The Basics of a Product P&L

Creating a P&L for all products that you sell will ensure the success of your small business.  The purpose of a P&L is that it allows you to have visibility into your profitability, costs, opportunities for cost reduction, and better management of your final retail price points.

My favorite P&L template divides your inputs and factors into four sections:

  1. Retail Price Drivers: Since the retailer that you are selling your product to typically will have a margin requirement to ensure their profitability, the price that you will be selling to them for ultimately determines the final SRP.  This is important because in small business marketing, we always want to be ahead of the game and make sure that we price competitively in-market by staying below key thresholds, undercutting or pricing in-line with competition, etc.
  2. Product Margin Factors: Your product margin is the area in the P&L that allows you to have visibility into the costs that you have control over.  For example, the cost to produce is controllable since you can always produce more efficiently, more cheaply (lower quality…not necessarily recommended!), etc.  The trade rate is the amount of funding that you want to allocate in market to offer discounts on scans (controllable) for the specific item that you are accruing a trade spend on (via the P&L).  The cash discount line is a way to incentivize retailers to order more product (i.e.: if you order a full truckload, I will knock off 2% off invoice).  And finally, if you are a food company, your spoils theoretically is a cost of manufacturing since you are over producing for what the market could bear – forcing you to buy back.
  3. Gross Margin Factors: The inputs that are typically out of your control.  For example, pre-negotiated rates if you sell through a broker, distribution costs, warehousing costs, selling expenses, and marketing spends.  Marketing spend is the odd ball here since you do have control over this spend.  However, at most companies the marketing spend is found below the product margin line since marketing dollars that you accrue don’t necessarily have to be used on the product that you accrued it on.  Therefore, removing this line from the product margin line frees up your marketing spend to be spent against any product that you sell.
  4. Profitability: The bottom line and how we manage to stay in business!

 

There are many things that I would like to explain to you on this P&L. In particular, two things that I will write about later are:

  • How to determine your trade rate and how to offer an EDLP (everyday low price)
  • How to improve your profitability while managing the retail price

In the meantime, what questions do you have on P&Ls?

Pricing Scenario: Shipping Through Distributor or Direct

If you own or manage a business that produces products or services (like essay writing where students are in search of where to pay to write essay ) that sell through a retail channel, there are two pricing scenarios that you need to develop so that you can determine what your selling price will be to either the retailer and the distributor that will sell to the retailer and within these two scenarios, two additional scenarios for a pick up price (at the manufacturing or warehouse location) or delivered price.  Potentially, you can have multiple delivered prices (full truck load, limited truck load, etc.) as illustrated below:

Pricing Scenarios

Because of the above, in order to sell efficiently as a small business owner or manager you should be creating two separate price lists if you sell your items both direct to retail or through a distributor (who then sells to the retail) – one price list for direct customers and another for distributors.  On each price list you should provide one set of prices quoted as both FOB (AKA pickup) and delivered for all of your products.  Although this is not really what I want to cover in this article, the benefits of separate price lists are:

  1. Easier to manage your targeted SRP by adjusting your sell price.  Typically, your selling price to distributors should be less than that to direct customers because ideally you want your SRP to be one price at any retail location (this will be further discussed below)
  2. Since more margin is added when going to distributor vs. direct, which results in two different sell prices, it becomes easier to manage your profitability by have P&Ls for direct customers and P&Ls for distributors
  3. Custom programs.  Some distributors are not properly educated on your product benefits.  Paying extra money for placement in their catalog so that you can drive messaging and awareness to the local reps within the distributor company could be the difference of a distributor pushing your product vs. not pushing it

Now going back to the original point of the article: how to develop the two separate pricing scenarios.  Let’s assume that the average retail margin is 40% and the average distributor margin is 10%.  Let’s also assume that at a sell price of $1.50/unit, you will be hitting your targeted profit margin.  Below are the SRPs for Direct and Distributor based on the above:

