Branes Grey Matter Articles

When Good Data Goes Bad

2008-07-24T21:19:00.000-07:00

The Third in a Series on Developing an Effective Performance Management System

Were you thrilled with the new lower price you got by waiting for your iPhone... until you found out the hot new G3 will be coming out for the lowest price yet of only $199? Have you ever rushed to finish your dinner and join a snaking line in front of the movie theater, only to find there is a second, less-crowded showing of your movie starting 20 minutes later? What about that great sale on hot water heaters you saw - the week before yours gave out? Being able to make good decisions that take advantage of opportunities is about more than getting the right kind of information. What value is good data at the wrong time?

Designing your performance measurement system to provide good data with meaningful context at the right time does more than simply providing great information. It makes the information useful and easy to absorb. Now, what do we mean by context?

When do you need to see the information to identify opportunities and make changes?

How do you need to see the information? Do other elements need to accompany your data to make it meaningful?

So how can you keep your good data from going bad? Consider the following five questions.

How should the information be grouped?
Chunking information around a few basic concepts allows you to consider all of the information in context at the same time. This means you can spot patterns and relationships more readily, and develop better intuition about root causes and opportunities.
Let's test the power of 'chunking'. Look, for as long as you like, at the letters below. Now look away, and see if you can write them all down flawlessly.
Did you spot the pattern? Did you wonder why three of those letters are included? Or are you still just trying to remember them all?
Now let's see what happens when you have the same letters, but with context. To keep this exercise realistic, we've placed this image below.

Now are you able to look away and record the series flawlessly? In this example, most people find it much easier to remember the letters, which means now they can focus on the meaning instead.
Is your reporting actionable?
A report showing declining revenue doesn't tell you
- Whether revenue typically declines during this time of year
- Where you thought revenue would be, compared to where it is
- Whether any changes have occurred in marketing or sales that may have caused the shift
- Whether the change is due to a particular customer, product, lower prices, or lower volumes
- Whether the revenue decrease is offset by decreased costs.
If you chose to report the changes in profitability within the context of what's happening in your top 10% of customers or products, however, you'd target the discussion to the few elements that make up 80% - 90% of the results. Add some trend and target lines, and your opportunities can become crystal clear, rather than clear as mud.
Are you reflecting what's meaningful? Or just what's easy?
Did you know that the Yankee Group estimates 40% - 80% of new business leads are lost, not followed up, or otherwise dropped? How much business is that? Yet when you choose to measure specifics, you find it's not always easy to measure net close rates attributable to a specific campaign, particularly when you haven't described the context for meaning. If you find people are spending less time solving the problem than they are spending arguing about which is the right version of "the truth", it's time for a time-out.
Which "truth" you select usually isn't nearly as important as simply selecting one, and insisting that the one you've chosen measures only the final collaborative outcome. It will transform the level of attention your teams give to resolving those communication and process issues.
Whether it's collaboration, innovation, trust or expertise, don't shy away from measuring more nebulous concepts that are crucial to your success. In most cases, the trend is more important than the absolute measurement. Provide the appropriate context to interpret and act prudently, and then measure away. Chances are, you'll see significant improvements simply from providing a clear and public definition of what you value and the results you expect it will create.
Are you distinguishing trends from facts, or just massaging the facts?
If you're really measuring what matters, some measurements won't be absolute and objective. For softer information, keep your presentation focused on trends, not exact values. At the same time, be alert for attempts to muddy the facts when results such as profitability aren't favorable.
But if profit from top customers is dwindling, changing the overhead allocation will only distract resources, not increase profits. Be attentive to changes that can make your decision-making more effective, but stand firm against tweaking measurements that may change the look of trends, but not the facts.
What other contextual elements will make your measures most valuable? And more meaningful?
We work in a wide variety of business types, and what provides context for one business is simply distracting chatter for another. Our advice: think about the decisions you can make about people, processes, products and customers.
For example, let's say that you think you've started to see your sales pulling back, perhaps from a weakening economy. But your sales typically don't occur in a straight line. So what you see when you look at your sales trend is this:
Are sales going up? Or down? In this example you may see a weekly pattern, but it's difficult to see more of a trend than lows going lower, and highs rising higher. Without more context it's difficult to understand what's going on, and even more difficult too determine what you might want to do about it.
What happens if we add a little more context? Let's try looking at it within the context of a weekly cycle.

This picture makes it easier to see what's changing. With so many lines, however, it's beginning to look like spaghetti. Imagine if you wanted to look back over the last quarter rather than just eight weeks. Would this chart be able to provide much context? Would it give you any intuitive sense of what might be the cause of those lower lows, or the opportunity you might be able to take advantage of with those higher highs?
Let's see if a cycle plot can add the context we're missing. Again, this will have the same data, but it's now shown in a different context.

Now is it easier to tell what's happening? Is your mind filling with ideas about what you might check? For example, is that new part-time sales person having an impact on sales? Or by Tuesday are you running out of a key product that typically arrives Wednesday morning? How about that earlier question: would last quarter data be just as easy to understand as these eight weeks? Might they even add more value?
Compare again the first and last pictures in this series. Can you see how even simple contextual changes such as this will help you make better decisions, faster, and less painfully?
Also consider the value you might gain by presenting the answers to some of your earlier questions as contextual elements in the same picture. For example, looking at coverage ratios such as average sales per person might reveal under-staffing on Tuesdays, while Mondays and Wednesdays might reveal the secret for just the right amount of coverage.
If you're interested in finding more ideas for providing context to your performance measurement, try this list to jump-start your thinking:
- Review Frequency. Should sales or production data be reviewed weekly or even daily? Or should you focus on staff training or a marketing campaign that will take a quarter or more to play out? Different elements are meaningful at different reporting frequencies.
  Magazines have editorial calendars; we recommend your performance measurement system has a calendar too. Don't waste time preparing and reviewing information just so the report looks the same each time. Your team will understand weekly, monthly, and quarterly schedules.
- Is your information for learning or for monitoring? For example, are you split-testing a concept of marketing, management or financial investments to see which method works better? Are you learning whether a new idea or process is viable or more successful than the old way? Or are you monitoring for problems with service, product defects, or unintended consequences of the new sales compensation plan? Match your measurements and presentation to what you need to know.
- Are relationships more important than measurements? If you need to see how differing inputs change results, don't force yourself to use your imagination. Show it all in a single picture, then use your energy to figure out what to do about it instead.
- What should you compare it to? Planned results, planned inputs, or what you forecast as results for that level of input? For example, if one 727 has 10% lower fuel efficiency for the same weight as another, will United want to pull that plane in to improve its performance? Or if your sales team has 1,800 leads, will you be more interested in knowing that you that you closed 215 of them, or that your close rate increased 7.5% over the typical 200 you've closed in the past?
- Would it be more meaningful to show relationships to sister elements? In the sales lead example above, if you've closed 7.5% more sales, is it important also to show that sales shifted to products with lower profitability? In a changing economy, product preferences often change, which often changes your productivity and efficiency priorities, too.
- Is it useful to show projected results? In sales, showing projected results from your current pipeline of opportunities can provide early-warning and manage the shift of work between building relationships and closing deals.

Vetting your measures for context can make the difference between a performance measurement system that's interesting, and one that drives results. Will you make the investment to improve your results?

Letters with Context:

Now are you able to look away and write the series of letters flawlessly? Did you experience a sense of relief as you were able to let go of trying decrypt the message and focus on the meaning instead? And why is IBM the only for-profit on this list?

Back to article

Note: We'd like to credit Naomi Robbins, Ph.D. for the cycle plot demonstration. See Naomi's web site for a tutorial on creating your own cycle plots in Excel.

Selecting Measures That Matter

2008-07-24T21:06:00.000-07:00

The second in a series on developing an effective performance management system

You've decided you're finally ready to really transform your organization using performance measurement. You've thought about your business, and what you're really trying to achieve. Now you're prepared to select some performance measurements.

You consult a few resources. Transforming Performance Measurement, an excellent book by Dean Spitzer on creating an effective measurement environment, lists 34 categories of measurements that can be truly transformational. Each category has multiple measures.

Then you see a major marketing firm lists 100 measurements in its marketing metrics toolkit. You try to imagine the time it must take to gather and input the data required to feed all those calculations. Then, you try to imagine having the time to do anything about the results after you absorbed what those hundred numbers mean. Your brain can't really process more than four chunks of information at once. Is this possible?

Talk about transformation. Initially it seemed like a great idea to have a process customized to measure what's really important for your business. Now, the cookie cutter approach, or doing nothing at all, is showing far greater appeal.

Sorting through the possibilities to select the handful of measures most meaningful for you can seem daunting. But it doesn't need to be. Answering some key questions about your business can help you rapidly narrow down the list.

Using Strategy to Determine Focus Areas

Some organizations have a clear, succinct version of their strategy that unifies everyone's activities across all functions and areas. Unfortunately, most don't. If this describes you, you're not the exception. However, to have a productive discussion about which measures will help your team the most, you'll need to have that clarity. So first let's make sure your vision is clear.

Internal vs. External

Business strategies generally have two components:

External: Where you compete

Internal: How you compete

The external element addresses the business that you're in, the customers you're targeting, and therefore the needs you're satisfying. Conversely, the internal element addresses how you choose to fulfill your customers' needs. So measuring your internal elements identifies whether you're doing the right things and doing enough of them. Meanwhile, measuring external elements determines whether your actions are having the desired affect on your customers and the corresponding financial results.

For your system to be successful, you'll need to have a balance of both internal and external measures. To determine which categories of these measurements provide your best candidates, take a look at these success factors for your strategy type.

What's Your Strategy?

There are a number of approaches to effectively defining strategy, but most businesses settle on one of four general approaches.

