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The Speed Traders. Edgar Perez.  A guest post from  Nora McCallum of Scotia McLeod.  2011. ISBN 978-0071768283

Reg, thanks for passing along “The Speed Traders” by Edgar Perez.  I enjoyed reading this book. Most of the research to date demonstrates that HFT’s (and hedge fund managers for that matter) can have a period of very high success but ultimately fail. The extinction ratio for this investors class is very high. I think that the book gives a clear and concise overview of the (short) history and current role that High Frequency Trading plays in the capital markets. Given that speed is of the essence with this tool, I am not sure how much more time can be shaved off the technology; it will be very interesting to see how these trading techniques continue to develop and influence the global capital markets.

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Training your customers for regular price increases. Pricing part 12.   If you want to be one of the successful companies who are able to regularly raise prices, through value selling plus other methods you have to start now.  Start when they first become a new customer.  i.e. start Day1 by reinforcing how to prevent late fees, change of terms costs, change order costs, decision delay charges, partial ordering charges and so on.

Use  psychology 101.

• Stepwise small price increases are more palatable than one large one.
• The power of 9 still reigns in setting price (sets a reference price).
• Large cuts are seen as better than a series of small ones (increase the  perception of saving).
• Humans love to see that they have avoided a cost versus having one forced on them ( The sense of something gained vs something lost).
• Take an offer away when you say you will. ( Increase sense of loss)
• Communicate your price increases many months ahead – see what the competition does

Use the power of stories

• The need for vendors to remain viable
• A mutual need for survival
• All competitors will be treated equally

Be prepared for those who went to buyers school (e.g. Lowes, WalMart, IKEA, Safeway)

• Run lots of “what ifs” prior to any large bids/contracts
• Never volunteer you give price exceptions
• Resist being bulled – cause they will try to
• Maintain price integrity
• Be ready to walk – they are talking to you because they want something from you.
• Be prepared to let someone else go broke selling to them

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• Safeway Deflates Its Way to a Profit (fool.com)
• Every Day Low Prices: The Real Story of Wal-mart (socyberty.com)
• When does the customer first ask about price? Pricing part 2. (regnordman.com)
• Osaka Titanium to Increase Prices on Aviation Demand (businessweek.com)
• Bloxx knocks rivals’ price hikes (channelweb.co.uk)
• Pricing survey indicates you are dropping prices, but for the right reasons? Part 1. (regnordman.com)
• What generates the highest profit margin, product or service? Pricing part 3 (regnordman.com)
• Make Customers Pay Extra With a Great Customer Experience (customerthink.com)
• The Competitive Edge: Differentiating Your Product or Service (pamil-visions.net)
• Customer history, is it helpful in raising prices? Pricing part 5. (regnordman.com)
• Examples of Companies That Use Cost Leadership Strategies (thinkup.waldenu.edu)
• Wal-Mart Is Offering Free Online Shipping To Increase Sales (lockergnome.com)
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So what can you do to improve your pricing? Pricing part 11.  Tips if you are a CEO, Marketer, Salesperson, or CFO

What can a CEO do?

• You are the holder of common sense. Does the pricing policy ( you do have policy? ) make sense to the customers?
• Manage the change process expectations. Of course it will take time and hard work.
• Set up cross functional teams to set your pricing policy
• Keep your marketing dept focused on maintaining constant  deep market research
• Move to pricing excellence, not blaming sales and marketing.

What can the CFO do?

• Track the price waterfall for individual transactions, especially Outlaw customers
• Track contract compliance by customer
• Monitor discounts ( discount creep) including unplanned ones. *(eg extended credit, missed deadlines, rebates, one time promos, signing bonus, partial shipments and so on
• Have quarterly analysis on pricing initiatives given to sales/marketing to track real impact on net profits
• Keep long term look aheads on pricing trend and impacts

What can marketing do?

• Be on top of the value drivers (stories) for every stage of customer progress through engagement, buy and close.
• Manage communications to ensure price changes are open, transparent and believeable.
• Test before you deploy
• Create templates, policies, and documentation to support value selling by sales.

What can sales do?

• Actively create and train on tactics and tools to demonstrate and maintain value through the sales process.
• Collect supporting customer stories, competitive data, and validate buyer stories. get this back to marketing.
• calendar tender and contract expiry dates – Pre call proactively and early.

Resources.

