Business Techniques in Troubled Times

“Growth through Focus”: Prune Your Business

by tomgray | on May 02, 2012 | No Comments

Every business seeks growth, especially small business, where a few new customers can cover the overhead and transform loss into profit. The owner tries a new marketing message, or goes after a new market, even if it means new products. He or she is not afraid to customize to get one new customer, or may even come up with a new brand for a second identity.

But experts in turning around businesses take a different approach. Before expanding, they seek understanding. Turnaround experts ask “what works today, and what does not?” They look at the margins of products or product lines, customer groups, geographies served, and production processes. Usually owners have never analyzed these segments of their business, and the results can be astounding!

Armed with this segmented margin analysis, they work with the owner to decide on one more input: what margin do you need to meet your goal of saving or expanding the business? Knowing that, they can see which segments meet the target. You want to do more of those! Find more customers like those customers; make more products with that process; sell more into the best geography or find similar areas.

“Segment profitability analysis” usually leads to figuring out how to fix the laggards. That is natural, but typically results in minor gains, if any. It is often more effective to push the laggards aside for the moment, and focus instead on doing more of what works. Celebrate these successes, and find ways to do more of them! Spend your time and money on success, not rehab.

The segments with margins below target call for improvement or cancellation. If you work on improving them, as you probably have already been doing, your attention and resources are devoted to them rather than to growing the successful segments.

On the other hand, if you decide to close them down, the time and money you spent there can be re-invested to grow the successful segments. If there is a quick fix with major results, great! Otherwise, you must decide when doing more of the same and hoping for different results is a triumph of heart over head. You already know what works well! Concentrate resources where your company has the best chance of winning.

The following is from Growth through Focus: A Blueprint for Driving Profitable Expansion, by Khosla and Sawhney in Strategy and Business, Autumn 2010: “…growth often comes from fewer but stronger arrows aimed at fewer targets. The engines of growth are focus (fewer brands, fewer categories, fewer markets) and simplicity (simple vision, simplified execution, and simpler organizational design)…complexity is an avoidable enemy of growth.”

For the “vision thing”, see the five blog posts under this heading: Vision Development | Thomas H. Gray.

Next week’s article will address some techniques for growing your business through focus.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

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Ten Pricing Techniques from Business Techniques in Troubled Times

by tomgray | on May 02, 2012 | No Comments

Business Techniques in Troubled Times has been running a series of ten articles on pricing techniques. This article sums them up. To see them all, go to Pricing | Thomas H. Gray.

Pricing Basics: Value Positioning and Margin – these are the two basics in pricing. Customers buy value, so you must know what your customers value, and how well you deliver that value compared to competitors. Be better, and charge more. Margin is price minus production and sales costs. You use margin to pay for your fixed costs, and to reach your target profit. So know your costs to set your price, but set it to earn the target profit, not just cover costs.

Margin Analysis Drives Pricing – understand the cost elements for each product, expressed as a percentage of its sales price. Then you can tinker: change how you use a cost element to reduce its percentage of price; raise the price itself, either in small bites or only for products facing less competition; bundle products into a higher margin package price; stop serving customers who demand low margins.

Pricing Tips: Start High; Big Results from Small Changes – the list price is an umbrella. It allows room underneath for temporary promotions, but only if the list price is high enough so that margin remains even after it is discounted. The other idea is this: small price changes can make a huge percentage change on your bottom line. Customers ignore small changes, but if you understand your margins, you realize that a 10% price change could mean a 100% change in profits.

Pricing in a Job Shop: Setting the Shop Rate – avoid the two biggest mistakes: forgetting to include your target profit as one the “costs” your price must recover; and assuming all paid hours are also billable hours. The tip about small changes having big results applies here too!

Pricing Technique: Good, Better, Best – offer customers three levels of quality/service for three different prices. Customers like choice, and three tiers shows a clear upgrade path to the risk-averse.

Pricing Technique: Value in Use – set your price according to how much your product saves the customers vs. their alternative. If you save him 10, charge him 5. Split the value with him. He’s thinking  about his value, not your costs, so set your price based on what he is thinking about.