Low Total Cost

Product Leadership

Complete Customer Solutions

System Lock-In

Low Total Cost

This approach, also broadly referred to as Operational Excellence, is exemplified by companies such as Southwest Airlines, Dell, Ikea, Target, or McDonald's. Businesses pursuing this strategy are known for being the best buy or having the lowest total cost. If this represents your organization, you'll probably choose measurements that emphasize the elements you need to deliver the experience customers expect:

Consistent quality

Price

Lead times / inventory

Purchase convenience

Delivery speed

Selection

Product Leadership

Do your products and services provide superior functionality or performance in exchange for above-average prices? If you offer particular features or leading-edge functionality that makes your customers willing to pay more, you've chosen the path of companies like Apple, Cirque du Soleil, Mercedes, Starbucks, and Intel as product and innovation leaders. Your measures are likely to emphasize elements that give you the edge in product leadership, such as:

Innovation of valued features (e.g., speed, size, accuracy, or power consumption)

Speed to market with new features and functionality

Core competencies for crossing into new markets (e.g., Apple's iMac, iPod, iTunes, and iPhone)

Intangibles supporting brand prestige, image and "it" factors leading to early adoption

Speed of competitor imitations

Complete Customer Solutions

When IBM dominated the computer industry, it didn't offer the lowest prices, cutting-edge technology or the greatest computing power. But what it did offer was complete solutions designed for each customer's business: hardware, software, installation, training, maintenance, repair, etc.

Ritz-Carlton Hotels offers completely, personalized care for their customers' every need while away from home. You'll notice that even strategies emphasizing high-touch customer intimacy and customized customer solutions like Ritz-Carlton, however, are relying ever more heavily on technology to help them identify individual customers and propose custom solutions to meet their needs.

Another example, Netflix, deploys custom recommendations and platform-independent services to deliver your experience wherever you are, on any device, at any time, whether on your laptop in the coffee shop or your surround-sound theater at home.

If you offer your customers an end-to-end solution that makes them feel like you know them and truly care about them, your measures are likely to emphasize the following components:

Quality and reliability of solutions

Purchasing bundles or number of products / services per customer

Before- and after-sale service

Customer relationship quality (retention, referral, and lifetime value)

System Lock-in

Let's play Monopoly! This strategy locks in customers with its dominance. Exchanges requiring a critical mass of mutually interested parties, like eBay, the Yellow Pages, Facebook, or the old Blue Chip Stamps (showing my age!) are system lock-in plays. So are operating systems and tools or complementors linked to them like Microsoft's Windows and Office software dominating the business market - although lately less so.

This strategy seeks to dominate an industry and create high barriers for competitor entry and/or customer switching. If this is your intent, your measures are likely to emphasize:

Your degree of dominance (e.g., share of buyers and sellers)

Barriers to new entrants and switching costs for customers

Unique or proprietary functionality

Identify which of these four strategies most closely matches yours. Then use the emphasis checklists to trigger ideas about what factors are critical in your business.

Balancing the Big Picture

Once you've defined the broad categories, you should next review them for balance. Have you identified the factors that have the most influence on your team's ability to deliver the results you desire? What are the most crucial inputs and processes, and what are the key customer and financial outcomes? Are you striking an appropriate balance between short- and long-term goals, especially for low cost strategies? Have you found dual-purpose measures - lagging indicators for one activity, but leaders for the next? Are you also measuring the things you can't touch, the intangible elements that typically exert the most influence on your results?

From Questions to Measures

Most teams, once provided a framework, have little difficulty identifying hot spots for measuring, if asked in a penalty-free environment. Often the most effective way to develop a focused set of measures representing the greatest opportunities is to perform a series of anonymous, one-on-one interviews with key stakeholders. From these one-hour interviews with executives, managers and selected team members, a clear and consistent view of the results emerges, including:

The most important inputs

The crucial process breakdowns

The highest tension or trade-off areas

The internal customer knowledge and customer satisfaction

The internally identified gaps (inputs + process ≠ expected results)

Feeding back these results, especially when coupled with customer feedback, provokes stimulating, engaged discussion about the real measures of organizational success. There is often a sense of relief as disconnects that have been frustrating delivery teams and executives alike are revealed, along with miscommunication and unintended effects that aren't given voice until accumulated privately. Symptoms are then explored to reveal the underlying issues affecting the performance the team wants to achieve. The feedback is the foundation for dialog that transforms individual visions into a shared future.

The Journey Is The Destination

A performance management system helps you transform your data into wisdom that informs your actions. Converting your data into performance measures creates the information you need to ask questions and gain knowledge. Considering and testing the implications of your knowledge, you gain wisdom informing your actions.

Notice that developing and reviewing the performance measures represents less than 50% of the transformation process. The conversation, the questions, the exploration: together, they're more than half.

What Makes The Biggest Difference

Don't get me wrong. Selecting the right measures is important. The measures you select focus your dialog; they define the activities you'll be focused on. You don't want to leave gaping holes or overwhelm the prep team or yourself with more measures than you can digest. You do want to focus on what makes the biggest difference.

But if you're a little off, don't sweat the small stuff. Gaining wisdom requires learning. You'll figure it out, continue to choose better measures, and move on to gain more wisdom. 80% wiser is certainly better than no wiser at all. Besides, if one thing is certain, it's that what you need to measure, and what you need to discuss, will be changing too.

Graduating to Improved Performance

2008-05-29T14:58:00.000-07:00

The first in a series on developing an effective performance management system

Is your performance measurement system delivering what you want? What you expect? Do you have such a system? Developing an effective performance measurement system can be tricky. To paraphrase management guru Peter Drucker, some implementation efforts result in people doing with great efficiency that which should not be done at all. Consider the following examples:

A fast-food restaurant manager so motivated to meet his efficiency goals reducing food waste that he directs staff not to cook meals until ordered, spiraling the outlet into losses as customers refuse to return.

Sales people jeopardizing customer relationships and sales by delaying contracts when they've already met their quota for the period. Or alternatively, those that are so motivated to maximize sales, they close all deals, no matter the impact on production, customer satisfaction or profit.

Purchasing managers, rewarded for discounts, buying in lots so large that the company experiences a cash crunch, halting production and severely damaging its reputation when it's unable to pay its bills. Or purchasing managers rewarded for meeting cash-flow-conscious inventory targets, resulting in production stoppages while waiting for missing parts.

Effective performance measurement can be transformational, but creating a system that has the intended effects requires careful thought and commitment. This series focuses on how to create a performance measurement system that is effective, instructive and data-based, but intuitive. A system that is a competitive advantage, not an administrative burden.

Throughout this series we'll help you avoid common traps while you:

Set the stage

Create the environment for meaningful discussion

Reach a unified understanding of your strategy

Develop understanding of processes and causal relationships

Focus attention on inputs and action

Emphasize relevance, understanding and flexibility over "standards"

Develop presentations converting data to information, and triggering discussion, understanding, and ultimately effective and profitable action

Setting the Stage: Who will use your performance measurement system?
The most important aspect of your system is social, not numeric. Really. Performance is generated by people, your team. They're also the ultimate user of your measurement system. The output of your system is important, but it pales in comparison to the discussion and discovery it generates.
For many of our clients the learning and changes generated during the creation or update of their performance measurement system exceed their initial goals for the project. Sustaining the dialog through review of the system's results, and through continuous improvements to the measures, generates an ever-growing pool of expertise and a powerful platform for innovation. Without people to read, understand and act on it, however, your performance measurements will be little more than a pile of preserved electrons or sacrificed trees gathering dust on an analyst's shelf.
The culture in which you introduce your system is also crucial. Successful systems encourage discussion and understanding, not punishment and reward. Integrating punishment and reward with your measurements typically generates unintended consequences and encourages destructive gaming of the system. You're likely to end up like the Russian government with super-heavyweight weight lifter Vasili Alexeyev. He was rewarded with handsome bonuses for breaking world records, so he learned to smash them frequently and successively, but by only one or two grams at a time.
Be clear about your strategy. One of the most powerful phases of this process is developing a common understanding about your strategy and what you're trying to achieve. Consider these company strategy statements.
- We will generate a loyal, long-term customer base through superior customer service.
- We will generate competitive advantage by continually setting the standard, delivering faster and better, for less.
- We will grow our leadership position through our commitment to innovation.
These may all be inspiring words for the right audience, but what do they really mean? Does providing superior customer service not include delivering faster, better and cheaper? Will we provide superior customer service even when it means being unprofitable? If so, how far is too far or how long is too long? Is our commitment to innovation limited to certain industries or product lines? When will we pursue innovation that cannibalizes our own product line? How do we even define innovation?
These are all important questions. Questions for which these companies' team members had a multitude of intelligent, but different and often conflicting, answers. Chances are your organization has similar questions, where it's crucial your team explores the options and develops a common answer that unifies your efforts for maximum impact.
Get clear about the process. If you don't know how the process works, you can't manipulate the outcomes. This is just as crucial for service businesses as it is for manufacturing.
Wells Fargo Turned Banker's Hours Upside Down
Terri Dial turned the concept of a banker's leisurely consideration and thoughtful pace on its head while at Wells Fargo. Bankers' hours, long payday lines and months-long loan approvals were common practice at that time in California banks. Informed by solid analysis but still risking mutiny in the branches, Dial announced Wells Fargo would now open its branches at 8:00 a.m., remain open until 5:00 p.m. or later, and in some locations even open their doors on Saturdays. Not long thereafter, Dial instituted the Ten Minute Max, committing branches to a maximum customer wait time.
Because she and her team understood the business, the stakes and the risks, Dial could choose to change the game, surprising her competitors and making a powerful statement about Wells Fargo's commitment to customers. In the following years Dial continued to change the expectations for banks' customer service. She pushed through initiatives such as compressing loan approval times for most small business loans from roughly three months to one week, then five minutes, and finally the virtual process we now expect to see within seconds over the Internet every day. Painful for bankers? Certainly. But the change was inevitable. Only the leader was to be decided.
Service firms may look at processing times or cross-selling services. Manufacturers may look at end-to-end cycle time or component costs. What's important is to understand the process and develop an understanding of the relationships and causal links. Without that understanding, you may as well be playing the slots in Las Vegas, where what goes there, stays there.
Inputs come before outputs. Performance measurements are for taking action first, and monitoring results second. Systems that merely monitor and report results after the fact generate little value. They are more prone to generate creative story-telling than performance improvements that will push you beyond the competition.
To make your system effective, focus more of your measurements on the inputs you can manage than the outputs measuring the impact of what you changed. Monitoring outputs is important to understanding which efforts have the most impact and why. Learning the intricacies of your inputs is what creates competitive advantage. This typically translates to more leading indicators around people and process than lagging indicators such as financial measures reporting results after the fact.
Look for leverage points. Effective performance measurement is about finding the smallest number of key measures providing the greatest insights. Too often we find dashboards, scorecards and performance matrices offering many pages more of detail than any manager should be reviewing on a regular basis. When everything is important, nothing is, because every effort is of equal value.
Archimedes said, "Give me a lever and a place to stand, and I will move the world." When you find yourself falling into the trap of too many measurements and not enough focus, ask yourself which of these measures can have an order of magnitude impact on your business. Which are the 10% that make 90% of the difference? Common triggers include customer retention, price points (net of discounts), and end-to-end cycle time. For Southwest Airlines, it was high utilization as measured by turn-around times between flights, a tangible goal everyone had to work together to achieve. For Dell, it was a measure of cash flow. What is it for your business?
Back From the Brink
In Dell Computer's early days, it had a laser-like focus on growth. As it succeeded in growing, however, new challenges emerged. The rapid pace consumed ever-larger amounts of cash to fund manufacturing, faster than Dell could find sources. As Dell teetered on the edge, it discovered a new key performance metric that would make all the difference: its cash conversion cycle time. Dell focused the entire company on reducing its cash-to-cash conversion time, driving it down relentlessly from 70 days to an amazing less-than-zero days. By developing a business process that allowed it to collect the cash for its products before it paid for the units it had just sold, Dell fueled an enormous engine for growth.
Now the market has changed again, and Dell faces new challenges. Will it be able to discover a measure to drive its performance to new heights again?