• Strategy & Tactics of Pricing – 5^th ed. Thomas T. Nagle
• Practical Pricing. Michael Calogrides. 2010
• Sixteenventures.com
• McKinseyQuarterly.com
• http://marketreadiness.blogspot.com
• http://www.strategy-business.com/article/16333

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• The Strategy and Tactics of Pricing. A guide to growing more profitably. Thomas T. Nagle, John E. Hogan, Joseph Zale. (regnordman.com)
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• Your Company culture often works to resist raising prices. Pricing part 4 (regnordman.com)
• Are you still using Groupthink to set prices? Pricing panel 8 (regnordman.com)
• Pricing survey indicates you are dropping prices, but for the right reasons? Part 1. (regnordman.com)

Built to Sell. Turn your business into one you can sell. John Warrillow.  2010. ISBN 9780986480300.  Written as a business story, this is written as a clear blueprint for anyone owning a service business to turn his “baby” into a sellable product company.   If you already have a product company, there is still a tremendous amount of work involved to make it salable.  Well written, with very clear guidance and metrics presented to the reader.   You will rip right through this one, but it hits well above its weight class.  This is due to the success of the author in selling his own businesses.

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• Trader Joe’s flirts with being bigger over better (theglobeandmail.com)
• How to Build a Bulletproof Company Culture (inc.com)
• In side a $25 million game of chicken (theglobeandmail.com)
• Test your company’s value by going on vacation (theglobeandmail.com)

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Why Buffett and  Bill Gates will not get that much charity donating in Asia.  This is simple.  (Lessons learned from working with Vancouver’s Asian run companies ) The Asian mindset is focused on the family.   There is such an age long bond to family that to think about “giving” funds outside that is not part of the culture.   If you want to approach charity fundraising  in this market consider  two  must-have answers  to business questions.  (If you do not do this, there is no way to start to meet the givers needs.)

1. Is this charity a good thing?   Is it a good thing that they do?  How does it help? Who does it help? What is the societal benefit of this? Why is that a good thing?   Do not assume the audience shares your belief in the intrinsic good of giving or that saving lives in some far off country is important.
2. What will the individual get out of the gift?   What type of recognition is planned? Photo op? Celebratory dinner? Plaque for his office wall?  Laudatory newspaper article?   Do not make the mistake of the photo of Gates shaking the donor’s hand happening  before the cheque clears the bank.

Also remember the preservation of face. By attending a fund-raising event will the potential donor be pressured socially to give?  The fear of that is likely to prevent many from attending.

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Most profit, product or service?

What generates the highest profit margin, product or service? Pricing part 3.

This was a surprising data point from our Oct 2010 survey on pricing.  I was expecting that the impact of  product commoditization, SaaS, web apps, tied freemium offers and the ample opportunity to up sell present clients would have made an impact on the survey from other times. Most analysts say that products are being commoditized and true value is coming from services.  But it seems not.

Mature companies like SAP and Oracle are able to create huge profits from their services group. IBM has swung the majority of its revenue with huge profits from services.  Best Buys Geek Squad has bigger profits than the stores (its a growth department and they generate 60 % of income on products that come from competitors) .

At Rocket Builders we see in this data a reflection of a less mature approach to the market and ultimately pricing errors due to poor value communication in the surveyed companies.  Yes, the technology community is a youthful one , but the companies have been around for a good length of time through many cycles, with ample opportunities to build more mature business models.

A company might have very valid reasons for not getting more margin from a services group. Perhaps:

• The customers say they will not pay for services
• The competition does not charge for service
• Its part of a short term penetration strategy
• The services  may not be valuable
• There are no salable  services

Perhaps you have lower services margin for preventable reasons such as:

• You do not up sell services
• You do not track margin erosion through the services group
• You “toss” services in with the product sale
• You never thought about it
• You do not know how to do that
• Its part of your history and culture
• You do not grow your services departments soft skills and technical expertise
• Your customer experience is just not that great
• Field services does not sell

Service revenue should be a large and growing profit center for a well run company.  It requires current customer knowledge and the extraction of the value you help a customer get out of your solution.  But these are areas where knowledgeable and experienced marketing and sales departments can really bring the value stories back to the services department. Customer testimonials are the gold that will fill your mint.

Not getting the profits you deserve is preventable. If you want to know more about how to get more value  for your services, give Rocket Builders a ring.   Bringing out customer value is what we do every day.

