This is the second in a series devoted to building business on value and redesigning your business to maximize customer perceived value.

Small business succeeds when it – consciously or unconsciously – provides customer perceived value. This begins with a new understanding of customer loyalty.

Customer loyalty may be the most misunderstood value in commerce. The US economy grew in the ‘50s on the unspoken marketing concept of “built-in obsolescence,” the presumption that, because customers were repeat buyers, their loyalty would keep them buying brand. Quality, not surprisingly, stole these “loyal” customers away from American manufacturers in the ‘70s and thereafter.

Now that American businesses have learned the value of quality – a reasonable demand of local and global customers – we are winning back markets thought lost. American designs, programming, engineers, and craftspeople have regained dominance in automotive, aerospace, and technology.

Small businesses, on the other hand, have always understood and depended on the values of buying local and customer service. Given small business volume, a lost customer is not just “a drop in the bucket.”

• Small business must move away from so-called “customer loyalty” that is really just reluctant allegiance. For example, every Christmas, a dry cleaner I know, bless him, gives out lint brushes. In his mind, he is repaying customers for their loyalty. But, it isn’t the lint brush that keeps them coming back; it is the convenience of the store’s location and the geniality of the counter person. Open another dry cleaner across the street and cut the price by $1.OO per shirt, and he will be overstocked with lint brushes.
• Small business has to learn that customers don’t like having no choice in the matter. They do not like having their loyalty monopolized. This is what tears at the fabric of small town businesses as customers flee to improved perceived value at the newly big box stores. Customers are fickle and whimsical, but they will stick with you if your perceived value gives them a choice. They are able and ready to compute the cost of travel away from town to save a few cents, but if you can’t offer an offsetting experience, they will one-stop shop.
• Small business rewards only matter so much. Big businesses can lure and harness customers with rewards programs. But, studies show this link is tenuous at best. For example, United Airlines’ frequent flyer points are nowhere near to turning people away from the perceived value in flying Southwest. A flyer may keep his/her United frequent flyer plan open because the boss pays for the flights or because United goes to some places that Southwest does not, but all things considered, Southwest has the edge in value – and an attractive travel incentive plan to  boot.
• Small business needs to learn that customer loyalty is not a tangible asset. You cannot trade on it even though it may figure into the price of your goodwill. You are missing the point of loyalty and corrupting the principle if you think of loyalty as leverage, as customer ownership. A goal – not a strategy – loyalty is driven by total customer experience.

When businesses learn to drive this total customer experience – and to price it accordingly, they will define their future success. If they fail to do so – and do so soon, they’ll wonder what they missed.

The right Small Business Coach can challenge you to set and achieve bigger goals in 2012, while helping you navigate the obstacles.  Know what you are looking for in order to choose the best candidate.  Read on for some practical advice for choosing the right candidate:

Let’s start with what you don’t need in a Small Business Coach:

• Nice is not a virtue. You want someone to hold you to high expectations. If you think you are a good manager, then, you probably have a skill in holding employees to performance accountability. You will best benefit from the advice of someone who practices the same demands. Expect to be pressed to the edge of your comfort zone.
• Expertise is not a priority. You need someone who is a good coach. What you need is cross-disciplinary skills: communication, planning, training, etc. These are valuable transferable skills that help you see the short and long-term.
• Avoid a therapist. Don’t pay someone just to listen to you and all your problems. Look for someone who will turn your path around. You need someone focused on action, plans, and deliverables. You don’t have the time for the coach to worry about your feelings.

So, what do you need?

• Someone you can afford. Bargain basement coaching is not worth the money. It will cost you time and money, and some outcomes may require additional investment. So, you need to be at a point where all this makes sense: the need, the expectations, and the price. Shop available coaches; seek word of mouth; look for referrals. It’s a big decision, and deserves focused investigation.
• Someone you can listen to. Coaching is partly a matter of style. If – and only if – you are ready to take a close look at what you are doing, you need to find someone with the rapport you need to take a few hits. You are paying to be told things you may not want to hear, to get tough about what you have been doing, and to push your face into some bad decisions you may have made. For this to work, you need someone you can work with.
• Someone with a plan. Demand a schedule and agenda in writing in advance. Expect the coach candidate to demonstrate goal-setting and effective planning. Ask to see models and samples of what the coach has done for other clients, and make him/her connect the dots between plan and results. Ask the candidate to introduce you to previous clients with your intent to seek their story of the relationship. And, be sure you talk to more than just one.
• Someone who knows what you don’t know. Remember, you are looking for someone to bring something new to you. Much of this should be in the form of plans and direction. But, you also want insights, product knowledge, marketing strengths, and fresh perceptions about your business. I am reluctant, for example, to recommend a coach who claims to be “all things to all people.” You’d be better off with someone experienced in your line or business or business sector.