Direct Customers: $1.50/(1-.6) = $2.50 SRP

Distributor: ($1.50/(1-.9))/.6) = $2.78 SRP

As you can see from the above, you pricing structure will not be consistent in stores that ship through distributor vs. stores that ship direct from your plant.  In order for the Distributor pricing to lead to $2.50 SRP, the sell price would need to be $1.35 as opposed to $1.50. Or, your Direct price should bump up to $1.67 to deliver a $2.78 SRP.  You might be wondering what this has to do with marketing?  Well, if your direct price is the same as the distributor price then good luck trying to sell to large customers.  They will know and recognize that you aren’t giving them the best deal since going through a middle man is always more expensive.  Therefore, two separate price lists is the way to go so that you can have two different pricing structures.  Furthermore, your direct customers will never see your distributor pricing and vice versa, always giving you more leverage.

Clorox, Price Discrimination, and Line Segmentation

Take a look at the above: Both product lines are within the Clorox family of products – one is branded Clorox and the other is branded Green Works.  Although the image of Green Works does not show it, Green Works also offers disinfectant wipes and detergent.  Essentially, the Green Works line has the same product types as the Clorox line.  This is an example of both price discrimination and line segmentation.  Below I will walk through both price discrimination and line segmentation in action so that you can learn and hopefully develop creative ways to utilize the same strategies in your small business marketing strategy.

Price Discrimination:

  • Clorox Bathroom Spray is $4.49 vs. Green Works Bathroom Spray at $5.79
  • Clorox Toilet Cleaner is $3.79 vs. Green Works Toilet Cleaner at $5.49
  • Clorox Disinfecting Wipes is $2.99 vs. Green Works Disinfecting Wipes at $5.99
  • Clorox Stain Fighter & Color Booster is $5.79 vs. Green Works Detergents at $5.99
Each of the compares in the above is an apples to apples analysis – same oz., similar product.  And as you can see, Clorox clearly marks up the price of its Green Works line vs. its generic brand.  Why is this?  There is a different value proposition behind the Green Works line – it is natural, and because of this, they believe that natural-seeking consumers are willing to pay the premium for better-for-you products.
Through the Green Works line, Clorox reaches a new set of consumers and potentially cannibalizes its own sales on its existing Clorox brand.  However, this cannibalization is positive cannibalization since the consumers are pricing up to a more expensive line.

Line Segmentation:

Clorox manages its cleaning products portfolio by segmenting the market into mainstream and natural and leveraging different brands, that are relevant to each market, within each market.  This benefit of creating two distinct brands is that Clorox has the ability to develop two distinct and targeted marketing plans.  It would be difficult for Clorox to develop a marketing plan to natural consumers without impacting its brand positioning within the mainstream channel (which is Clorox’ bread and butter).  Likewise, it would be difficult for Clorox to maintain its brand positioning in mainstream while also trying to effectively market to natural consumers.  There are also financial reasons for such a segmentation:  For example, since the Green Works line is premium priced, the financials behind a couponing or promotional campaign will look differently than that of the mainstream Clorox line.

Conclusion and Implications:

As a small business owner developing a marketing strategy, if you find a new need within your market that you would like to market against to generate incremental sales, consider a price discrimination and line segmentation strategy if the new need is a different type of consumers.  By following this rule, you will be sure to not impact your existing brand, products, or sales while taking advantage and capturing the new market opportunity.  This rule implies for both product, retail, or service driven companies.

Going From Small to Big Business: What You Need to Know as a Manufacturer

So you have a product that you sell locally, for now.  Whether it is a local cupcake business, bread producer, toy manufacturer, etc. this will apply to you because your goal is success and the more success, the better…right?

Growing your business requires incremental dollar sales month over month, year over year.  Holding everything constant (product, price, distribution, placement, etc.) there is no reason to believe that the customers that you currently sell to or the shop that you currently sell at  will produce more sales one year over the next.  Therefore, the only way to grow when holding everything constant is to increase the number of stores that you are selling to.

