you can (and you must) take steps to reduce CODB and increase margins. Market won’t let you go far off the median – unless, of course, you’re government-mandated monopoly, like AT&T or cable companies.

So for this company in question the pricing structure was determined at the whim of the managing partner. Employees’ salaries tied in directly as a percentage of the price of service and, therefore, are also at the same whim. Having heard about so many promotions and sales event but having absolutely zero knowledge of how these things worked this partner distributed flyers and promo cards with 10, 20, 30 or – the latest – a 50% discount. Funny part is that his two employees who actually performed the services and collected the money found out about promotions from clients who showed up with promo materials. Of course with rates already lowest on the market their salaries were discounted into ranges of minimum wages or less. From previous experience I can attest that sometimes expensive places do these kinds of promotions for a very limited time to get new clients in. Experienced sales people pitch more expensive services that span longer periods of time, so overall this tactic is very successful. But just discounting your service by 50% out of nowhere is a message to the employees “we’re going out of business, grab what have left before we close our doors“. To the clients it reads like “we’re so cheap that McDonald’s looks like 5-star restaurant compared to us“.

As you may have imagined already the employees’ outrage resulting from latest 50% pricing cut was on par with recent volcano eruption. Both employees have quit on the spot. There wasn’t much of quitting involved though – the volume of clients only allowed for one and a half day of work per week.

Having said all that I must admin – I was (again!) being overly optimistic about those 6 to 7 months, it all fell down in less than three. In my defense I can only say that I based those assumptions on brief initial analysis.