Friday, September 25, 2009

The Tomato Company (humor)

This is a sad tale of technology that I hope you will enjoy?

An unemployed man is desperate to support his family of a wife and three kids. He applies for a janitor's job at a large firm and easily passes an aptitude test.

The human resources manager tells him, "You will be hired at minimum wage of $5.35 an hour. Let me have your e-mail address so that we can get you in the loop. Our system will automatically e-mail you all the forms and advise you when to start and where to report on your first day."

Taken aback, the man protests that he is poor and has neither a computer nor an e-mail address.

To this the manager replies, "You must understand that to a company like ours, that means that you virtually do not exist.. Without an e-mail address you can hardly expect to be employed by a high-tech firm. Good day."

Stunned, the man leaves. Not knowing where to turn and having $10 in his wallet, he walks past a farmers' market and sees a stand selling 25 lb. crates of beautiful red tomatoes. He buys a crate, carries it to a busy corner and displays the tomatoes. In less than 2 hours he sells all the tomatoes and makes 100% profit. Repeating the process several times more that day, he ends up with almost $100 and arrives home that night with several bags of groceries for his family.

During the night he decides to repeat the tomato business the next day. By the end of the week he is getting up early every day and working into the night. He multiplies his profits quickly.

Early in the second week he acquires a cart to transport several boxes of tomatoes at a time, but before a month is up he sells the cart to buy a broken-down pickup truck.

At the end of a year he owns three old trucks. His two sons have left their neighborhood gangs to help him with the tomato business, his wife is buying the tomatoes, and his daughter is taking night courses at the community college so she can keep books for him.

By the end of the second year he has a dozen very nice used trucks and employs fifteen previously unemployed people, all selling tomatoes. He continues to work hard..

Time passes and at the end of the fifth year he owns a fleet of nice trucks and a warehouse that his wife supervises, plus two tomato farms that the boys manage. The tomato company's payroll has put hundreds of homeless and jobless people to work. His daughter reports that the business grossed over one million dollars.

Planning for the future, he decides to buy some life insurance.

Consulting with an insurance adviser, he picks an insurance plan to fit his new circumstances. Then the adviser asks him for his e-mail address in order to send the final documents electronically.

When the man replies that he doesn't have time to mess with a computer and has no e-mail address, the insurance man is stunned, "What, you don't have e-mail? No computer? No Internet? Just think where you would be today if you'd had all of that five years ago!"

"Ha!" snorts the man. "If I'd had e-mail five years ago I would be sweeping floors at Microsoft and making $5.35 an hour."

Which brings us to the moral of the story:

Since you got this story by e-mail, you're probably closer to being a janitor than a millionaire.

Sadly, I received it also.

Thursday, September 17, 2009

Pricing: Discounting v. Unbundling

With times being so tough, most companies feel that the only way to attract new customers is to lower their pricing. While doing so in some cases will generate a short burst of activity and increased revenues, as a standard, long term course of action, it is not a wise thing to do .

The first reason why it is not a good idea to lower your prices is that your associated costs have not been lowered, and in order to make the same amount of profit, you have to sell a higher percentage of product just to stay even. A case in point, if you lower your prices by 20%, you need to increase your sales volume by 25%. If you reduce your prices by 30%, then you need a correspondent increase in sales VOLUME of 42%; a 40% discount needs a 67% increase in sales. I think you see where this is going. Unless there is a huge amount of elasticity in your pricing (where volume increases appreciably more with a price reduction), that without corresponding lowering of your costs, a reduction in price is at best a stop gap measure and at worst can lead to your eventual demise.

There are also some secondary problems that arise when you just arbitrary lower prices without taking something away in the sale. While market conditions might warrant some course of drastic action, an arbitrary price reduction can accidentally convey two things to your present and future customers. The first is an ongoing expectation that you will always lower your prices when things are tough. This essentially conditions your customers to "wait it out" until you decide to lower prices. The second is an impression that you have been lying to them all along if all of a sudden you can lower you price without giving up anything in exchange. This second situation is disastrous to the long term health of your company.

So what are you to do to increase sales AND profits? If you have to lower your prices, there are some strategies you can use to add more customers, reduce your costs, stay above the fray, and in the process keep from loosing the farm.

First and foremost, you need to look at how much PROFIT you make pre product and which products produce the most profits, not necessarily the most revenues. If you can make $10 selling a $20 item, or $20 selling a $100 item, sell the hell out of the $20 item. Plus the margin on the $20 item is 50% (versus 20%), and it will be a hell of a lot easier to sell five $20 items, than one $100 item (usually). Next, look at your portfolio of products and get rid (i.e. stop selling) those products that do NOT generate significant PROFITS. That is right! You may have to shelve high volume revenue products that are NOT producing profits. THIS IS THE MOST IMPORTANT CONCEPT I CAN CONVEY TO YOU, and it will be a hard pill to swallow in some case, but in the long run the you will see the benefits of actually having MORE money and will have to exert LESS effort in obtaining it by following this strategy.

OK, say all your products make about the same profits, and they are all priced comparably, what then? The next strategy is called unbundling. Say you have a product you sell for $100, and it has 3 or 4 components to it. Well, you can now remove sell each component separately for say $40 (versus $25 in a bundle), OK, say you cannot physically separate the product what then? Well you can ask the customer to give up (or pay extra for) the warranty, or customer service, or something if you are going to sell it for anything close to $25. This does two things: First is to increase your profits (or reduce your costs) and secondly instill some value for the “freebies” you used to give away while giving your customers the power to choose what “features” they want to pay (or save on) for.

A good example unbundling comes from Proctor & Gamble's attempt to sell shampoo into India. Initially, P&G wanted to sell a 12 oz container of its shampoo into the Indian market (similar to how they sell in Europe and the USA. There initial foray was disastrous for two reasons. First, this container cost the equivalent of a day's salary and secondly since Indians do not wash their hair as often as in the West, the quantity was equivalent to a year's worth of shampoo. P&G was able to penetrate this market (and still holds an 80% market share) when repacked their product for a single use size (about 20 rupees or 40 cents). This move was actually MORE profitable for P&G than selling in volume and allowed them to services a market that was previously untapped.

Too often I just see people leave money on the table when price negotiations begin and end. With these strategies and focusing on your profits (instead of just revenues), you will be in a better position to weather this economic storm of uncertainty.