There are two ways to go about this: continue to sell locally or expand into national or regional accounts such as Costco, Target, Toys R Us, etc.  In either scenario from the above and similar to what you require for growth,what retail is looking for when deciding to take on new products in their finite space is also incremental dollar sales.  What I mean by this is the following:

If you sell locally your famous mustard recipe, why would a retailer want to replace an item on their shelf that is already profitable for an item that has yet to be proven?  The answer is this: you need to demonstrate to the retailers why your product will drive incrementality to their mustard category.

Incrementality within manufacturing is typically achieved through innovation or differentiation/unique characteristics of your product vs. the competitor.  Perhaps for mustard, it could be that your mustard is Kosher Certified and USDA Organic whereas Grey Poupon or Boar’s Head is not.  Also, maybe your mustard is incremental due to the unique packaging that doesn’t leave crustiness on the rim after closing the cap and storing in the refrigerator (I hate this!).  Whatever the differentiation is, you must prove that it is valuable differentiation and therefore, incremental in dollar sales because existing mustard consumers will switch to your product for whatever that added value is.

Now there are two ways to get in on shelf at bigger accounts:

  1. Analyze the competitors within the space that you want to compete in and recommend to the retailer a competitor that you would like to “pick-off” because it is slow moving, but nutritional label, etc.
  2. Present to the retailer via research (surveys, customer testimonials, consumer needs, etc.) why your product deserves a slot on shelf

Developing these stories is the tricky part.  Adam and myself have the experience of selling-in to national retailers over various industries and would love to hear your story and how we can help, if needed.

Service Industry: The Job is Not Done Once Complete

A few weeks ago, I wrote about 3 Keys for a Service-Driven Small Business.  These 3 keys are most important before and during a job.  However, today I want to expand upon how to succeed as a service-driven small business by discussing one of the most important thing to do after the job.  Similar to sales or selling, the job is not done and the relationship is not locked-in once contact information is exchanged.  Likewise, your job as a service small business company is not complete once the job is done.  You must continue to follow-up after the job multiple times to check that everything is still good, everything has gone as planned, etc.

Following up on a completed job is one of the most important things that you can do to solidify word-of-mouth referrals by taking your company/brand from ordinary to extraordinary.  Furthermore, aside from checking to make sure that the work you performed is still holding up as transacted, you will also be showing your customers that you are invested and take pride in the work that you do.  This ensures consistency, quality, and a level of satisfaction that one day you might be able to charge a premium for since your brand/company will become known as one of the best in your local market.

Below are three things that you will be guaranteed to see when implementing a plan of following-up:

Positive Brand / Company Perception:  Your customers will begin to view your business as “the step above” within your industry and even so far as among local service companies.  Word-of-mouth referrals is one of the biggest drivers for service driven companies and therefore, positive attitudes toward your company will without a doubt lead to more customers.

Quality Improvement:  Let’s face it, there are always errors, faults, things that go unplanned, etc.  Mitigate your own risk of failure or not fully meeting your customer’s expectations by following-up and addressing any concerns or problems after the fact.  This might wind up taking time away from another site to spend potentially hours fixing the site that was already paid for, however, you will never leave a customer unhappy.

Ability to Increase Price in the Long-term:  As you gain more customers via word-of mouth and as your quality becomes unmatchable, you will then gain leverage to charge a premium for your services since you offer proven outstanding services.

Is there a right number of times you should follow-up with individual customers?  I don’t think so.  Your customers paid a lot for the services that you performed and with that, they expect outstanding service.

Quality Assurance and 3 Small Business Solutions to Improve Quality

Here me out for a second: quality assurance is one of the greatest challenges of small businesses.  I know that some of you might not agree with this statement because small business owners take pride and ownership in their business and are producing their products/services in a much smaller quantity than any large business would therefore, you assume that lower volume equals higher quantity.  However, my argument is that this is not the case.  Although lower volume should equal higher quality, the issue that small businesses have is a limitation of resources, which impacts quality.