When you're setting the stage for your organization's performance measurement, avoid the temptation to get it over-with, relying on generic industry measures. Measures of best-in-class performance are only useful for those who want to be in the same class. If you're ready to graduate, select the measures that reflect your unique circumstances - and create a unique advantage.

Misleading By The Numbers – 5 Traps To Avoid

2008-05-13T22:17:00.000-07:00

How do I mislead thee? Let me count the ways.

If sales grew by 40% last year, but fell by 30% this year, how would you feel about the trend?

This comparison is typical of many dashboards and metrics reports and year-over-year financial comparisons. It would leave most of us feeling that sales were still up overall by about 10%. But before you leave the room feeling comfortably ahead, consider that this, in reality, means that sales have fallen 2% over the last two years.

The fact of the matter is that most business reporting is unwittingly designed to mislead. That's certainly not the intent in the majority of cases. It's more a matter of not knowing what we don't know.

As you review your first quarter results with a thoughtful eye for the months ahead, use this checklist to make sure you're not misled and that your decisions are on target:

Two Plus Two Does Not Equal Four. People tend to treat percentages like whole numbers, making systematic and predictable errors in calculation. If your production statistics show efficiencies have reduced costs by 20% last quarter, and your production manager tells you they've found an additional 25%, chances are you'll be looking for a 45% improvement in the next report. You may even be slightly disappointed by the impressive 40% gain.
This is the same phenomena responsible for the 10% growth versus 2% fall in the example above. When it comes to percentages you can't always trust your gut, so make sure you're doing the extra checking necessary to make sure you're not misled.
A 300% Rise, Or An Increase < ½ %? Did you see this week's (04/23/08) headlines? "Home Foreclosures Quadruple in State, Bay Area" or, "Bay Area Home Foreclosures Soar Over 300%". It's doubtful that, "Bay Area Home Foreclosures Reach 0.04%" would be as effective in grabbing your attention, although it describes the same data points.
Most people tend to be good at simple percentages, but we're not good at taking those same results and putting them into different perspectives. Even when we have the necessary knowledge at our fingertips, we often don't make it to the next step. For example, if I tell you 40% of all sick days are taken on a Monday or Friday, would you be suspicious of long week-ends? (Monday and Friday represent 40% of the days in a typical work week.)
Which would you support?
Would you rather support research for a disease that affects 30,000 Americans a year or one that affects just .01 percent of the U.S. population? Charities, health researchers and public officials often use this principle to present their cause in ways that will motivate us to act. Rather than dispassionately informing us, they persuade by choosing presentations emphasizing their relevance, such as describing an increased risk of cancer in terms of percentage increase in likelihood you'll have the disease (i.e., a 50% increase in your risk of cancer) versus the actual change in the incident rate (e.g., from 0.0050% to 0.0075%).
So even if the trends you're seeing are accurate, are they presented in the most appropriate context? (Note: This is a significant issue with graphs, dashboards and other visual presentations, the subject of an upcoming Grey Matter article.)
Anchoring Bias Away For Your Expectations. Did you know that just writing down your social security number is enough to bias you toward that number?
Bidding for Bias
In a study by Ariely of MIT, participants were asked to write down the last two digits of their social security number before being asked what they would pay for items. In a real auction at the end of the study, the half of the participants with social security numbers ending in higher digits paid 60% - 120% more than those with lower ending numbers.
This bias, called anchoring, occurs in all aspects of life, including when you're negotiating, evaluating prices and reviewing your financial results. After reading in today's paper that Starbucks says the economic environment is the weakest in company history, as a coffee shop owner you may be pleased if your sales are stable or growing in the low single digits. On the other hand, if you read that McDonald's attributes much of its double-digit sales growth to its new line of coffee as direct competition to counter the Starbucks juggernaut, you may wonder instead why you're not able to achieve the same kind of growth with your personalized service.
Confirming Your Own Conclusions. Frank Abagnale, the real-life character in the Steven Spielberg/Tom Hanks/Leonardo di Caprio film, Catch Me If You Can, often tells about how he took advantage of the assumptions people make once they are given a cue to reach their own conclusions. Late one evening as the airport was closing, he noticed ticket counter staff bagging up the cash from their drawers, walking down to the end of a hall, and pulling open the drop-box at the end to deposit the day's earnings.
The next evening when ticket counter staff walked down to the end of the hall, they saw Frank Abagnale in a security guard uniform with a garbage bag next to him and a sign taped to the drop-box door: DOOR BROKEN. PLEASE LEAVE BAGS WITH SECURITY GUARD. Seeing the sign, and Mr. Abagnale in his freshly-purchased and pressed security guard uniform, everyone dutifully dropped the day's earnings into his bag. Mr. Abagnale tells of sweating bullets at the time, thinking, "Somebody's going to figure this out. It's a hole in the wall with a door over it. How could it possibly be broken?" But no one stopped to question how a drop-box door could really be broken. The consistency of the sign and the security guard uniform were enough to stop everyone from considering any other conclusion.
In the last decade, Kodak repeatedly made the same mistake, continually convincing themselves that their sales were about to take off, allowing them to reclaim their leadership position of an earlier era in the new digital photo market.
Recently General Electric made the same error, announcing to the market that they were still on track despite numerous threats to multiple core businesses in their portfolio. Just three weeks later, instead of earnings growth, GE reported a 6% drop in profits, somehow surprised by the effects of the real estate market and slowing economies. (This prompted former GE CEO Jack Welch to comment on CNBC that Jeff Immelt, his handpicked successor, "Has a credibility issue.")
The Risky Shift. How you evaluate your results will also depend upon who you're with at the time you do it. When we are with a group, we tend to moderate our individual opinions to be more like those of the group, resulting in a group opinion that is more extreme than each individual would have reached on their own. Originally known as the Risky Shift, the affect of this tendency has been especially well-studied for its impact on jury decisions and the effects of prejudice. And in teen-agers hanging out with their friends. Beware of its effect on your judgment.

Despite all these biases, one thing we do know is that being aware of tendencies and biases can help us to be vigilant in mitigating their effects. So keep your eyes open, always be vigilant, and remember to be aware of information bias. You know... the tendency to want more information, even when it won't affect your actions. Any questions?

Five Tips For Making Good Choices

2008-04-25T15:13:00.000-07:00

Choices. As the economy steps into recession, we all begin to adjust to the choices we need to make. Some have already acted, but many of us are still trying to define the wisest course. Whether you're a global powerhouse or a main street retail shop, the shifting landscape offers both opportunity and risk. The choices we make will determine whether we thrive, survive, or see our fortunes dive.

How do you make the right choice? Here are five tips.

Don't worry about making the perfect choice. We can struggle for weeks or months between similar choices. The truth is, many different choices can be successful. As management guru Peter Drucker said, about 10% of what you do leads to 90% of your results. Focus on defining that 10%.

Play out the scenario. Considering choices in the abstract makes it easy to overlook concerns that may be obvious in retrospect. Instead, make your choices real. Even if you don't build a model, you can use your imagination. Ask yourself:
- If I do this, what will my team do?
- How will my customers respond - next month but also next year?
- In what areas will my leadership be most influential?
- How will my competitors react if they see us as successful, or vulnerable?
- What could happen that would make this plan fail, and what might I do to counteract that before it's too late? For example, have I considered cash flow, not just profit?
Playing out a few likely scenarios for your top options will make you more comfortable with your choices, and better at getting the most out of them when you finally implement your decisions.
Gather input from multiple sources. The greater the diversity of input in your thought process, the more you'll be able to integrate options into a cohesive whole. Having a greater variety can also help you improve the realism of your scenarios and risk analysis.