A final caution is that you do want to see the track record or credentials of a coach who does this for a living. I am reluctant to recommend the coach who is an out of work MBA. Interview candidates with their experience in mind.

The increasing importance of credit union financing in small business operations and lending has recently been the topic of an SBA Advocacy report. As of this posting, a million customers have moved their checking and savings plans from banks to credit unions. Coincident to the Occupy Wall Street activity and ostensibly prompted by Bank of America’s ill-advised debit card fee, credit unions are swamped by applicants while major banks don’t even seem to notice. What does this “revolution” mean to small businesses?

As recession-bound banks hold back on loans to small businesses, credit unions are taking the initiative. And, with their sudden growth in deposits, they appear ready to move aggressively when Congress raises their cap on loans.

The Small Business Administration watched bank lending to small business decline by 6% in 2010. It also reports credit union financing increased by a comparable percentage. Still, commercial banks lend 200% more than credit unions, so we will have to see if this trend continues. Nonetheless, it’s worth looking at your local credit unions to see what they can do for your small business.

For starters, credit unions account for only 5% of the total lending pool. However, the Small Business Lending Enhancement Act, introduced to Congress in March, could raise the current lending cap to 25% of their assets. This more than doubles their lending potential. With their lending cap raised and their influx of deposits, credit unions will expand, multiply, and hire.

 It is also likely that, as economic confidence returns, lending underwriting guidelines will loosen allowing businesses to borrow more with less secure experience and collateral. Among other things, credit unions are exempt from federal corporate income taxation. They do not belong to the FDIC; instead, they have a separate deposit insurance system and fund – with lower premiums. Such features help them to provide lower-priced products and services. They are non-profits, and this may reduce performance incentives for management.

 Small businesses have been underserved by banks in recent years – despite a $30 billion commitment by Washington. In addition, only 30% of the nation’s credit union lend to small businesses. But, credit unions are seeing gold in the weaknesses in today’s bank market and are upping their staff training to underwrite and market small business loans.

Give it some thought: look at what your local credit unions can do for you, check their credibility with CUNA, move your money if and when it is in your own interest. Remember, that most credit unions – unlike banks – are local and “behave” like small businesses in your community. You may find you have a lot in common.

Running any business is tough enough, but involving family members can make it even more challenging.   Unfortunately, if family members are drawn in, you greatly increase your risk of failure when you don’t handle it correctly.  Here are a few tips to help you successfully navigate those challenges…

I know of many successful family-run businesses. But, such enterprises have their own set of problems, and success only follows solid management.

• For starters, don’t let a family business happen by accident. As often as not, the business starts; then, you call in your spouse to do the accounting, and/or recruit the children to work on weekends or fill in at the counter or phones. Once you have envisioned your business, decide then and there whether this is going to be family based or not. Then, structure it accordingly.
• Imagine a table of organization with job descriptions. Start to formalize the descriptions with skills, knowledge, and experience. Then, decide which relatives could best serve in those roles. Frankly, you have no obligation to include all members of the family, and this would be a first step in strong management. If your brother-in-law or nephew fits your needs, great; if they do not, you might explain what it is you need and what they need to do to fit your needs. But, you have no obligation to please.
• Form a mission statement. It is your job to keep “your eye on the prize.” Call the family together to share your vision. Invite them to help you with the mission statement, but let them know there job is to defer to your leadership. In doing this, draw a simple but firm chain of command and line of authority. You can do this with authority and still maintain the family magic.
• Confirm how disputes will be handled. Friction occurs among people in any business. Somehow, families make it more intense and longer lasting. In a regular business, the manager can resolve conflicts with authority; in family businesses, dysfunction and grudges can ruin things. With a family business, family matters require different handling.
• Take care of this as much as possible up front. Well before, you “open the doors,” let the family know this is a real concern of yours, and solicit input on structured solutions. Let this happen over several planned meetings, so they appreciate the weight of the problem. And, put as much of this as possible into writing. Let these meetings be the first of regular family meetings.
• Include tough subjects in these early meetings. Present and discuss your succession plan and sharing “the wealth” of sweat equity. These plans can and should evolve with time and experience, but everyone should know where your head is at from the beginning. Of course, these plans are best formed and maintained if you have legitimately secured and integrated the family’s input.
• Finally, formalize a system for conflict resolution. The family can survive arguments over Aunt Sally’s gruffness. But, workloads and salary discrepancies are another matter. Structure a “court” for discussion and resolve, and secure allegiance to the policy and procedure.