Take the example of a bagel shop in New York City – on a few occasions, if you ordered a bagel with egg, cheese, salt, pepper, and ketchup, they might forget the cheese.  For the amount of volume that a small bagel shop does vs. a large scale breakfast egg sandwich manufacturer (a product that you might find in the frozen aisle of your grocery store), the small bagel shop has a much higher % error than the large scale manufacturer.  This is so because a large manufacturer has the capital to invest in labor and systems to provide higher quality and assurance than a small business.

So what can you do as a small business owner to ensure quality assurance if you do not have the money to invest in systems or additional labor?  Below are my solutions for you:

Attention to detail:  This is the most obvious of solutions.  However, one that many small business owners forget as they get entrenched in a busy workday where the goal might be to produce “x” amount of product or finish “z” jobs.  In everything that you do, ensure that your T’s are crossed and I’s are dotted.  Don’t release product or finish a service without properly inspecting your product.  Although you might think that this will slow down your business and make you less efficient, in the long-run, your unprecedented quality assurance is a point of differentiation for your marketing strategy that you can charge a premium for or that you will receive more business for through word-or-mouth and referrals.

Kaizen: Japanese for “improvement”, the moment you or anyone that works for you comes across a problem, stop the service work or production immediately.  This will allow you to track back the source of any problem before you are too far along where you will never be able to find the source!  Finding the source of a problem will enable you to prevent future occurrences of a similar problem.

Check-ins: Enable a staging process in your production or service so that at the completion of each stage, you can review your work to ensure quality assurance (as well as anything else for that matter).  For example, review random samples of every 200 units that you produce.  Or if you are a service company such as gutter installation company, don’t focus on banging out your job and moving on to the next, stage your installation in 2 or 3 stages (old gutter removal = 1, new gutter sizing = 2, gutter installation = 3) to make sure that everything is still good after each stage.

Again, although you might think that the above quality assurance solutions will slow down your efficiency, the long-term benefits will lead to increased positive referrals and word-of-mouth, ability to use the quality assurance as a point of differentiation for your marketing strategy, or the ability to price your product/service at a premium due to the quality that you provide vs. any competitors.

What Social Media Platforms Are Right For Your Small Business

A little over a month ago, I wrote an article that discussed the “Social Media Marketing Fallacy“.  It is very easy as a small business owner to get caught up in the latest marketing bubbles.  I truly believe that Social Media Marketing is a marketing bubble because many create social media accounts to develop a social media marketing strategy, even though it might not make sense to be on certain social platforms.  If you are doing social media marketing correctly, the rewards could be great but if you are are using social media incorrectly, you are just wasting your time.  Here are some things to consider in your small business social media marketing strategy so that you are using social media correctly:

What consumers are using what platforms?

The latest marketing bubble is Pinterest.  Many are recommending that small business owners create a Pinterest account to hop on this bandwagon.  However, sites like Pinterest might not make sense for all small businesses.  The Pinterest consumer is mostly females and moms that like digital scrap booking.  If you own a roofing company or a men’s store, Pinterest might not make sense for you.  The same holds true for any social media platform – Twitter users are different from Facebook users, who are also different from YouTube users.  Find the platform that is right for you before proliferating your small business social media accounts and wasting your time!

What platforms enable you to achieve your social media objectives?

Pinterest is more for sharing visual appeal, Facebook is for interacting, Twitter is for updating, etc.  If you have no images to show, then Pinterest clearly won’t be beneficial for your small business.  If your goal is to simply send updates to your consumers then Twitter and Facebook would be best.  However, if you do not have the manpower to monitor the Facebook conversations, then perhaps you should steer clear of having a Facebook account.  One of the worst things for your business is to have consumers ask questions on your Facebook wall and not receive a response!  Whatever platform(s) you choose to use, you need to own the conversation!

My List of What Not to do When Launching a New Item

There are many articles, books, writings, etc. that speak to what you are supposed to do when marketing a product – whether a new product or an existing one.  I decided to compile a list of my own for what not to do when launching new products because, frankly, there are too many dos out there and not enough don’ts.