Be conscious of information trade-offs.
- How much? Deciding how much information you need before choosing is a delicate dance. Information and data can make choices easier and more successful. But just how much better will your decision actually be?
- How good is it? Information, even from reputable and respected sources, won't improve your decision if it's not answering the right question. Consider whether your information may be flawed or misleading given the question you're answering.
Thinking About Information Differently
If Apple had chosen whether to develop the iPod based on consumer surveys, where they probably would have heard we wouldn't buy one, or had estimated the potential size of its market based on the popularity of other products serving a similar function, like the Sony Walkman and other me-too portable music players, it's unlikely I'd have an iPod at my desk today.
But Apple realized that consumers are notoriously poor at accurately predicting whether or not they'll buy something. The company also recognized that consumers wanted things the Sony Walkman couldn't deliver, so "stealing" the current Walkman market wasn't an appropriate comparison. Instead Apple looked at its information differently, ultimately making a very successful choice to single-handedly create a new market of iTunes and iPods to drive industry sales, convert PC users to Apple lovers, and become the wolrd's largest music retailer, surpassing even Wal-Mart recently.
Consider your options, but then choose. In this environment, this tough choice may be the most important tip, and the most difficult to practice. In our dithering over which is the best decision, or how we can we improve it, we can lose our opportunity to make any good choices at all. The 14th century philosopher Jean Buridan described this common dilemma as a hungry donkey that perishes from starvation while trying to choose between two equidistant but similar piles of hay. Don't let your wealth of choices paralyze you.
Close That Door Before It Shuts Itself
We all have a compulsion to leave the doors of opportunity open, even when we know we're damaging our overall success. This desire doesn't seem to change, regardless of how many other doors are there or how valuable the current opportunity we're pursuing. In 2004, researchers at MIT decided to see just how strong this compulsion is.
They devised a computer game with, literally, doors of opportunity. Players chose to enter through any of three major doors on the screen. Each knock on a subsequent door rewarded the player with a pay-off: 5.8 cents, 6.5 cents, 3.5 cents, etc. Players' earnings grew with each knock. When players could knock on whatever door they wanted, their earnings were pretty substantial, at least for college students.
But then the game was changed. Each time a knock was made on another door, the neglected doors would shrink, disappearing altogether after twelve knocks elsewhere.
Players became obsessed with not allowing any door of opportunity to disappear. No matter how successful they were with Door #1, they would frantically shift back to knock on Door #2 or Door #3 before it disappeared.
Realizing that knocking on those doors rewarded them with substantially less money did not stop their compulsion to keep the doors on the screen. Even when the game was changed so that a vanished door would reappear on command, players continued to knock on the less profitable doors to keep them from disappearing -- to the tune of about 15% lower earnings. They just couldn't stand to lose the opportunity of being able to knock on those doors later.

We all want to make the right choices, and as Areily and his researchers at MIT proved, we're compulsive about not losing out on opportunities, lucrative or otherwise. But these good intentions don't always lead to good choices. After all, good choices do require good analysis, but they also require the action to make them real.

You'll never know whether you really made the right choice at the right time, except perhaps in retrospect. By being conscious of your natural tendencies and how they affect your organization, however, can lead you to a more successful determination of when you have all the information you need to act.

Just as Buridan's donkey didn't know the piles of hay were equal until he got within sight of them, you won't understand your choices until you considered the options. Being smart about how you consider them is important. But once that's done, don't starve your business with debate over which pile of profit may be incrementally better. Choose one, and make it yours.

The High-Value Customer of Tomorrow

2008-04-10T19:58:00.000-07:00

John has been in sales for years. Until a few years ago, he spent about two-thirds of his time on the road wooing clients. John's travel partners -- hotel chains, airlines and his credit card company -- all showered him with special treatment to earn his loyalty. Then John was promoted. Although he still travels frequently, more often people now come to him.

One of John's travel partners monitors their high-value customers carefully, but they made a mistake. When John's travel costs declined, they decided he was no longer as valuable to them. The personal touch disappeared and his benefits were yanked with an impersonal "to serve you better" note.

As the senior sales executive, when the time came to evaluate the quality of potential long-term partners, John had little trouble assessing whether this company would rise to the top, or fall to the bottom. As so many companies do, they defined high-value customers by looking at spending trends today. By narrowing their definition to the most obvious data, they missed John's whole company's high-value customers of tomorrow.

Who is The High-Value Customer of Tomorrow?

Certainly, you want to be as profitable as you can be today, but not at the expense of tomorrow. Where are the high-value customers of tomorrow? You can get a foothold in realizing who they are by looking at today's.

Start by seeing where today's high-value customers came from, especially those who recently joined the list and those who are falling off, to gain insight into finding your most profitable customers of tomorrow.

Where did your current high-value customers come from? Are they from a particular marketing channel or a promotional effort? Did they begin with a different product or service? Test your findings to get a better understanding of whom you're most likely to convert and how. When you have a solid understanding of what attracts them, consider testing parallel groups with similar needs to expand your pool even further.

What do less profitable customers have in common with your high-value customers? Do you have occasional users or influencers in your existing customer base that can be converted? Is one of your smaller customers taking over competitors -- perhaps competitors using alternative suppliers? Consider why your high-value customers consider you as their best alternative. Then mine your existing customer base for others that have the potential to realize the same value.
How did today's customers become high-value? Many probably didn't start their initial relationships with you as high-value customers. Identify the primary paths your high-value customers have taken. Should a change in customer contact name trigger activities that maximize sales growth under the new manager? Do currency fluctuations beyond a certain level or certain trade policy changes create greater opportunities? Or do shifts between certain products or services signal early signs of growth? Identifying tomorrow's potentials and building your relationship today will require far less investment than trying to woo back a former customer tomorrow.

What about yesterday's model? What has happened to yesterday's high-value customer? Why aren't they high-value any more? Has the customer entered a new age in their lifecycle where they just don't need us anymore? Was it our pricing? Our service? Have we been displaced? Perhaps they decided to take our function in-house? Did they eliminate it altogether? Whatever the transition point, consider what it can teach you about your current high-value customers, and those of the future. What can you change, and when is it time to stop investing?

What is the potential impact of product changes? When you add or modify products, consider where it will significantly increase or reduce the value you're providing to your clients.
Reading the Future of Bar Codes
As an example of how technology affects high-value customers, consider the bar code reader. Once, they were all similar to the ones at your local grocer's check-out counter: a stationary reader over which you pass the item's bar code. Everywhere bar codes were used, the product had to be brought to the reader. The manufacturer assumed the market for its new portable reader was the same as that for its old stationary reader market. They didn't think about the many new possible uses for the portable reader.
This simple oversight of the new feature's impact ultimately carried a great cost to the company. Priced too low for the dramatically increased demand, supply chains were not protected for their most valued customers, and even those who received the product were disappointed by the quality of a manufacturing process pushed beyond capacity to meet demand. Quality, reputation and relationships in tatters, the company's ability to fight off new competitors was significantly weakened and its long-term profits irreparably lowered.

Predicting the road ahead. Now that you know what a future high-value customer looks like, what can you do to increase the likelihood that they'll be yours? What traits tell you who is most likely to convert? Not all predictors are equal. Consider what traits are simply correlated versus those that signal a change. Be mindful of your assumptions; what changes might make that relationship cease to exist? How predictive is your measurement: can these traits predict historical customer behavior? If not, can efficient small-scale tests help validate and prioritize investments? Early identification and special treatment for future high-value customers can produce far greater returns on your investments than simply applying the same great tactics to your customer base as whole.

Using Your Discoveries Effectively

Identifying your high-value customers reveals more than who has the largest sales volume. It simultaneously provides the means to accelerate your growth and reduce your costs. As management guru Peter Drucker once said, more often it's about what you need to stop doing, not what you need to start. Identifying your high-value customers of both today and tomorrow:

Defines what elements of your offering provide the most value, and those that provide the least

Reveals your biggest advocates, and what could change their minds

Identifies your most effective marketing messages, channels and tools, and the brand perceptions that support them

Creates a more complete and nuanced view of who your best customers are, whether today or in the future

Provides a rubric for prioritizing your efforts.

So don't settle for simply determining who generates the most revenue, or which accounts generate the largest profit margins. Instead, aim to understand the bigger value equation. It will be one of the highest value activities you perform.

Redefining Your High Value Customers

2008-03-27T19:10:00.000-07:00

During challenging economic times, it's more important than ever to focus on the profitability of your business. What are the keys to sustaining profitable sales? What vulnerabilities might your competitors discover and exploit? And how does the changing environment create customers, cost reductions or other advantages you can snare?

Certainly its important to consider these questions from a grand perspective to develop a sense of the key decisions you face. But these important questions should also be viewed through the lens of your high-value customers: current and future. These are the clients that provide you the highest return for your investments in them, the ones often responsible for 80% or more of your profits.

Yet often, under the strain of difficult decisions, this fuel for profit is ill-defined or, worse yet, its unique needs and contributions are ignored altogether. Frequently, this creates a domino effect: first, sales weaken; next, profitability drains, then, core advantages begin to wither from lack of resources. All too often, the business sputters onto life support and eventually fails. Meanwhile competitors with seemingly comparable offerings thrive or even grow.

What Fuels The Engine?

When your car runs out of gas, you know what fuel it needs: unleaded gasoline, diesel, ethanol, or bio-fuel. You know that pouring in the wrong fuel can ruin the engine. Similarly, defining your high-value customers helps you understand the fuel you must acquire and preserve to keep your business humming profitably.

The Dual-Valve Approach

High-value customers bring you the most profitability because you bring them value. In exchange they return value to you. When you stop bringing that value, they become yesterday's high-value customer. As both you and your customers change and evolve, your pipeline to profitability must include your high-value customers of today, and those of tomorrow. If either valve closes, the pipeline empties and the engine dies.

Getting a Handle on True Profitability

Today's high-value customers aren't necessarily your biggest customers -- those with the highest purchasing volume. Many other factors influence the value customers return to you. What does it cost you to sell to and serve them? How long do they stay - like an annuity, what's their lifetime value? You'll want to consider each component in the checklist below:

Sales Volume.How much your customer spends is important; it's just not the only thing that matters.

Profit Margin. What's the profit margin on the sales after you allocate costs? A 10% profit margin on $10,000 in sales is equivalent to a 1% margin on $100,000 in sales, but the $100,000 sale often requires far more indirect resources. Ultimately you want to define your final profit margin, and often the simplest approach is to start with gross margin, then modify for other harder-to-match costs.

Product Mix. Is this client an early adopter, the viral marketing tool that money can't buy? Do they purchase a profitable mix of products, or only your most unique items they can't get from anyone else?