Price Structure Alternatives –  what are you charging for? Is it hours, or a finished project, a product unit or set, or the right to buy some (membership fee) or a right to use (subscription fee). This article offers nine price structures with pros and cons for each, plus a few recommendations.

Differentiated Prices – who would happily pay more, and who would buy elsewhere if they were cheaper? You can charge different prices per customer group (e.g. students) or per location (e.g. resort) or by time (e.g. due date or show time). This article offers six bases for differentiation and situations for each.

Promotional Pricing – temporary discount programs can boost sales. The new customers may stay with you for years: what is their lifetime value (profit) to your company?  This article explains eight promotion types, but there are many more. Always test your promotion to see if the result is what you expect and worth the discount.

Pricing to Distributors: What is a Reasonable Markup? – if the producer margin is only 15%, why does it make sense to expect a wholesaler markup of 20% and a retailer markup of 40%? Margin and markup are not the same thing. Wholesalers and retailers cover their costs out of their markup. As a producer, you must understand the retail price for your product, and the costs/value of your distributors. Your product’s value vs. competition sets this ceiling, and all the markups and margins work within the range of market price and producer cost.

Pricing is a fertile field. Readers surely have other techniques that work for them. Share them in a comment on this post!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

 

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Pricing To Distributors: What is Reasonable Markup?

by tomgray | on Apr 26, 2012 | No Comments

Distributors are the middle component of a three-tier distribution chain: producer à distributor à retailer. The distributor is the “middleman”. The distributor and the retailer incur their own costs in bringing the product to customers, and both need to recover those costs and earn adequate margins.

To set prices to distributors at the right level, producers must understand both distributor and retailer functions and costs. Producers must also understand the retail price dictated by product value and competitive alternatives.

For example, imagine a product priced at $100 retail. Potential pricing for a three-tier distribution model might be:

Cost

Markup

Selling Price
Manufacturer

$51.77

15%

$59.53
Wholesaler

$59.53

20%

$71.43
Retailer

$71.43

40%

$100

 

In this example, the manufacturer’s price to the wholesaler is 52% of the retail price. Let’s assume that his cost includes an allocation of all his overhead, so his 15% markup is pure margin. The total markup by all three players is $48.33, or 92% of the manufacturer’s cost.

To allow “room” for markups by downstream players, the manufacturer must know the likely retail price. This is determined not by retailer whim, but by value to users relative to competition and their prices. See Pricing Technique: “Value in Use”.

Wholesaler markups average 20% and will not exceed 30-40%, according to The Average Profit Margin for Wholesale | Small Business – Chron.com.

For the retailer markup over what he pays the wholesaler, situations vary depending on the size and market power of the players, but a typical retailer markup would be at least 40% for big box retailers and more for boutiques. In this example the difference is 68%: (100 – 59.53 = 40.47 / 59.53).

Note markup vs. margin – markup is sales price less cost to buy it, and margin is the remainder of the markup after the distributor covers his own costs as well as his cost to buy the product. See Pricing, Markup, Margins and Mass Confusion | Brooding on Matters | Travis T.

For a handy online calculator for markup and margin in a  four-tier distribution model, see Channel Margins Tool by Harvard Business School Publishing.

The wholesaler’s price to the retailer determines not only the wholesaler’s markup – it also determines the retailer’s markup. Competition defines the retail price, so the retailer’s markup will be that market-determined price minus the wholesaler’s price. To understand what markup is fair for both players, you first must understand what value they are adding, and their related costs.

 

Wholesaler   Functions

Retailer   Functions

Buying the product

Buying the Product

Promoting/Contracting with Retailers to   Sell It

Promoting/Contracting with Consumers to   Buy It

Inventory Risks & Facility Costs

Inventory Risks & Store Costs

Assembling Product Assortments

In-store Merchandising

Sorting: Break down into small   quantities

Shelving

Delivery to Retailers

Delivery to Customers

Financing Retailer Buys

Financing Customer Buys

Grading the product

Handling Returns

Market Info Feedback to Manufacturer

Market Feedback to Wholesaler

 

Retailers have higher costs than wholesalers for their facility and for their advertising, promotions and merchandising, offset in part by higher delivery costs for wholesalers. In general, retailers have higher costs than wholesalers to perform their functions after they have purchased the product. This means retailers need a higher % markup between what they pay to buy the product and what they can sell it for. This markup is mostly used to cover their costs. Only a small percentage remains as a margin for their business.