So here it is, my list of do nots:

  1. Do not have inconsistent messaging across your brand
  2. Do not have a bad price/value relationship – evaluate what your competition is offering and at what price point they are selling as a benchmark
  3. Do not launch a product with negative profit, unless it will serve as a loss leader
  4. Do not arbitrarily set your price – evaluate your competition and price gaps to make a good pricing decision
  5. Do not advertise your new product for the sake of advertising.  Make sure that you are communicating your selling points only.  Too many messages makes the advertisement in effective
  6. Do not launch a product that doesn’t fit within your small business marketing strategy
  7. Do not forget about tracking the sales performance of your new item
  8. Do not forget about going after low hanging fruit opportunities.  The low hanging fruit opportunities in aggregate will equal a big win
  9. Do not position your product for any consumer that is willing to purchase your item, like most small businesses do.  Have a targeted marketing strategy to increase the effectiveness of your marketing.  In marketing, a small net will catch more fish.
  10. Do not forget to tell consumers that your product exists.  All new product launches must be supported with small business marketing support
  11. Do not discontinue your item if sales are slow initially.  It takes time to generate sufficient awareness, trial, and repeat purchases
  12. Do not discount your consumers.  If you learn their decision tree for purchasing, you have a high likelihood of selling more if you market to the points on the decision tree
  13. Do not forget to track your sales during promotional offerings.  Tracking will allow you to determine what promotional pricing provides the highest ROI for you
  14. Do not place your item on shelves that do not make sense (such as a child’s product being sold at a height that is above children); do not sell your item in stores where your targeted consumer does not shop
  15. Do not develop packaging without evaluating what you will be shelved with.  You want to differentiate yourself as much as possible on shelf so that consumers will easily spot you or be visually be gravitated toward you
  16. Do not forget to bundle your new item with other complementary items that you might have to sell as a package deal
  17. Do not have an idle social networking account.  Use your social media to run polls and interact with your consumers.  At the very least, when you run a poll you will find out something about your consumer!

Are You More Convenient Than Your Competitors?

Take a look around you.  If there is one thing that marketers do well, it is to make products and services more convenient for their consumers.  Convenience has been on trend for a long-time.  For example, the number of microwavable frozen foods has proliferated in the last 15 years.  Moreover, if you were to do an audit, I would bet that more frozen foods are microwavable than oven-only, although microwavable implies “oven ready”.  Outside of frozen foods, even the marketers at Tide have been challenging themselves to reinvent the way we do laundry to make it more convenient.  Tide has removed multiple steps in the washing process (detergent, stain-remover, and brightener) by combining into one process through the launch of the Tide Pods.  I don’t think there has ever been a trend as clear as this one that is screaming at you – the small business owner – to leverage immediately.

The proliferation of more convenient products and services is seen all around you: Fandango, fast food, at home grocery deliveries, iTunes, TiVo, Ronzoni boil in a bag, EZ Pass, Chase check deposit smart phone app, etc.  Not only has convenience been an on-going trend across multiple consume categories, but it also is a behavioral need that marketers and product developers are constantly trying to improve.  It is also obvious that the need for increased convenience in our lifestyles is becoming more apparent.

In today’s world, you can narrow down all sets of purchasing consumers that are in the labor force (implies the ability to purchase due to income) into 3 cohorts:

  1. Married couples
  2. Cohabitating partners
  3. Those living independently

Among married couples and those that are cohabitating with a partner, most likely both spouses or partners are working unless a child is in the picture.  If a couple has a child, maybe only one member of the relationship is working.  In either case, these relationship types demand products and services that are more convenient.  If both members of the relationship are working, then time for standard household operations is limited.  Even in the scenario where only one member is working and the other is raising a child, time to conduct household operations is still limited since the member that is not working is pre-occupied with the child.  Therefore, cohorts 1 and 2 in the above are living a lifestyle that demands more convenient products and services.

For those living independently and are working, they are in the same situation as if both spouses in a relationship are working – time is limited for household operations since there is no one at home to take on the household operations.  With that said, even cohort 3 is living a lifestyle that demands more convenient products.