Acquisition and Retention Costs. What does it cost you to sell to this customer? For example, what marketing, sales, administrative and service costs did it take to acquire the business? EADS and Northrop Grumman spent millions to win the Air Force's contract for the tanker of the future. And what does it take to keep the customer? Boeing also spent millions in their attempt to win that same contract from the Air Force who was their existing customer, and failed. Don't ignore resources consumed in persuading and wooing your clients, especially unpaid consulting, proofs of concept, and valuable executive time.
Costs To Service.This step involves looking for patterns in costs after sale - costs that can vary significantly by customer: return rates, customer service calls, warranty costs, payment timeliness or collection costs. In 2007 Sprint "fired" over 1,000 customers because their repeated calls to customer service demanding credits to their bill was costing thousands of dollars in refunds alone. Costs that were effectively passed on to more desirable customers through diminished service or higher rates. These 'complainers' were the 1% of customers making the vast majority of the difference in customer service and return costs.
This cost of service analysis is especially tricky, however, for larger organizations because their internal systems provide a false sense of confidence and validity. It's easy to forget that these systems were not often designed with your specific analysis in mind, and even if they were, their somewhat "Black Box" calculations are subject to the same garbage-in, garbage-out and pro-rata allocations that infect other data.
Where could differences between customers make a significant impact on net profit? Consider this question systemically, holistically. Then tailor your skepticism and testing accordingly.
Influence. In every social system, influencers play a disproportionate role to their stated power. Oprah only needs one book, but if she chooses to feature it in her book club, the sale of that one book is worth far more than any other sale. Its value is so significant that most publishers wouldn't even dream of charging Oprah for a book. We all have our own Oprah we wouldn't dream of upsetting if we stopped to consider our decisions in those terms. Conversely, do some of your customers have negative a influence on your business, disclosing inappropriate details to the press or making statements that undermine your position with other customers?

Retention. We mentioned retention costs above, but we didn't mention the other dimension: how long does that customer stay with you? Retaining customers even for just a year longer generates some of the most dramatic increases available in profitability, often quoted at 30% or more. Of course the difference it makes to you will depend on the characteristics of your offering and your customers. No matter the details, however, the costs of wooing and learning to serve a new customer are so high that in established businesses, it's rare to find a case where resources are better spent on acquisition than retention.
Consider the full revenue stream, then allocate realistically. Don't rely on your accounting system to provide these answers. GAAP accounting is for investors. It doesn't provide the precision you need. Instead, use your Customer Relationship Management system, other customer service data, and carefully constructed data dives to define truer revenues and costs by clients.
Once you've created this estimate, verify the total value you've estimated is comparable to the financial results of a selected period. In other words, if you add up your estimated values for this year's earnings, is it close to actual results? If not, compare the detail until you find the differences that don't make sense. Make sure your allocation makes sense before moving onto the next step.
What's your customer structure? Now that you know who really adds the most profit, what can you learn from your basic portfolio structure? Does Pareto's Law apply -- are you making 80% of your profit from 20% of your customers? As the percentage of customers providing the bulk of your sales decreases from 80%/20% toward 90%/5% or lower, the vulnerability of your business increases. However, this same skew in your results also means you're likely to discover a lot of "low-hanging fruit" within your existing customer base - fruit that can mature into tomorrow's high value customers.
Walking The Tightrope Between Profitability and Cash Flow
One of our clients had eye-popping gross profit margins and phenomenally high customer evaluations, but seemed to constantly struggle with profitability and cash flow. Looking at averages per customer, it was difficult to spot the culprit.
However, a quick analysis by type of sale revealed the fundamental issue. Each sale involved a significant set of "per sale" costs that didn't fluctuate whether the sale was $500 or $50,000. With more than 90% of sales representing less than 5% of sales dollars, the client was losing money on every one of those smaller sales. This was a very expensive form of advertising, and an endless source of headaches. Once the company realized what was happening, pricing was immediately changed to break-even until they could do further analysis (on tomorrow's high value customers). On the few occasions they did lose a customer because of price, they were happy to pass the losses on to their competitors whose sales teams were often compensated for totals sales, regardless of profit.

As you go through this checklist, you'll almost undoubtedly discover customers costing you money to serve. If your best customers are funding these profit drains, it's time to take action. Most would recommend "firing" these customers once they're discovered, but don't do that yet. There's another step you need to complete first. Are some of these the high-value customers of tomorrow?

The Bottom Line

Recognizing your high-value customers can help fuel your sales pipeline and keep your company profitable with the least overall effort. By looking under the hood to discover the nuances of your customer base, you can determine which customers truly make a difference. You'll understand their vulnerabilities, their common elements, and how they react to the changing environment. By viewing your customer base through the lens of current and future high-value customers, you can more readily provide the value they need before returning value to you.

In our next post, we'll explore Part 2 of this story: Who is your high-value customer of tomorrow?

Who Do You Love?: Customer Personas

2008-03-27T18:54:00.000-07:00

In 2002, when Brad Anderson succeeded founder Richard Schulze as the CEO of Best Buy, he faced a huge challenge. Investors continued to expect growth of 20% per year, but Best Buy had completely saturated the North American market. The next wave of growth would require significant changes and a singular focus.

After an exhaustive search, going to conferences in a myriad of industries and tapping the brightest minds he could find, Anderson discovered a new component he considered critical to continued growth. Larry Selden of Columbia's Business School ("Angel Customers and Demon Customers") argued that many companies undermine their profitability by pursuing sales too blindly, failing to consider which customers are most profitable and which actually cost money to serve.

Anderson realized that no matter what other growth strategies Best Buy pursued, it was going to need to focus on attracting and retaining its most profitable customers, and finding ways to transform less profitable and unprofitable customers into more profitable ones. But how?

He began a campaign to convince his team of the importance of what Best Buy now calls "Customer Centricity."

To create Customer Centricity, Best Buy developed four personas to represent key customer segments for marketing, communication and training across North America:

Barry (the wealthy professional man)

Jill (the now-updated soccer mom)

Ray (the family man)

Buzz (the young tech enthusiast)

For two years, Best Buy invested in developing these personas and perfecting its roll-out even down to emphasizing a primary persona per store: over 60% of stores are designed to attract and service Barry or Jill. By 2005, sales in over 100 test stores were more than eight percent higher than those in regular stores.

What is a persona, and why should I care?

A persona is a research-based character that represents a group of customers or potential customers having similar goals and motivations. Personas help everyone on the team to understand and relate to your key customers on a personal level, whether front-line salespeople or IT departments and senior executives who may rarely talk with a real live customer.

Personas are formatted in many ways, but are typically one to two pages of engaging narrative, a name and a photo, and perhaps some minimal demographic data, all working to bring the persona's motivations and goals to life.

Personas don't represent target markets in the typical data-citing, quantitative, demographic sense. Instead, personas unite your target markets by what they want to accomplish and why. For example, Wesleyan University realized its one-fourth non-traditional students were united not by the field they wanted to study, but by the differing motivations and goals of pursuing an advanced degree at 20, 40, 60, or 80 years of age. One of Wesleyan's personas now is "Bill," a mid-level manager required to get an advanced degree.

In the Washington Post's feature story on Best Buy, In Retail, Profiling for Profit, we learn about the "Jill" persona. "Jill" is: "a soccer-mom type who is the main shopper for the family but usually avoids electronics stores. She is well-educated and usually very confident, but she is intimidated by the products and the store clerks who spout words like gigabytes and megapixels. According to the data Best Buy has collected, "Jill" shops a few times a year -- usually twice -- at an electronics store, but she usually spends a significant amount."

How is a persona used? From "Thin Is In" to Granny Power

Personas focus your marketing by bringing your customers to life in a real-world setting. They can unite your entire organization by providing an easily-digestible way for everyone to quickly and intuitively understand far more about your customers, their decisions and behavior, and how to delight them.

Re-targeting markets. The research required in creating personas reveals customer motivations in ways demographic research can't imitate. The one-on-one interaction offers rich and nuanced data; the patterns across interviews reveal the opportunities for greatest impact.

"Thin Is In"
Slim-Fast used personas to re-target its marketing to three personas: one needs to get "back to slim" for an upcoming event or vacation, one needs to lose weight gained over a few years, and the last needs to lose weight for health or medical reasons. When Slim-Fast used these personas for an email marketing campaign, email open and offer response rates were twice those achieved in any previous campaigns.

Prioritizing projects. Staples defined personas for their Web site. When they matched site visitors to specific personas, they discovered that two of their personas counted for just over a third of the site's visitors, but over half of sales and profit. Now they prioritize the projects that will keep these customers happy.

Improving customer experiences. Developing personas can reveal opportunities to dramatically increase purchases and customer satisfaction. For example, Universal Studios Orlando used personas to refocus its web site and saw online ticket purchases climb 80% the next year.

Granny Power

Reviewing their database, Best Buy realized the female Baby Boomer market was a significant opportunity for additional revenue. It's persona research, however, showed that they were trying to reach that market on grossly erroneous assumptions. The "granny market" was not the tech-ignorant, reluctant customer they had imagined. She was tech-aware, time-pressed, and wanted to shop for technology in the same way that fashion is often sold, with related accessories in one place rather than strewn across the store.

Shortening and focusing debates. Chrysler and Whirlpool use personas to help everyone understand what needs to be accomplished for customers, eliminating most product development and service disagreements and helping everyone intuitively understand exactly who they're selling to and serving. Many companies find personas so beneficial that the first page of project briefs feature the persona being served. Some companies, such as Chrysler, even hold meetings in specially designed persona rooms - outfitted with personal artifacts from furniture and art to energy drinks and MySpace pages - that immerse the team in the life of the customer they're serving.

Discovering untapped or underserved markets. E*Trade's persona research helped them understand that their customers typical behavior patterns weren't being taken into account by their systems. For example, customers usually want to check stock quotes before making a trade. When E*Trade implemented its redesigned customer experience easily integrating customers' natural steps, it saw an astonishing 15% jump in trading volume.