At this point one or two players in the chain start to think about vertical integration. For example, the manufacturer considers whether he can deal with retailers himself, to save the wholesaler’s markup. But here is a “word to the wise”: in doing so, you will have to perform the wholesaler’s functions yourself, so at best you would save the wholesaler’s margin, not the entire markup, most of which goes to covering his costs which you would then incur. For an example of comparing channel costs, see Understanding the Economics of Your Product Distribution Channels : Money :: American Express OPEN Forum.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

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Promotional Pricing

by tomgray | on Apr 25, 2012 | No Comments

Promotions are temporary. Promotional pricing is designed to provide a temporary boost in sales, by offering more attractive terms than the standard list price and options.

Unlike differentiated prices (see Differentiated Pricing), promotional prices are available to all buyers, with the possible exception of a credit check for a promotion involving better credit terms. But the same key question applies to both promotional and differentiated prices: are the additional sales worth more than the reduced margin per sale?

To answer this key question, companies always test their promotions. They introduce it for a narrow slice of the market or products, publicize it, track the additional sales, and assess whether any profit improvement resulted from the discount.

When testing, the same cautions apply: be sure to publicize the promotion; be sure to track it fully, and try to determine whether the customer would have bought anyway at the original price.

There may be as many types of promotions as there are stars in the sky! Owners design promotions according to market demand and product profitability, and the only limit is their creativity. Some examples are:

Promotion Type

Definition

Objective
Buy one get one free (BOGO) Two for price of one Increase unit sales; useful when production cost is a small % of   total cost 
Loss leader Price below cost Attract new buyers to the product line; sell more high margin   accessories or tie-ins 
Special-event pricing Limited time sale price Attract more buyers now who will return later and/or buy accessories   or tie-ins 
Cash rebate Buy for list price but get discount via cash back Maintain list price; offer appearance of a deal; reduce cost of   discount by % of buyers who do not pursue the rebate procedure 
Low interest financing As stated Maintain list price; attract more buyers via lower monthly payment;   Seller pays part of interest cost 
Longer payment terms or no payments until (delayed start) As stated Maintain list price; attract more buyers via lower monthly payment;   seller may borrow working capital to replace delayed cash flow 
Longer Warranty As stated Maintain list price; attract more buyers by reducing their perceived   risk; useful when most warranty issues occur early
Free component (free razor; pay for blades) As stated Attract more buyers; useful when most margins result from sale of   consumable accessory (blades)

 

Promotions make financial sense when you consider the lifetime value of the customer to your business. It is worth incurring a cost (lower margin) to gain a customer who will make subsequent purchases that generate high margins. Examples are automobile servicing, blades for razors, e-book purchases, credit card interest, replacement parts, etc.

To do the math, you need to consider the cost and the gains. Costs include lost margin for those who would have bought anyway (eventually) and publicity costs. Gains include any margin on the original sale from those who would NOT have bought from you, plus all the margin from their subsequent purchases, for as long as they buy from you.

How long does your average customer buy from you? For example, one credit card issuer calculated an average customer life of eight years. So they make a profit on promotions to gain new customers where cost (such as a lower interest rate for the first year) is less than the margins they earn from those customers over the next seven years.

Do the math, run the test, redo the math after seeing results of the test, then launch the promotion or modify the offer and test again.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

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Differentiated Pricing

by tomgray | on Apr 19, 2012 | 1 Comments

“Differentiated Pricing” means different prices for the same product in different situations. Familiar examples are senior discounts, high prices at airports and resorts, and lower prices for last-minute tickets.

The goal of differentiated pricing is to earn higher margins in one of two ways:

  • higher prices in a location with less competition (airport, resort, pro shop, entertainment venue)
  • lower prices whose lower margins are offset by producing enough additional sales to gain higher profits overall (last-minute sales of vacant rooms or cheap tickets)

For the small business owner, the challenge is to know the market well enough to be sure the differentiated price really does generate higher margins. Will that senior discount really draw more customers? At a movie theater, if popcorn costs less, how many more buckets would be sold?

