Do you know what business you’re really in?

Many companies, particularly new ones, make the mistake of not understanding what their business really is. This lack of understanding or mis-understanding then cascades into a series of wrong decisions about their company’s branding, marketing, sales, and message.

It may seem obvious what business you are in – just take a look at what product or service you offer, right? If you manufacture toys, then your “business” is toys. If you are a CPA, then your “business” is accounting and tax preparation. But, is that really what your customers are looking for? No, they are looking to fulfill a need and satisfy an emotion.

Your toys provide parents with the enjoyment of seeing their child excited about a new toy and of the interaction they get to have with their child while playing together. Your “business” is family bonding.

Your accounting and tax services provide your clients with a deeper knowledge about how their company is doing and in what areas they can make improvements to their bottom line. Your “business” is providing companies with the information they need to make the best decisions for their business.

The key to understanding what business you are really in is to think about the need and emotion you are satisfying, rather than the “feature list” of what you provide.

Think about Starbucks. They became wildly successful because Howard Schultz, the CEO, knew that people could go to any number of places to get a cup of coffee (convenience stores, fast food chains, cafes), and at a cheaper price than he was selling. That’s why he made Starbucks about the experience (“the third place”), not about the drink or the price.

Starbucks’ “business” is not coffee; it’s about the emotions and senses you feel when you walk in – the vibrant, energetic pace, the smell of coffee brewing, the hip music and young workers. Even the shorthand they use to describe their drinks (“grande skinny vanilla latte, soy, double”) makes you feel part of the in-crowd once you learn it.

A couple of years ago, Starbucks began making and selling hot sandwiches in its cafes, hoping to increase revenue. However, it backfired because the cafes started smelling like cooked food rather than coffee and customers didn’t like it. So, Starbucks stopped selling them. They were reminded that their business is not coffee or food – it’s the experience.

Do you know what business you’re really in? I would love to hear from you – leave a comment or contact me directly!

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Do you compete solely on price?

Why do customers decide to purchase your product or service? If it’s because you offer the lowest prices, and for no other reason, then your business will most likely fail because:

  • You won’t earn enough to pay your expenses and become profitable.
  • Your customers will quickly go someplace else if offered a better deal or if you try to raise your prices later.
  • Many potential customers will view your product or service as inferior or lacking in quality and thus never purchase.
  • You will become resentful if you do provide superior service and feel as if you aren’t being compensated appropriately (this is especially true for independent contractors).

You may think that, as a new business, you have to offer the lowest price in order to be competitive and get clients. But, that can be disastrous to your bottom line. You should certainly set your prices competitively, but they should be in line with what others are charging and you should find something else to be your differentiator. Do you offer personalized service that they can’t get from larger companies? Do you offer more customization options?

Let me tell you a story to illustrate what happens when you undersell your worth.

I know a cost estimator who attempted to start his own independent consulting business. When he got his first client, he gave that client a huge discount off the going market rate. He hoped in doing so it would begin a long-term repeat sales relationship with the client. The type of relationship entrepreneurs seek: a professional relationship in which each looked out for the other’s best interest.

However, after a few projects, at this greatly reduced rate, the cost estimator learned that the client was reselling his work for 4-6 times the amount he was charging. When he learned of this, he went to the client to negotiate a higher price for the next project. The client would not entertain the idea of paying more, even though he was making so much money. So the cost estimator, who was providing excellent work, decided to break off the relationship.

Later, he learned that the client had retained another cost estimator for three times the amount of his original discounted rate and also learned that the quality of the work was not as good. Eventually, the client’s business failed because of the shoddy work the new cost estimator was doing.

The lesson to be learned here is that once you undersell your services or products to another, it is very difficult for that other person to value you more. In other words, people don’t mind going down in price but once they are at that level they would rather attempt to go someplace else to try to get that same price again, instead of paying you more. What usually happens is that they don’t end up finding that lower price, but their pride prevents them from coming back to you to renegotiate. Adding to that, most of these situations don’t end amicably, thus that client does not return. It’s a lose-lose situation.

The moral of the story is: figure out what the market rate for your product or service is and if you feel you can deliver the same quality work that your competitors are delivering, then charge the same and differentiate yourself on something other than price. Also, keep in mind that if you are a one-man shop, you have a bit of a disadvantage because you will have to wear many hats (sales, production, and support). While it may appear that your prices can be lower because you have less overhead, in actuality you should be charging more because you don’t have the volume of sales that a larger business has. If you need to hire additional help, it will cost you more in profits than it does for a larger business.

Before setting your prices, research what others are charging and also have a good understanding of your expenses and how much you need to charge in order to make a profit.