Zipping Into New Markets

Zippos used personas to successfully guide the development and launch of its first product extensions in 70 years. Its traditional lighters were popular with the college crowd, but were there other markets they could serve? Using personas they found Louis, the week-end warrior who loves bonfires, camping and roasting marshmallows. He also loves the convenience of using the new Outdoor Utility lighter. Zippo met Mandy too, a Martha Stewart devotee, who uses the new multipurpose lighter around the house for lighting candles and barbeques.

What are the benefits of personas?

As Bruce Temkin of Forrester put it, "Starbucks has taught us that coffee shops don't have to compete based soley on their coffee." You matter more than beans as well, and personas can help you understand or intuit a brand-consistent differentiation that will matter more to your customers - and to your bottom line.

Personas get everyone on the same page. Remember "Jill" from Best Buy? For its story, the Washington Post asked employees at the Santa Rosa, California store about "Jill". These Best Buy employees didn't recite a verbatim description. They know "Jill": who she is, what she likes, and how to take care of her needs. When she walks in, they recognize and serve her accordingly.

'She's very smart and affluent,' says Best Buy employee Jenn Metzger.

''Jill' is a decision-maker. She is the CEO of the household,' asserts Tony Sagastume.

''Jill's children are the most important thing in her life,' Jenine Bryant adds.

After "Jill's" introduction, annual sales to "Jills" in the Santa Rosa store rose more than 25%.

Personas create a more consistently customer-focused experience. Once you read about "Jill", even from the few sentences here, you know who she is. Will "Jill" want to hear rap or techno music blasting through store speakers? Can "Jill" keep an eye on her children browsing through the games while she looks at a new digital camera for the family?

How are personas developed?

It's important to develop your personas appropriately. As Harley Manning of Forrester says in Persona Best Practices: Developing Your Customer Research Plan, "A persona that isn't based on primary user research is like a sociopath: charming, convincing, and dangerously misleading."

Base your personas on real research, not the impressions of a group of people within the company. Primary research - interviewing your customers and potential customers, watching them in action, seeing their goals and what triggers them to act - is the only way to generate genuine insight into your customers and opportunities.

Don't be limited by your knowledge. Personas expose new markets and new opportunities, but only if they are created with an open mind and updated as your market changes. If you think you already know what you need to know about your customers, it's unlikely you'll discover anything new. If you're open to possibilities, however, it's likely you'll discover you've overlooked or underserved a broad new market (like a hip Granny or an infrequently shopping "Jill"). Also, just as you and your company change, so do your customers and the culture they live in. The typical purchaser of a big screen TV, laptop, or even bell-bottom jeans has changed dramatically over the last three years.

Match the persona to the task. Gather the right data to understand your customers' and potential customers' motivations and goals for the activity you're trying to create or improve. Just as your reaction to a fire in your fireplace is unlikely to predict your reaction to a fire in your house, extending your persona to an untested area may render it ineffective or misleading.

Make your personas real. Add details, but meaningful ones that make it easy for the reader to capture the persona in his head. As Kim Goodwin says in the Cooper Journal of Design, "...add life to the persona by using environmental details to reinforce important characteristics. For example, if someone tends to be incredibly busy at work, don't just say he's incredibly busy; instead, say there's a sandwich on his desk that he's been trying to find time to eat for three hours."

Integrate your personas into processes. Once you've defined your personas like real people, with a captivating narrative and a photo that makes them real, introduce them and let them work their magic. Jackie Yeaney of Homebanc says, "It helps everyone outside your core marketing people figure out what you're trying to do, because our personas help them relate to the actual people they're serving. Other executives have even started using the names of our personas when they talk about improving the customer-service experience."

When people start talking about what "Jill" wants, and what "Jill" can understand, you're not only well on your way to knowing who you love - you're on your way to delighting her with the revelation.

Who do you love? Your personas? Yeah, we thought so.

Feel The Love

2008-03-01T12:10:00.000-08:00

How do your customers love you? Let us count the ways. Actually, if you are counting, and working on improving the reasons your customers love you, you're nurturing one of the strongest engines available to power your way to growth. But first, let's start with a little background.

In December 2003 Harvard Business Review published customer loyalty expert Fred Reichheld's, The One Number You Need To Grow. In it, Reichheld, Director Emeritus and Bain Fellow, championed a different, simpler way to measure loyalty and drive growth: the Net Promoter Score (NPS).

Simply, he said to measure your greatest champions, those
loyal customers who rate themselves as extremely likely to put their reputation on the line to recommend you to others. Then subtract those who are not likely to recommend you. The net score, of those who do promote you less those active or passive detractors, represents the net impact of free marketing by your supporters and the true measure of your retention and growth engines.

Does the NPS Really Work?

It certainly does! After three years of Satmetrix testing thousands of responses across multiple industries, the correlation in almost every industry was clear. In the airline industry, for example, the Net Promoter Score (NPS) relationship was so strong that it appeared to explain the relative growth rates across the entire industry.

In a few industries, the question changes a bit to reflect a small market (e.g., highly specialized software) or little consumer choice (e.g., monopolies). Generally, a higher NPS translates into higher growth and higher market share, with a 12 point increase in the score typically translating into a doubling of a company's growth rate. This is what GE discovered when it tested the NPS in its healthcare business, and what inspired its CEO Jeffrey Immelt to incorporate it as a key element in its Execute for Growth process that aims to generate growth two to three times greater than that of global GDP.

An Enterprising Invention Drove Rental Car Success

Enterprise's efforts striving to be the number one rental car company resulted in their success and a high Net Promoter Score (NPS). They needed a way to determine how well they were satisfying customer needs and gaining market share by discovering what they needed to work on most.

This need for a consistent, easy-to-collect customer and market metric drove them to the NPS question, with two limited follow-up questions for customers not extremely likely to recommend them to others. They refused to allow gaming of the system, and they focused relentlessly on finding ways to fix the problems customers reported. Enterprise became number one.

Two Reasons Why The NPS Works

Across a myriad of industries, increasing your Net Promoter Score depends on doing two things: increasing your promoters and decreasing your detractors. The score provides a framework for determining how well you're serving your customers' needs.

The 10% That Makes 90% of the Difference

NPS creates a singular focus on customers, something companies often profess but far less commonly deliver. Of over 350 companies surveyed by Bain and Co., 80% said they delivered a superior customer experience. Yet those same customers said only 8% of those companies were delivering a superior customer experience. That's a 10-to-1 distortion.

Most companies have an NPS in the 5% to 10% range, mirroring that 8%. But companies that grow explosively typically have much higher scores: those for Ebay and Amazon were 75% to 80% during their explosive growth periods. That focus on delivering what customers want is a powerful motivator for continued success.

KISS (Keep It Simple. Score.)

The Net Promoter Score is also very simple: keep it to just one question. Even with one or two follow-up questions, it is short enough to generate a high response rate and to be compiled for reporting fast enough to provide real feedback that can generate change. Additionally, because of the nature of the question, the NPS changes with the business for continual improvement.

American Express Enhances Service to Charge Ahead of Competitors

During the 1980s, American Express began shifting profits from its core card business into investments in a broad array of other financial businesses. By the early 1990s, it began to notice some defections in its card business, and embarked on a relatively stingy rewards program designed to staunch defections to Visa and MasterCard. Unfortunately, American Express customers were savvy enough to realize the change in emphasis and defected anyhow. The company was losing its most valuable customers.

This realization helped American Express set course to hold onto its most profitable customers. It created a special benefit program with its own customer service telephone number. The company had been under-satisfying its customers for so long, however, that it completely underestimated what was required to serve its customers right. Many "special" customers actually felt their service was even worse and defections increased.

Eventually American Express woke up. It began focusing on designing and delivering benefits that succeeded in delighting customers rather than making them angry, in making their customers feel valued, and in rewarding them for actions that increased the company's profit.

Next, they leveraged the increase in their customers' demand by expanding the number of merchants accepting their card. This refocus on what their customers wanted ultimately became a catalyst for American Express clientele charging four times more on their cards than Visa and MasterCard customers, which translated into record profits and a high price-earnings ratio embedded in the company's value.

Profits: The Good, The Bad and The Hidden

The Net Promoter Score also forces companies to address good profits versus bad profits. What's the difference? In The Ultimate Question, Fred Reichheld asks if the additional profit you're reporting is due to new hidden surcharges or because you're cutting customer defection rates? If it's from new hidden surcharges, you may still have your customers, but chances are they're not happy campers.

If you ask those customers if they're content, up to 90% of them will typically tell you they're satisfied or extremely satisfied. They'll also happily leave you at their first chance for a competitor offering a slightly better deal. Being satisfied is simply too low a threshold. And if your profits from those customers are bad profits, from new hidden surcharges or similar revenue sources, the moment those customers have a chance to bolt, they'll leave so fast, you'll see skid marks.

I like to think of it this way: if your customer lacks the intellectual or observational capacity to notice that you're taking advantage of them, their chances of having the resources to be a profitable long-term customer for you are very low. And if your customer does notice you taking advantage of them, your chances for long-term profitability from that customer are even lower.

Either way, finding a way to profit from serving your customers, inspiring their loyalty and receiving their referrals, is your best option for long-term success.

Seven Ways To Be More Effective Using Metrics

2008-02-14T16:12:00.000-08:00

Many organizations use performance metrics as a method for staying on strategy and measuring their progress. For many, however, it's difficult to tell whether the effort put into gathering and reporting the measurements is worth the results. For those defining their measures through review of a standardized laundry list, any performance lift is mediocre at best.

Reviewing the right measurements, however, can transform your organization and significantly improve your performance. If you don't have time to waste on mediocre measurements --and who does-- here are seven tips for selecting measurements that will help everyone be more effective.

Create the Right Environment
The purpose of performance measurement is to increase effectiveness, not to provide a de facto annual performance review or compensation system. After all, it's not the measurement so much as the conversation it inspires. As Larry Bossidy and Ram Charan tell us in Execution: The Discipline of Getting Things Done, "How people talk to each other absolutely determines how well the organization will function."

If you use your performance measurements to determine how to be more effective, you'll see dramatic improvements. Conversely, if you use them for evaluations, bonuses or especially punishment, you can expect data degradation and manipulation as individuals invest more of their energy into gaming the system than increasing effectiveness.