Like most other marketing initiatives, the best way to find out is to test. Try a differentiated price, publicize it, and see how many sales result. Ideally, you would also ask customers if they would have bought anyway at the old price.

A very common error in putting this “test it” advice into practice is failure to publicize: “we tried that for a week and got no uplift; no, we didn’t change our marketing – that would have cost too much.”  Do not do the test if you will not be telling customers about it!

Another common error is hit-and-miss recordkeeping about test results: “our afternoon clerk didn’t know he or she was supposed to ask or offer or tally….”

Here are some common Price Differentiation Techniques. Do any fit your business?

Basis for Differentiation

Situations with Special Prices

 
Customer Segment Discounts for Students; Seniors; Residents of taxing (e.g. park)   district
Product Form Ascending price per milligram for Sweetener box v. packets vs.   tablets
Channel of Distribution Ascending price for online vs. big box store vs. specialty store
Location Higher price for spot with less competition (pro shop, airport,   resort); lower price in outlet center
Time Lower price for advance purchase; low price for last minute purchase   of perishable good (most costly hotel room is the empty one)
Geography Ascending golf fees for rural vs. urban vs. resort; lower cost plane   ticket when flying from a low-income country

 

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

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Price Structure Alternatives

by tomgray | on Apr 19, 2012 | No Comments

Your “price structure” is what you charge for (product or service component or package) and when the payment is due. For example, you might charge an hourly rate, or a package price for an entire job. Your price structure should meet some or all of these goals: more margin per unit sold; sell more units; obtain cash flow early enough to enable continued operations; ensure on-time payments; reduce customer resistance for reasons of credibility or fear of exceeding budget; reduce your risk of costs exceeding budget.

Some common price structure alternatives used in different industries:

Technique/Example

Seller Pro/Con

Buyer Pro/Con
Per package, not per unit- Package of wood screws Pro: Sell more unitsCon: May need to discount the package price, e.g. = price for 45   units

 

 Pro: SimplicityCon: Am I paying for more screws than I need?
Per deal, not per hour- Consultant Pro: Customer has certaintyCon: Risk of poor estimate requires raising estimated hrs. by 10-20%   to get package price

 

 Pro: Certainty for budgetCon: Am I paying for more hours than I am getting?
Per hour not to exceed x without customer OK- Consultant Pro: Customer has controlCon: No risk of underestimating Pro: Control for budgetCon: Control is imperfect — when consultant asks for OK to exceed, I   will need to grant it for project to complete

 
Retainer plus price of excess units- Lawyer Pro: Covers setup time/cost; provides opportunity to develop   relationship and prove value; customer decision at a lower price point makes   it easier for him to say yesCon: Customer who would have paid high package price objects to   “nickel and diming”

 

 Pro: Smaller purchase before relationship is developedCon: No upper limit means lack of control, but customer can always   say stop!
Base product/price plus price for additional options- Car Pro:  Simplicity in product   package; sell more options than if they were ordered per item Pro: Simplicity of packageCon: Buy more options than needed
List price less various discounts- Insurance Pro: Discounted price makes customer feel good; manages price level   to risk levelCon: Company may appear high-priced if only list prices are compared Pro: Discounts make customer feel like a wise shopperCon: Availability and amount of discounts not clear at outset

 
Progress Payments- Construction Pro: Match cash flow to timing of expensesCon: Customer may resist paying before results received

 

 Pro: Spread out paymentsCon: Cash is paid out before value is received
Discount for payment within 30 days Pro: Motivates timely paymentCon: Some clients pay late and take the discount anyway!

 

 Pro: Discounts always welcomeCon: May wish to pay later
Late payment penalty for payment after due date Pro: Motivates timely payment; avoids late payers taking a discount   as aboveCon: Collecting difficult, but message is sent even without   collecting

 

 Pro:Con: Pressure to pay

 

Recommended techniques are:

  • Consultant price per hour up to a maximum,  requiring client approval to exceed it (balances risk of error in forecast, for both buyer and seller)
  • Base price for package of features, plus charge for options
  • Progress payments: these can be crucial to keeping your business solvent!
  • Late payment penalty: avoids clients paying late but taking a discount anyway.