Communicating your mission, dreams, and plans early, often, and with reasonably democratic participation goes far towards building the substructure you need for continuity.

Ever tried to define the value that you offer your customers?  A price is the dollar sign on a product, the tag on the item for sale, but that is not the same as value.  I’ve been mulling this over lately, and wanted to share some of my thoughts.  While this post is somewhat of a textbook discussion, it lays important groundwork for additional posts. 

Pricing of products and services has traditionally been cost-based, determined by adding a desired profit to a cost determined by cost analysis. That is, the seller/vendor figures out what the product cost is in terms of parts, materials, labor, sales/marketing, packaging, shipping, etc. Then, s/he added the desired profit margin, say 25-35%. Or, the lawyer/doctor/consultant charges hourly fees in an attempt to place an arbitrary price on a service that portends to cover operating costs plus the alleged value on professionalism.

The cost methods are not value based because they don’t clearly and unambiguously determine what value means to the customer.

In traditional costing, the attitude has been: “here’s the price; take it or leave it.” Small businesses hanging onto this tradition may not be serving their customers well – and are leaving money on the table. The tradition does not understand that a customer’s opinion of a product’s value determines the value to him or her. This value differs from the market price which has typically determined by competition and accessibility.  

I find that customers buy from the source that offers the highest perceived value; i.e., “the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives.  Customer perceived value is the exchange a customer would be willing to make before dropping down to the next offer.”

Small business customers do not place the same value on three martini lunches, big promotional items, or glossy marketing efforts. Frankly, they do not care what you paid for the item or how the economic crunch is hurting you.

Customers are more interested in the following:

• Overall, do you convey an image that respects your own self-image?
• Do you communicate frequently and with a caring attitude?
• Are your services offered on a timely and dependable basis?
• Are you available and responsive?
• Can your customer expect fairness and accountability from you?
• Is your work efficient and effective?
• Do customers feel they have learned something about the services/product and about what you have brought to the party?
• Do customers feel they have done the right thing – and that you have done right by them?

Notice that these are criteria separate and distinct from market values. For example, I knew a newly hired marketing manager at a manufacturer who promised to secure customer loyalty by delivering product as soon as possible. Trouble is most of the customers did not want the product until a specific later date because they did not have storage room. So, in this case, prompt delivery was not a value to the customer.

Small businesses can do better if they realize that loyalty is a strategy and not a tactic. Loyalty is not to be presumed. Target loyalty as a goal worth securing and developing – rather than as something you can bank on.

How you move from cost pricing to value-based pricing may be difficult. You may be turning around a big ship. And, the move may be more treacherous in some lines of work than others. I believe there is profit in making the move sooner than later, but here is the big question:  How do we clearly and succinctly identify what it is that our clients value? Stay tuned…

Optimism about the economy is on the upswing, according to recent surveys.  Big indexes are reading well – with high holiday sales, record cyber sales, and reduced unemployment. But, really – just how do small business owners feel?

A recent survey of small business owners’ problems and priorities conducted by the National Federation of Independent Businesses (NFIB) reports some good news. Attitudes about the future have improved, and priority concerns have changed.

There is a certain conservative element to small business futures. And, I think if you allow for that, there is a measurable sense of optimism about the coming months. For example, 14% of small businesses report having job openings and 3% expect to increase hiring. In addition, 21% plan on making capital outlays, and 7% feel it is a good climate in which to expand. The numbers may seem low, but they are increases over the past month.