Reflect Strategy, Not Process
Too often organizations get caught up in the brilliance and effectiveness of their process, confusing that with strategy. One company proudly displayed nearly 50 pages covered with rows of green-yellow-and-red bars. "Great," I said, "you've clearly invested a lot in gathering and reporting data. But how do you know when you've missed the most important number?" Good question. Now it's one predictive picture, on one page.

Even the most brilliant people can only consider seven concepts at once, and most of us max out at four. Unless your organization is composed entirely of the most brilliant people around, you need to reduce your strategies and your metrics to four concepts (or pictures) that they can consider and balance, at the same time. Thinking you can deliver effectively on anything else is a bit delusional.

Even the process of translating your strategy into metrics increases clarity and unity. As Peter Senge says in The Fifth Discipline, "We can argue like cats and dogs about the strategy, but without any way of getting at the assumptions behind the strategy, the argument is virtually pointless because we have no way of achieving a deeper, shared understanding."
FedEx Delivers on Strategy
When FedEx moved into India and China, its model was well-established and working very effectively in more developed and industrialized countries. But FedEx recognized that its strategy was about providing its customers with a result, reliable delivery within a defined time. It was not about the process it used to deliver that result, a highly-automated hub-and-spoke package movement system. Rather than adapting the outcome to its process, FedEx adapted its process to the outcome. Instead of two or three hubs, it has 16 facilities in different states. With this structure it can speed shipments out of the country by clearing goods through customs ahead of time, and provide staff and forms that allow customers to manage shipments in their local language (of which there are dozens). DHL has a long established lead in India, but by most accounts FedEx has moved up to second place in this rapidly growing market.
Seek Cooperative and Balanced Measures
Measures should balance each other, in reflecting your whole strategy but also in requiring 'silos' of function and interest to work together to achieve them. When aiming to do your best, it's easy to forget that optimization of any one function almost always sub-optimizes the whole. Likewise, when one person or department can control the outcome of a metric, you're more likely to see its results soar at the cost of others and to see gaming of the system.

You can't get a balanced picture with just financial measures either. You need to include what it takes to succeed, even if it's softer data, harder to measure and count. In "Coming Up Short on Nonfinancial Performance Measurement", Christopher Ittner and David Larker published data in the Harvard Business Review showing that organizations which look at their performance by linking nonfinancial measures produce a 5% higher return on equity over a five-year period.

So look for measures that reflect the balance of your whole strategy and demonstrate the need for everyone to work together in achieving your goals. For example, if one area is charged with communicating the process and the other with building it, use a cooperative measure such as rate of adoption that requires communication and process to work together to reach the goal.
Starbucks Grows Out Of Its Brand
In February 2007 Howard Schultz, founder of Starbucks, sent a memo to the organization's executives as they began strategic planning for the coming year. In it he lamented that, "Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand." He highlighted a number of decisions that, evaluated in the context of growth alone, seemed logical:
- Flavor locked packaging that assured freshness but removed the sensual experience of watching as fresh coffee is scooped from the bin for your drink, and virtually eliminating the aroma of coffee when you enter the store, both powerful nonverbal connections
- New machines offering faster service but blocking eye contact with the barista making your custom cup of coffee
- Store designs full of efficiency but sterile and devoid of soul
Unfortunately all of these decisions were viewed solely within the strategy of rapid growth. There was no real balancing with measurements for other strategies around service and the brand, and their role in attracting and retaining customers, which shifted the balance until the engine powering Starbucks growth ran out of fuel. As Howard Schultz admonished, "...it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience." Now that Howard Schultz is back, that's exactly what Starbucks is planning to do.

Push for the Positively Predictive
Nothing builds and tests understanding like using your knowledge to predict. Many don't try because it's intimidating. What if you're wrong? Well, if you are wrong, you're integrating those wrong assumptions in your day-to-day decision-making anyhow. So what do you have to lose?

Shifting your measurements to a predictive stance is just like any other piece of the measurement process: progress is iterative. You can't expect to be perfect. You can expect to learn more each time. Through the process of becoming predictive you'll learn where acting makes a difference and what types of effort create real change, which also reveals areas that may deserve less attention for now. The more you learn, the more effective you become, and the more you'll discover about your potential to add value.

Require Value
It's amazingly easy to build elaborate systems or institute excessively detailed reporting, but the output of these systems is no better than the input they receive. Will that additional effort for precision have a proportionate effect on results? Will the data be of sufficient quality to rely on its precision? Or instead of looking at minutes of processing time, for example, can an easily available proxy achieve similar gains, such as the number of times a request was accessed or touched as shown by the systems log or tick mark system? Metrics need to be meaningful while balancing the impact of their gathering and reporting with the expected return. Don't let your curious side influence your better judgment.

Avoid the Traps of Others' Thinking
Be wary of following your old patterns of thinking, or advice so obvious that it's not questioned. One trap often exposed by innovation and new market entrants is the quest for high value customers. Ask yourself, high value to whom? Just as iTunes and digital cameras changed the markets for music, photos and digital storage, so may "just enough" innovations for customers that may be just as happy with a lesser or different version of your product or service. So while high value customers are important, don't let your pursuit of them blind you to the very opportunities that your upstarts and competitors are targeting.

Change Now to Improve Tomorrow
You're not the same person you were last year, and your business isn't the same either. Perhaps last year the emphasis was growth, and this year it's shifting to better processes, lower costs or improving your brand execution. Whatever it is, divorce yourself from what you've sunk into your existing measurements. Instead, think about what you need today. What really needs to get done? How will you know that it's working? This is what boosts performance, and also, incidentally, tends to yield measures requiring more cooperative achievement than individual.

Becoming more effective is not always easy, but the reward for developing meaningful measurements can be truly transformational. Even when you don't succeed, you'll be better off than you are today. So what are you waiting for?

Six Tips For Accomplishing More by Doing Less

2008-01-21T15:32:00.000-08:00

How often do you plan more for your day than you can accomplish? How about for your year? A certain amount of stretching can inspire creative approaches and raise your productivity. Stretching becomes a problem, however, when it jeopardizes timely delivery and quality. Use the six tips below to make sure you stay on track.

Are your plans fully aligned?

We can become so energized by our vision for the coming year that we add more projects or related nice-to-have tasks than may be wise. When you’ve completed your plans, be sure to review them for single projects that can be modified to reach multiple goals. Look for opportunities to link projects to your strategies and to make adjustments in activities and timing so that projects will reinforce each other and leverage previous accomplishments. Also look for opportunities to shed activities not contributing as effectively to your strategy. It’s just as important to shed low-contributing activities as it is to identify the high contributors. Want a little help with the linking? Try our complimentary toolkit.
Wake Up and Smell the Starbucks Experience
In recent years, Starbucks has worked to strengthen its growth muscle so exclusively and so fast that this directive has overpowered the rest of the company. Growth consumed all of its resources, compressing other tasks critical to the Starbucks experience into an ever-shrinking resource pool.
Straining to function where it traditionally excelled, its reputation for innovative product line additions has devolved into fodder for comedians conjecturing about mythical new products. This last year is the first in Starbucks history where it has actually added paid advertising to its previously viral-only efforts. With founder Howard Schultz now returning to replace Jim Donald as CEO, Starbucks plans to focus again on supporting all the components of the unique Starbucks experience.
Are your plans realistic and appropriately prioritized?

If you can’t stay on track with your plan for the day, what might that mean to your carefully crafted plans for the year? Your projects have three basic dimensions: the scope and quality of what you achieve, the resources you allocate to achieve it, and the time available to accomplish it all.
When you stretch one corner of this triangle, the others will shrink to keep the equation in balance. If you’ve overloaded your project’s scope, it’s likely to be late, over budget, or absent functions or quality you need, like a champagne special weeks after the new year.
Are you making a crucial check on your plans?
In the enthusiasm of a new year and revitalized plans, it’s easy to schedule all your projects in the beginning for maximum impact. But that may not be realistic. Outside resources you rely on may be busy with everyone else’s must-do projects. Others may neglect to tell you of your pivotal role in their plans. You may not realize the demands other projects have on your time.
To keep your plans on track, make sure your projects are clearly prioritized, sequenced for maximum impact and incorporate realistic timeframes. Don’t have time for a detailed analysis? Try one of my favorite tools, the Planning Wheel, for a quick, intuitive picture of where you may be overloaded, be at risk or have more opportunity.
Are you moving from ideas to actions?
When you’re satisfied with the priorities, balance and sequence of your projects, define each project’s steps with ownership, resource requirements and due dates. Project plans convert your ideas into actions, so make sure you’ve been realistic, and determine the who, what and when to measure against.
There are many project planning tools; use what works best for you. If your project is complex or high-risk, considering finding someone with special certification, such as a PMP, or reviewing the PMBOK for help. What’s important at this stage is making sure you’ve considered the necessary steps and resources. If you aren’t using a tool already, you can try the detailed project plan template for no cost in our Planning and Staying on Track Toolkit.
Are you measuring progress and predicting outcomes?
Once you’ve started, you often need more than project milestones to know if you’re on track. If projects have greater or less than their expected impact, you need to be able to adjust your plans now, before it’s too late. Consider using both financial and non-financial metrics. Although non-financial metrics can be more challenging to collect and validate, managing without them is a bit like black-and-white versus color: you might see results and some relationships, but you will miss important color about what’s really going on.
Cisco's Frequent Reviews
One factor shown to be key in projects that create change, whether short or long, is frequent review. Cisco is famous for its weekly forecasting of sales, and even during the dot-com plummet credited the early warning from this system for their ability to survive the downturn. As John Chambers put it in one interview, once they realized and corrected for a lack of frank assessment by their front lines, the system helped them understand where the bottom was falling out and how fast it was falling, so that they could estimate the degree of adjustment necessary.
Measurement and metrics are useful, then, in keeping projects on track and providing guidance for what the future holds. Thinking through what activities will directly impact future results helps you focus on the factors that truly affect outcomes, sharpening your ability to pay attention to the right things, whether or not they make it to your final list. Predicting outcomes helps you anticipate opportunities and provides early-warning for adjustments to consider. And finally, predicting outcomes and measuring results against them refines your understanding of the many relationships at work.
Does everyone know what outcomes will be rewarded?
Don’t wait for your first major achievement to reward results. As soon as the right behaviors appear, award them with words. And when they create positive outcomes, reward them with action.
“Thanks for helping us keep our new plan on track,” is not specific enough. Describe the changed behavior and the impact it can create. Your behavior will be rewarded in return.
Nucor Steels Its Managers for Success
Ken Iverson knew to be successful in the steel business into the 1990s and beyond would take a different kind of steel company. He realized Nucor’s future depended not on the brilliance of its executives, but on the commitment and inventiveness of its employees.
At a typical steel company there were nine or more layers of management, at Nucor there were only four. At a typical steel company managers directed and controlled; at Nucor managers were only rewarded for answering questions, getting out of the way, and listening closely to the foreman, plant managers and workers for new practices and ideas that could be successfully applied across the company. Managers who didn’t model this behavior didn’t receive the conciliatory bonuses or partial rewards that often undermine management messages.
Nucor’s stock has been rewarded for this consistent rewarding of the right behaviors and outcomes, dramatically outpacing the marketing through Iverson’s tenure and continuing to soar another nearly nine times in value since 2000 under successor Dan DiMicco.