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• UPDATE 1-Gentex says profits jump but margins squeezed (reuters.com)
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Does finance still set your prices?  If this is true, its time to get into a more recent century.  Along with this,  lazy companies often set their prices as cost plus – which according to Thomas Nagle, under prices for some customers while penalizing others.  In my experience cost plus pricing was used to set a list price, which no sales guy ever followed.  Every customer received some form of discount along the way from order to delivery.  Forrester tells us 95% of customers get a discount.

Another sin is being unable/unwilling to track all initiatives, contracts, and discounts all the way through each transaction.  This is used in the concept of a price/margin waterfall.  In essence the company does not really know how much profit it received  from every transaction.   How do you know which clients are “at risk”  for being poached and which ones are chronic “outlaws” in getting maximum discounts if you do not track full transaction margin?   Bringing some up to date financial controls to this area will result immediate profit uptakes. Plus Finance will be able to play a proactive role in your pricing strategy.

Related articles

• Pricing survey indicates you are dropping prices, but for the right reasons? Part 1. (regnordman.com)
• The Strategy and Tactics of Pricing. A guide to growing more profitably. Thomas T. Nagle, John E. Hogan, Joseph Zale. (regnordman.com)
• Practical Pricing. Translating pricing theory into sustainable profit improvement. Michael Calogridis. (regnordman.com)
• Does Price Matter Most? (businessinsider.com)
• The Impact of Finance on Business Growth (thinkup.waldenu.edu)
• What generates the highest profit margin, product or service? Pricing part 3 (regnordman.com)
• Pay Cash, Get Discount? (online.wsj.com)
• Customer history, is it helpful in raising prices? Pricing part 5. (regnordman.com)
• When does the customer first ask about price? Pricing part 2. (regnordman.com)
• Should the “Competitive Leadership Model” Really Be “The Value Leadership Model”? (leveragepoint.com)
• Is price raised at the beginning of your sales process? Pricing panel Part 6. (regnordman.com)
• Pricing Strategy for Rainmakers (avantrasara.com)

Practical Pricing. Translating pricing theory into sustainable profit improvement. Michael Calogridis.2010. ISBN 9780230614604.  A different book on the subject than Thomas Nagles.  Calogridis gets you very quickly into the hows of pricing and gives the reader very useful tools to display the concepts to others clearly and efficiently.  It works well as a first serious book on pricing and reads quickly and easily. I really enjoyed his “here’s how to do this” style and his obvious experience with how utterly unprepared companies are to make strategic pricing decisions.  It is not always the sales guys fault that they ask for all those discounts to get the sale.  There are numerous approaches, tactics and assumptions that companies can use to be fully  ready well before the sales guy has to sell.  Once sales guys sell (and get comp’d) on value, they will start to complain about all the ways the company fails to deliver on their value promise, which will make you a better company.

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• Getting Your Pricing Right – A BCTIA Panel Discussion in Vancouver (leveragepoint.com)
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• Sales and Marketing Alignment (demandmetric.com)

Why Your World is About to Get a Whole Lot smaller. Oil and the end of globalization. Jeff Rubin

Why Your World is About to Get a Whole Lot smaller. Oil and the end of globalization. Jeff Rubin. 2009. ISBN 9780307357519. This may be the most important book you read this year. Rubin was the Chief Economist for CIBC World Markets and one of the first to accurately predict soaring oil prices in 2000. He makes some very strong arguments for the return of high oil prices in a swinging up and down cycle, with the highs getting progressively higher and the lows being set at the most recent highs. Our dependence (and the 3rd worlds) on oil has not been reduced even tho’ we are getting more efficient with it. He makes a very good case that we should look at how our life will change and how we should change our investment outlook if:
a carbon tax is a new way for NA to level the economic playing field
Oil prices just continue to go up
Massive deficits create an inflationary economy
Global growth remains at 1-2%
Large government debts need to be paid back with higher taxes and cutbacks
The US dollar not longer is the world reserve currency and the US can not inflate its way to a recovery
Eating local vs globally becomes a necessity vs a luxury.
I suggest you get this book and read it.

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The skinny on series. The housing crisis, credit cards and willpower. Jim Randel.  2009.

1. The Skinny on credit cards. ISBN 9780981893549
2. The skinny on willpower . ISBN  9780981893532
3. The skinny on housing crisis. ISBN 9780981893525

These mini guides are great. They take what could be a complex issue and really break it down to its simplest story. The style is easy to understand, with a good use of humour. The tag line is …for really busy people.  The topics are such that youth and adults can gain from them . Great gifts to your children or  young friends/relatives.  Check them out at www.theskinnyon.com