There are continuing negative concerns about credit conditions, earnings trends, and overall economic improvement. However, these indexes reflect improvements over previous months.

The survey shows that financing and credit sources remain the #1 business problem. In October, reporting showed only 9 % felt all their credit needs were satisfied, and 11% found loans were harder to get. Of those surveyed, 26% report poor sales as their top concern. The optimism here is in the fact that, in most of these metrics, there has been cautious improvement.

I thought it might be interesting to look at the problems that rank among the lowest in the 75 measures of concern in the survey:

66. Competition from imported products is less a problem than it had been. This sense of balance is supported by recent reports on US trade balance.

67. Credit Rating does not seem to be a problem, suggesting that the owners have a confidence about their stability.

69. Competition from Internet Businesses is not the concern it was, admitting that, while there is competition, owners are more confident about their ability to manage it.

70. Undocumented Workers do not present the problem they did because employers are getting better at meeting their recruiting and documentation obligations.

71. Winning Contracts from Federal/State/Local Governments is a low concern, either because the businesses choose not to compete in such markets or because they have gotten better at the process.

72. Obtaining Short-Term (Less than 12 Months or Revolving) Business Loans is very low in the priority index because such loans are easily secured.

73. Obtaining Long-Term (5 Years or More) Business Loans is surprisingly low in the index and may indicate that owners have likely despaired of such financing sources.

Small businesses will feel economic recovery first. I am banking on the fact that their optimism is likely to be cautious and reserved. If I’m right, their measured optimism will underestimate the force of the recovery.

Creative leverage can mean profits while debt – what some might call “leverage” –  increases small business risk significantly. You don’t profit by becoming a “debt slave.” So, don’t buy into the concept of leverage as making debt work for you.  Instead try out these ideas for creative leverage and tailor them to work for your business.

• Leverage your time. Time is one asset you can use to your advantage. If your business is a service business, for example, there are only so many hours you can work. So, avoid being paid only for your time.

Instead, price the time to cover the cost of hiring or outsourcing the work. Or, in a family business, factor the time worked by family members against their future benefits from the success of the business.

• Leverage relationships. It is much easier and less costly to keep an existing customer than to find a new one. (In my business, alone, it costs 11 times as much to land a new customer, as it is to keep an existing customer relationship.)

So, ask yourself what other products and services you could bundle together to increase your sales per customer. Adding value to what you’re already doing would be to your advantage as well as the customer’s.

• Leverage your technology. Delegate work to specialized equipment or software. Thoroughly explore MS Office to see if you are using all its tools. Look to Google+ and Google Docs to conduct your business on The Cloud. Look into the use of virtual assistants or other virtual specialists.

Again, if time is your asset, free time up by delegating work and pricing your services to include this cost.

• Leverage underutilized assets. Cash reserves, for example, sit in the bank earning little or no interest. Ask your financial advisor how they might be better invested in property or equipment.

Or, consider your space. You might be able to rent unused space in your building or on your lot. You might even share equipment or personnel.

• Leverage your good credit. Goodwill and good credit are very real – though intangible – assets. The community at large has an interest in your success because of what it brings to the community. (Every dollar spent in the community spawns three dollars spent.) Parlay your presence into a local success story.

And, creditors and vendors – without your incurring any additional debt – have a stake in your success. They survive and grow with you. As a customer, you are fee to move your business, so press for maximum service and continued patronage.

It is my belief that debt is simply money owed, a burden to any business. To increase debt in pursuit of leverage is a mistake – a desperate move. It makes far more sense to leverage aspects of your performance directly linked to profits and your success.

Chances are good that you have a strategic plan, but what about strategic marketing?  Strategic marketing is a mind-set and blueprint. It is specific, analytic, and motivational in ways that Business Plans are not.   Yes, your marketing strategies must promote your product or service, but they must also outline marketing logistics for identifying your customers, and build the business credibility of your name, experience, and potential.

Strategic marketing spells out your plans for partners, employees, and others interested in your success. To put it simply, it is a way of understanding who and what you are as a business.