The bottom line:

The first step to keeping your plans on track is to align all that you’re doing with your strategies, making sure that you’re maintaining balance across the resources and the disciplines needed to support them, and using frequent reviews to measure and reward success. The Planning Wheel is a great way to quickly see how your plans balance out this year.

"By Lorre Zuppan of branes, LLC. Please also visit branes's web site at www.branes.com for additional articles and resources on strategy and management for your business." (Make sure the link is live if placed in an eZine or in a web site.)

Get Your Business in Shape

2007-12-18T11:19:00.000-08:00

Have you ever intended to get in shape? Lose that weight? You know you'll feel better, yet two thirds of us are overweight. Understanding you need to lose weight or telling others you plan to get in shape does not get you any closer to doing it.

It takes more than knowing you "should" to change your behavior for your health and for your business. As the New Year begins how do you get yourself and your team to make the changes needed to implement your plan?

Ask Yourself:

Is your message specific enough for your team to understand priorities and make daily decisions?

A lack of clarity about what you're really trying to achieve can create chaos. "Creating shareholder value," "growing market share," and "increasing profitability" may all be admirable goals, but goals this vague can be achieved in so many ways that often what results is nothing but disillusion and tragically wasted resources.

Success Stories For Understanding Priorities and Making Daily Decisions.

How Toyota 'Beat Benz.'

Toyota's "Beat Benz" motto made it clear that each worker could do something in their daily job to move them toward the company's goal. Oversimplified? Perhaps.

But it created a common understanding that management could then shape with company culture and key initiatives within each area. It helped teams understand how they needed to partner. It helped engineers understand what inventions and innovations would be appropriate. And it helped sales and marketing teams understand the targeted customer base.

How Southwest Became The Low Cost Airline.
Likewise at Southwest, Herb Kellerher's mantra to be the low cost airline helped team members make decisions every day, from what amenities would be offered, to the importance of flight turn-around times, to cultural factors like how pilots and flight attendants treat each other or what types of humor may be appropriate during flight announcements.
Are you communicating enough?

Your team needs to hear you. For advertising it takes at least seven messages or touchpoints before people even recognize they've seen your message, and some estimate as many as 21 times before they'll remember it and associate it with you.

Your team needs to believe you. When you were a teenager, how much did you pay attention to your parents' warnings? Did you immediately heed all advice? For some things, did you think you knew better until you experienced a reason to believe? Your team needs more than facts and figures to understand where you're headed. Connect with their emotional evaluators too, demonstrating the importance of your goals through stories or tangible experiences.

Your team needs to practice the change. Did you know that we don't really break old habits? Instead we replace our old habits with new ones. And typically it takes a minimum of 21 days practicing our new habit before it actually becomes a habit. So whether it's new personal priorities around diet and exercise or new work priorities around where we spend our time and other resources, keep communicating, showing and practicing in everything you do for at least the first month.

Are you practicing your new priorities?

How Kodak Failed To Click with Megapixels.

The Bottom Line. If you're not communicating clearly enough, often enough, or consistently with your actions, you may need to take a step back to reassess your priorities.

Next Issue: We'll talk about tools you can use to keep your plans on track.

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The attribution should read: "By Lorre Zuppan of branes, LLC. Please also visit branes's web site at www.branes.com for additional articles and resources on strategy and management for your business." (Make sure the link is live if placed in an eZine or in a web site.)

Business Planning

2007-08-21T16:18:00.000-07:00

Originally published in the Alameda Journal Business Section, February 2004

Planning for Success

With the passing of the holidays, business is resuming its regular rhythm. The economy continues to show signs of growth with many businesses reporting impressive profit improvements. Optimism is in the air. While a business plan can improve your company’s performance in any environment, in a turning economy it can position you for even greater success and personal satisfaction.

Experts agree, business planning is one of the most important – and most often ignored – elements of business success. As Lewis Carroll writes in Alice in Wonderland, when you don’t know where you’re going, any path will take you there. In your business plan you define where you are going, when you expect to get there, and what you believe is the best path for arriving successfully. With a business plan you don’t spend time analyzing all of your options at each fork in the road. If you run into a detour, it’s easy to get back on track. And if you spot a great opportunity, you’re prepared to analyze it and decide before it disappears.

So why do we put it off? Why does business planning inspire such dread?

When she first created her business plan it was the hardest thing she’d ever done explains Kate Pryor, owner of Tucker’s Ice Cream, a favorite place for many Alamedans. Creating and updating your business plan means challenging your assumptions about the economy, your markets, your competition, and your business. The insight you gain is used to make choices and take calculated risks. Your plan creates an integrated picture of the company’s future in everyone’s mind, and translates it from a vision with strategies and tactics down into individual programs and project plans that show the budget, due date, and name of the person completing that next step to success.

Creating a business plan, especially the first one, can seem overwhelming, especially if you don’t have help. She makes it look easy, but Pryor shares that with her first business plan, “I didn’t know where to start.” Working with a counselor from a local small business organization, she was able to ask the right questions. Knowing she needed to complete her homework before meeting with her counselor again each week assured her success through the tougher times.

Today there are more resources than ever to help you write your business plan: your local library, the Internet, the Small Business Administration (SBA), and business consultants. These resources can help you determine the questions to answer, find the information you’ll need, provide tools for analyzing what you discover, and translate your vision into words. They can also help you to create a living business plan, with measurable goals that will keep you on track and celebrating your successes throughout the year.

No question, business planning is hard work, but the rewards are tremendous. John F. Kennedy once said, “Some men see things as they are and say, ‘Why?’ I dream of things that never were, and say, ‘Why not?’” Isn’t it time for you to create some dreams for your company?

More Information: What’s In A Business Plan?

There are a wide variety of opinions about what goes in a business plan, from Jay Levinson’s Guerilla Marketing 7-Sentence Plan to corporate plans that rival your favorite novel for length. The keys to a successful plan are the quality of thinking and the usefulness of the document. Generally, however, business plans contain the following.

I. Executive Summary
II. Company Description
III. Products and Services
IV. Market Analysis
V. Strategies and Implementation (e.g., project plans)
VI. Management Team and Expertise
VII. Supporting Financials

You can learn more about business planning at the SBA’s site, or see sample business plans at the SBA’s recommended site.

Pricing

2007-08-15T10:59:00.000-07:00

Originally published in the Alameda Journal Business Section, March 2004

Pricing: What Is It Worth

Determining the price of what we offer our customers is one of the more intimidating business decisions we make. Price has a tremendous impact: on volume, on reputation, and on the profit that keeps your company in business. Charging just 1% less than the optimal price can reduce your profit by 8% according to analysis of the S&P 1500 by McKinsey & Company. So how can you determine the optimal price?

Pricing considers many factors including your cost to deliver, uniqueness, competitors’ pricing, image for value and quality, and desired market share. Many businesses start with these factors and then apply some combination of cost-plus, competitive, incremental, or value-based pricing.

Cost-plus pricing is a valuable way to determine a pricing floor. This approach uses what it costs you to offer the product as a base and adds an acceptable return for profit to arrive at the total price. Under this method low-cost producers are rewarded with competitive advantage, weeding inefficiencies out of the chain. Be watchful under this method, however, as many businesses commonly fail to include all of the related costs, dangerously torpedoing their profits and while building customer expectations for lower prices.

Providing a “me-too” offering restricts you to a narrower range of pricing options since it means you are primarily matching your competition, and adjusting for considerations such as market share growth, brand value or quality. Grocers often select competitively-priced signpost items, like a can of Coca~Cola, for artificially low prices to create high customer traffic and the impression of value in the hope that customers will be drawn in to purchase other more profitable offerings.

Incremental pricing is often applied to evolutionary products offering slightly new features or advantages. Here the advantage of the new product is quantified and added to the price of the old product. The danger here is not thinking through the implications of the new product. In a classic case, one of the first makers of the portable bar code reader developed the price for this new product by estimating the time customers would save on existing uses for the reader. But because the new portable reader enabled so many new uses, the company was inundated with orders. Unable to keep up with demand, their quality suffered and their reputation and market share were irreparably damaged. If that weren't enough, estimates are that the industry as a whole lost profits of more than $1 billion because of the price expectations set by this decision.

So what is it worth? This is the question of value-based pricing. Consider what the offering does for your customer. Will it change how they live and conduct business? Lest you think this approach works only for unique, top-line or revolutionary products, think about the last time you stepped on an airplane. How many different prices were paid for essentially the same transportation service? We may not all have the resources for the complex one-on-one pricing of airlines, but we all have the ability to put ourselves in our customers’ shoes.

Pricing methodologies provide a structured way to think about price ranges and how we can tailor price to meet business objectives. In the end, however, it comes down to your customer’s perception of value, because really, that's what it’s worth.