My reason for painting the above picture is to facilitate the point that the size of the prize for consumers that demand more convenient products and services is massive.  Unlike other need fulfillment tactics, achieving convenience is never finalized – you can make your products and services more convenient, but there will always be opportunity to improve the convenience through some form of innovation or process improvement.  With that said, the question is not are you convenient but rather, it is are you more convenient than your competitors?

I’ve yet to see the implementation or activation or convenience trickle down from big business (Tide, Apple, Fandango, etc.) to small business (you).  This is your opportunity to make convenience the next small business marketing trend by implementing increased convenience in your marketing strategy.

10 Ways to Analyze Your Business Performance to Increase Sales

If you are looking to increase business sales, you first need to analyze your business performance to determine the right marketing tactics that will help you to achieve your goals.  Below are 10 ideas to help you get started to analyze business performance:

  1. Optimizing the Path to Purchase. If a consumer is standing in front of a shelf that houses your product or is scrolling through an online store to find a product to purchase, what matters most to the consumer?  Build a survey for your consumers to fill out so that you can determine what matters most to them.  As an example, if you are in the ice cream section at a grocery store – what is the first thing that you look for – Flavor? Brand? Price? Size?  Assuming it is size, what is the next point in the consumer’s decision tree: Brand? Flavor? Price?  Keep narrowing down so that you can find out what is most important to a consumer by building a decision tree analysis similar to the above.
  2. Advertising Channels.  Do you know where your competition is advertising and how often they are advertising?  Try to find out what your competition is doing this way you can preempt your competition and reach the same consumers that they are trying to reach.
  3. Product Mix.  Is your product or service line segmented to target a variety of consumers?  For example, Verizon Wireless offers a broad mix of phones, each targeting different consumers – Blackberrys for businesses, iPhones for the tech saavy/innovators, pre-paid for those that don’t need many minutes, phones with great cameras, phones that are waterproof, etc.  By offering a wide product mix, Verizon Wireless is maximizing their revenue by expanding the pool of target consumers.  Secondary, check out what your competition is offering to see if there is opportunity to improve your product mix.
  4. Optimize Price Mix. Similar to number 3 above, determine if there is opportunity to segment your products not by product type, but by price bracket.  Not all consumers are willing to pay $120/month for cable TV, however, cable providers maximize their pool of consumers by offering pricing structures that segments their consumers based on what the consumer is willing to pay.  This is similar to pricing discrimination.
  5. Leverage Surveys.  Different from number one on this list, use surveys to determine the attitudes and usages of your consumers toward your product/service, industry, category, etc.  This might give you some valuable insight that will help you to get an edge on your competition.
  6. Analyze the Competition.  Is your competition launching new product or offering discounted pricing for a similar service?  If so, this might give you valuable insight on new suppliers (which could be helping your competition to drive down their price), industry trends (leverage research that the competitor might have that you don’t), or new product renovations (packaging concepts, product features, additional services, etc.)
  7. Monitor the Price Gaps.  If you haven’t already learned by now, we have taught many times that there is a relationship between product benefits and propensity to purchase which can be quantified through a metric called elasticity.  If the difference in price between you and your competition is not being carefully monitored, you can be losing sales based on the elasticity impact.  Read this article on price gaps for more information.
  8. Distribution Channels.  Is your product distributed in all channels that sell that product type (locally or nationally)?  To give yourself an easy start on where you should at the least be distributed, do some research to determine where your competition is distributed and you are not.  Fill those gaps to increase your sales.
  9. Increase Awareness.  Leverage effective advertising strategies such as coupon marketing to drive trial of your product.  Design the coupon to entice repeat purchases so that your consumers continue to come back.  If you are a service company, design a clever advertising campaign that targets your niche of consumers.
  10. Keep the Consumer Top of Mind.  Who doesn’t love free products or trials – offer these to bring new consumers into your pool.  Reach out to your target consumers via social media to engage with them, drive loyalty, and make them feel special.