 

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

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Consolidating State of Illinois Without Madigan

by tomgray | on Apr 11, 2012 | No Comments

Illinois’ Comptroller and Treasurer both seek to consolidate their two departments and eliminate one of their jobs! The functions of these offices are related and in some cases duplicative. This is a common sense move, especially in these troubled times for budgets. But the Legislature, and especially its leader Mr. Madigan, will not pass a law to enable this move, believing  that it violates the Illinois Constitution’s explicit enumeration of these positions and departments.

Take heart! This consolidation does not need to wait for approval from the Legislature and Mr. Madigan. The Executive Branch can use a common business reorganization technique to achieve the savings and the efficiency without violating the Illinois Constitution. Here is the recipe:

1. Create a consolidated back office, within either of the two bureaus or in a third one.

2. Fund it by having each of the two bureaus discontinue self-performing their functions, and use their budgets to pay the new back office for performing those functions, presumably with greater efficiency.

3. Continue to have an elected official nominally in charge of each bureau, but assign managerial responsibilities in the combined back office to each of them, so they won’t waste their time and salary as figureheads!

This way we achieve the efficiency savings of consolidation yet bypass the delays involved in the Constitutional and legislative impasse/power struggle. The key technique is simply to maintain the two separate offices nominally, but combine them functionally.

There is precedent: this is how Ameritech centralized the operations of its five independent state phone companies back in the 90’s. Illinois Bell became a façade with a low level “president” and few employees, and the rest of the work went to centralized functional entities.

By the way, this approach also works well for moving government functions to the more efficient private sector: keep the façade and move the work, using the budget to pay for the outsourced work.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

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Pricing Technique: “Value in Use”

by tomgray | on Apr 11, 2012 | 1 Comments

“Value in Use” pricing means the price is based on the product’s value to the customer, not the manufacturer’s cost of production.  For example, if a normal saw blade is priced at $7, and you create one that lasts 4 times as long, the value to the customer of the long-life blade would be $28, aside from saving the time and rework involved in changing blades. What price should you set for the long-life blade?

Assuming the blade-changing effort is minimal, you will want to set your price below $28, since that is the point where the customer is indifferent to one of your new blades vs. four of the old blades. A price level somewhere between $14 and $21 seems reasonable if there is no competition for your new blade. If you price it at $17, the buyer and the seller each take half the increase in value. The difference is large enough to get the buyer’s attention and make him consider changing his habitual purchase behavior.

Using $17 as a test price level, you can then consider your development costs and any production cost difference between the old and the new blade, to see the effect of this price level on your margins. The price you choose should be low enough that customers see significant value, but high enough to generate premium margins while leaving room for price cuts when competitors match your innovation.

Obviously, this is not “cost-based pricing,” and it is not “pricing to competition.” The price is based on the value to the customer who buys the long-life blade. Only after establishing that value do you consider your cost and potential competitive responses.

Many customers will quickly understand the higher value of the higher-priced long-life blade. But some will not see the need yet. To widen the market, consider an upgrade path for those not ready to change yet.

To illustrate, we need to change our example. Consider a server equipped with new software enabling it to work so fast that it can do the work of four servers. You want to set prices for three customer groups:

1. Data-Hogs: Buyers who need to buy more than two servers.

2. Entrants: Those who think they need to buy only one or two servers

3. Upgraders: Those who already own one server, and then realize the need to add one or more new servers.

Assume the old server price is $10,000, and you decide to price the new hardware/software package at $20,000. This is great deal for data-hogs, and delivers high margin for the seller. Smaller data users, the other two segments, are attractive for their numbers and future growth, but $20,000 is a much higher price than your competitor offers for an old-style server adequate for their current needs.

The solution is to continue to offer your old server at $10,000, like the competition, but enhance its value vs. the competition by offering to equip it with the new four-times-faster software when the customer is ready. This is an upgrade path.