• Be able to explain your business in 60 seconds. Refine and reduce your business concept to a mini-commercial that sets your business apart. Be able to explain your value and key selling points. If you are not ready to do this in 60 seconds or five sentences, you are not ready to go on.
• Draw a detailed picture of your target customer. Use internet resources to build a specific profile that includes demographics, socio-economic data, and spending habits. Include specifics that show you know the competition, their products, pricing, and marketing plans. Use software to create a model that updates the data and drives your response.
• Set clear, measurable, short and long-term goals. Target the year’s revenue, the anticipated sales, and the expected profit. Then, benchmark quarterly and monthly expectations. Setting objectives motivates you, your staff, and those with a financial interest in your success.
• Develop a plan of attack. Draw a blueprint of how you plan to meet your objectives. Include staffing and advertising. If your business requires a sales force, you need to engineer a sales performance model that will justify the added expenses that employees bring to the mix. Describe the organization of the sales team, their territories and approaches, and compensation plan. In any case, you need an advertising and communication strategy. You need to target your media – print ads, website sales, radio spots, etc. Be very specific about targets, costs, and justification.
• Prepare a budget. Project your expected gains and costs on a calendar. Make it as finite as you can because this is a living document evolving over the year and, then, over the ensuing years. Cite detail that educates you and everyone with an interest.

Strategies need to be agile and responsive. They require tools and know-how to keep them freshly informed and effective. Strategic marketing is a work-in-progress. This is both its challenge and its value.

Small business owners generally aren’t very schooled in how to set prices for their products or services. In an era where the Internet or a phone app can tell a consumer instantly what the best price is and where to find it, how do you know where to start or how to compete?

Pricing strategy is a huge topic and a business science so there are only going to be a few basics covered here. But before you even consider pricing, you need to clearly define what other ways you plan on standing apart. If you are setting prices with the goal of being the “lowest price in town”, that’s fine. But that can be a slippery slope because consumers have a very clear way of knowing if you are offering the lowest price.

You need to know as much as consumers by finding out what the competition is charging but you also want to have a careful understanding of the net profit you have to make and the net profit you want to make. Somewhere between those two goals is a good starting point.

Offer a variety of price points. If you sell widgets, sell them in smaller and larger quantities including a “sample size” like Benjamin Moore’s paint samples. A classic service example is the basic and deluxe oil changes many auto service locations offer.

Rafi Mohammad’s must-have book on pricing, The 1% Windfall, offers these steps to determining a value-based price:

1. Identify your target customers
2. Determine their next best alternative to your product or service
3. Understand how your product or service differs from the alternative
4. Calculate your value based on that difference
5. Do a “reality check”

Testing and inquiry are going to be a key components of your pricing strategy. Feedback from your sales team and your customers, plus hard numbers will help you know if you are on track regarding price-or if it is an issue with the product or service itself.

For more on pricing check out this Charlie Gilkey article from Inc.

Passive income is income that you, the small business owner, generally only has to develop once and is a way to financially utilize information or products that you already use in your business. Streams of passive income are great because they involve little or no time once the additional product is developed and can be continually sold with minor tweaks for an indefinite period of time.

Information products are the #1 way to generate passive income for small business owners and entrepreneurs, but you can also consider repurposing a product you already sell. Here are some tips on ways to generate passive income:

• Videotape yourself providing a service that you routinely provide. Package and market this to an audience who cannot access you personally. This is great for speakers, coaches, and educators, because they are in front of people presenting workshops and seminars routinely. But…
• Also consider offering “how-to” guides even if you are in a blue collar trade. If you are an experienced remodeler and find homeowners have the same 5-10 questions or needs, consider videotaping this service and selling it to a broader DIY audience.
• Repackage any videos you make into written guides. For only the cost of transcription and some graphic design, you can turn your video into a handy reference guide or:
• Turn the same information into an e-book. E-books can be multimedia and this is one of the reasons they are outselling traditional books in many venues. You can, in fact, incorporate your videos and written guides into a multimedia e-book that can be sold at a higher price because it can be used in a variety of ways.
• If you sell certain products, consider changing the packaging, color, or marketing to appeal to a new market. Pink smaller handtools are popular for women, many grooming products for men are simply repurposed beauty products for women, etc. Brainstorm niche markets and how you might rework your products for one or more new ones.

Passive income keeps you supplied with funds that you don’t have to show up for, provide a service for or work for! It is a great supplement to your traditional business AND, in some cases, can replace it all together.