How would you price this software-only retrofit? It should be more than $10,000, to avoid competing with your new server priced at $20,000.  It should be less than $20,000, because otherwise the customer who already has one server could just buy two more old servers from you or your competitor, and see no price difference. A reasonable price for the software-only upgrade would be 1.5 times the price of an old server: $15,000.

This table summarizes a value in use pricing plan for this example:

Customer Need

1 Server

2 Servers

3 Servers

4 Servers
Today’s Customer Spends

10,000

20,000

30,000

40,000
New Data-Hog spends 20K:   HW/SW package

20,000

20,000

20,000

20,000
Entrant spends 10-25K: HW +   retrofit

10,000

15,000
Upgrader spends 15K: SW-only   retrofit

15,000

15,000

15,000

 

Those who buy the package pay $20,000, while those who buy in two steps pay $25,000. Yet previous server customers get the new technology for $5,000 less than new buyers, recognizing the value of the current customer base.

Offering the choice of a software-only upgrade sets a value for the software, and shows by comparison that the hardware in the package offer costs only $5000, half the normal old server price. In this way, the retrofit choice actually defines the value of the package offer as a better deal: new hardware for half the old hardware price, plus growth at no cost. By offering the upgrade as an alternative to the package offer, the seller is actually enhancing the perception of the package offer’s value. This is a good example of the “decoy effect” that results from offering different alternatives.  See Pricing Technique: Good, Better, Best.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

 

 

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Pricing Technique: Good, Better, Best

by tomgray | on Apr 11, 2012 | 1 Comments

Three-tiered pricing is a popular and proven pricing technique. It goes by many names: good, better, best; economy, standard, premium; bronze, silver, gold; consumer, professional, expert, etc. The idea is to give customers a choice and a basis for comparison, but not choice overload – not a laundry list. See Product and Service Bundles: Product Strategy.

Buyers appreciate choice for several reasons. It shows that the seller respects them by responding to a variety of customer requirements and price ranges. Choice also gives buyers a basis for comparison by showing how the price changes when different features are added or subtracted. Buyers can be comfortable they made a good buying decision because they bought only as much as they needed.

On the other hand, buyers do not respond well to choice overload. They expect the seller to anticipate some common sets of needs, and design packages to address them. Examples are all around us: software versions, car models, Olympic medals, etc. For some reason, the human brain is comfortable with sets of three. Even jokes often cite three situations, with the third containing the punch line!

Sellers like three-tier pricing for other reasons. First, it communicates everything they can do without requiring everyone to buy the premium package. Merely defining the premium package communicates the extent of the seller’s capabilities, earning credibility. Those who choose a lower tier still have the comfort that they can upgrade to a higher tier without losing their investment.

Second, three-tier pricing appeals to a wider market. It offers an affordable entry level, as well as the complete package for high-end buyers. Sellers can use the lower tiers to compete against discounters without risking a price war, while showing their capabilities to those willing to spend more to get more.

Third, experience shows that more people choose a higher price alternative when three tiers are offered vs. two, sometimes called the “decoy effect.” See We’re All Predictably Irrational – Dan Ariely – YouTube.

To make the technique work:

1. Establish three versions of your product, geared to three types of customers or three common sets of customer needs.

2. Find a way (often a table) to show at a glance which services fall into each tier. This enables customer to compare, as well as to understand the full extent of the seller’s capabilities.

3. Offer an upgrade path. Those who buy a lower tier should be able to see that they can get additional services on an ad hoc basis, usually for more than if they bought some predetermined set of those services in the higher tier in the first place. This helps customers manage the risk of overbuying or underbuying, increasing their comfort level.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

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Can Small Businesses Benefit from Chapter 11?

by tomgray | on Apr 04, 2012 | 8 Comments

This week we have a guest author, Barbara L. Yong, Partner with Golan & Christie LLP, writing on a topic requested by one of our subscribers. Barb’s article follows.

Can Small Business Benefit from Chapter 11?

By Barbara L. Yong, Partner with Gould & Christie LLP

The answer is a resounding, YES!!!  And here’s why.

1)      Immediately upon filing, the debtor is entitled to the protections of the automatic stay.  This prevents your creditors from taking any action to collect their debts.  It puts all litigation on hold and can prevent a lender from proceeding with a foreclosure of its mortgage or a UCC sale of business assets.  This is meant to afford you a little bit of breathing room.

2)      The debtor can also reject unfavorable contracts like leases or rental agreements.  This allows you to close locations and get relief from above market rent.

3)      The debtor can also borrow new money through a debtor-in-possession or DIP loan, and give the lender a super-priority lien, which puts them ahead of the business’ existing lenders.

4)      Debtors can also sell some or all of their assets free and clear of liens and claims, with the liens attaching to the proceeds of the sale.  This can include real estate, machinery and equipment, vehicles, and even intellectual property.

5)      The Debtor also gets a reprieve from paying its pre-bankruptcy debts while it is in Chapter 11.  During this time, the Debtor can accumulate a surplus to help strengthen the business after bankruptcy.   While these debts must be addressed in a plan, and a percentage must be paid over time, the total to be paid to unsecured creditors depends on the liquidation value of the business, which is generally much less than the total owed.

Can some or all of this be done outside of a bankruptcy?  The answer is no.  These protections only exist in bankruptcy.

Is Chapter 11 the answer for every small business that either can’t afford to pay its creditors or finds itself upside down, meaning its liabilities exceed its assets?  The answer is no, but it should definitely be considered, along with several other less costly options.  These options should be discussed with experienced bankruptcy counsel.  Especially if the business is continuing to lose money and can only survive by increasing the amounts owed to its trade creditors or by failing to pay payroll taxes, both of which can subject the business owner to personal liability.

Some of the factors that can weigh in favor or against the filing of a bankruptcy include the following:

 

-          Whether the business can break even or operate at a profit during the Chapter 11.

-          Whether the business model is effective, e.g. do they offer goods and/or services which are in demand.

-          What is the relationship between the debtor and its trade creditors?

-          What is the relationship between the debtor and its lenders?

-          Does the business own the real estate in which it operates and, if not, what is the relationship between the debtor and its landlord.

-          What is the quality and loyalty of the workforce?

-          Does the owner have access to cash or credit to put into the business?

-          Does the business have non-essential assets which can be marketed and sold?

-          Did the business owners take a lot of money out of the business during the prior year.

 

And there are many others.

 

Oh, don’t get me wrong, it is definitely possible for struggling and cash-strapped businesses to change their business model, obtain new financing, restructure existing debt and negotiate payment plans with their creditors without filing a bankruptcy.  My firm and I offer these services to our clients as well, as do the many highly experienced turnaround consultants and professionals who also belong to the Turnaround Management Association (TMA).  But when all else fails, Chapter 11 should at least be considered as an option before shutting the doors.

While Chapter 11 is expensive, don’t let the price tag deter you.  Yes, there are Debtor’s counsel’s fees, lender’s counsel’s fees, quarterly trustee fees, and sometimes even creditors’ committee’s fees.  But depending on the size of the business, these fees are quite reasonable compared to the valuable benefits Chapter 11 can provide, not to mention the huge amount of debt which can be eliminated from your business’ bottom line.

Why should you believe what I have to say?  I’ll tell you why.  I have been practicing law for 30 years, and bankruptcy for nearly 20.  Most of my experience comes from representing small businesses and business owners.  I am also a board member and officer of the Chicago/Midwest Chapter of the Turnaround Management Association (TMA) and a founding member of the Chicago Network of the International Women’s Insolvency and Restructuring Confederation (IWIRC).  And, if that’s not enough, I am also proud to say that according to the United States Trustee’s Office, my firm, Golan & Christie, currently has the most active Chapter 11 cases pending in the Northern District of Illinois.

Feel free to contact me at Blyong@golanchristie.com to see whether your business might benefit from filing a Chapter 11 bankruptcy or one of the less costly alternatives.

Barb Yong is an experienced bankruptcy attorney and a partner in the Chicago law firm of Golan & Christie LLP.  Barb represents both debtors and creditors in Chapters 7, 11 and 13.  Most of her debtor clients are small to medium sized businesses and business owners.  She also practices commercial litigation and speaks frequently on bankruptcy issues and effective collection techniques. She can be reached at 312-696-2034 or blyong@golanchristie.com.  See www.golanchristie.com.    

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

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