An Elevator pitch is designed to describe your value proposition in a short one sentence summary that gets to the heart of the matter and opens up your audience to ask follow up questions, by making them curious to find out more. What it also forces you to do is completely understand what you are offering to prospects, as the quote above states, if you can’t explain it simply, you don’t understand it enough, and if you don’t understand it enough, how do you expect prospects to?
To construct your elevator pitch answer the following set of questions:
Who are you? – I’m Mike
What you love to do? (what do you feel supremely qualified to teach other people) – Provide business solutions
Who do you do it for? – Small business owners
What do those people want or need? Run more successful businesses
How do they change or transform as a result of what you give them? -Have a better quality of life
Now put this all together into a sentence – “I’m Mike, I provide business solutions to small business owners so they can run more successful businesses, and have a better quality of life”
Only the first 2 are about yourself the others are about other people. The most successful people focus on other people.
When answering “What do you do?” answer by starting with the last point “I help small business owners enjoy a better quality of life”, this opens up the conversation and begs a follow up question.
Check out our Ultimate guides by clicking on the links below for more in-depth content
So why is it you aren’t getting results? Why did something not work out for you? Why did you fail to achieve a goal?
Is it because you aren’t capable? You haven’t got the necessary skills to be effective? You just can’t figure out what went wrong,? Well if you said yes to any of these questions, you might be tempted to throw your hands in the air, give it up as a fail, and move onto something else.
The trouble with this approach is, you will inevitably reach this point again, maybe not in relation to what you have done this time, but for sure, you will for something else, and what will you do then, give up and move onto something else and so it continues. You’re hitting the outer barrier of your capability and failing to push past it. If you can’t break through this barrier you’ll have to be content with your present situation. Be grateful for what you have, and settle for that, and many people do just that, they settle.
Lack of resources
When asked why they failed to achieve something, or why they did not achieve their goal, people often say that they didn’t know enough, didn’t have the knowledge, know-how, didn’t have enough time, money, or they didn’t get the right support from colleagues, family members or friends. What they mean by this is they didn’t have the resources. Time, money, knowledge, motivation, and support are all resources.
RESOURCEFULNESS is what counts
The truth is, it’s not a lack of resources that’s the problem, although these may indeed be lacking, but it’s resourcefulness which is missing, and this is the defining factor of failure. Resourcefulness comes from being in touch with your emotions. It’s emotions that drive you to take action.
We must tap into our passions and desires, find inspiration to pursue a cause bigger than us, we must desire the end goal enough to be driven forward, and have enough grit and determination to push through any obstacle that we will inevitable encounter.
Find MEANING in what you do
How do we do this? Well for a start we must make our actions meaningful by aligning them to a meaningful goal. Each action should contribute to the acquisition of that goal, steady but sure. Aim for a goal that is deeply desired, with great passion. A goal that challenges us, and is specific enough that we can clearly define it to ourselves.
We must understand and believe that ability is not fixed or gifted, but comes from practice, repetition and the pursuit of excellence. Having a growth mindset will motivate progress, and help banish thoughts of having limitations. Be a master of what you know and an apprentice of what you don’t. Seek functional excellence in your chosen pursuit, and know that the only limitations we have are those we impose on ourselves or allow others to talk us into believing.
Being creative is about remaining open minded, and having the ability to stand back and see things from a different perspective, making the most of your resources (strengths, abilities, knowledge, tools, networks), You need to be able to look at your situation from a variety of angles and perspectives and then make use of what you have at your disposal to help resolve your problem. Look for ways to apply unrelated ways of doing things to your situation. Many innovative new products or services have made use of this approach, rather than trying to come up with something completely new. Why try to reinvent the wheel, when you can build on the work done by others.
Take responsibility, if you try to blame others, you relinquish your power to take the initiative. Be on the front foot, rather than waiting for things to drop in your lap or come to you.
Being connected to information and people is a must. If you have the ability to acquire tools, and techniques and find, organise and more importantly use information effectively, you increase your ability to solve problems outside your current span of knowledge and capabilities.
If you are able to utilise other peoples’ resources, people like family, friends, colleagues, and/or associates, you increase your resourcefulness exponentially. It’s often the shortest and easiest path to getting a positive conclusion, but is a skill that needs to be developed and nurtured over time.
To get better results, be more resourceful, by being determined to acquire the necessary resources to get the job done, no matter what, find a way. Find resources that will improve your KNOWLEDGE, MOTIVATION and PRODUCTIVITY. Where will you find these? Well check out our ULTIMATE RESOURCE GUIDES currently covering Weight loss, Business and Marketing, they’re a great place to begin.
We make decision’s every day of our lives, from the simplest decision about what to eat for breakfast or what to wear when we go out, to more complex problem solving decisions such as how to overcome an particular obstacle that is preventing us achieving a particular goal, or which choice of investment will provide the best return.
What is decision making?
Decision making refers to making choices between alternative courses of action. This involves a comparative assessment of the costs and benefits of different courses of action, however the future value of a choice is not always fixed or known before it is made. This means we can only make most decisions based on a “best guess” basis. So there is a level of risk associated with most of the decisions we make, particularly the important ones.
There are many factors that play into our decision making process, and the subsequent choices we opt for. Here is a breakdown of those factors.
Risk taking refers to decision making when the outcomes of particular choices are not guaranteed, and the consequent uncertainty means that an assessment of the probability (chance) of a positive or negative outcome has to occur. Given that human thinking about probability is prone to many errors and biases, there are many important practical implications for risk taking behaviour. We will discuss many of these errors later.
We are constantly assessing the risks against the rewards of taking any particular course of action, especially if it’s an important decision. We have a tendency, as human beings, to prefer safety over risk and will often favour the status quo over action that has the potential of opening us up to risk, danger and uncertainty.
To overcome this bias we have to find the NEED, or WANT within us, to motivate us enough to take the risk, effectively swinging the balance in favour of action over settling for the status quo.
Choice architecture is the design of different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision-making. It’s the fact people are more likely to op-in to something rather than opt-out, if the default value is already the opt-in option and vise versa.
How things are presented to us has a greater impact on our choices than we realise. Big businesses have long since known this and set things up for their advantage, making the most of our natural tendencies and dispositions.
It’s important to realise that the creators of the modern world, are not necessarily designing things with our best interests at heart, and we should, at least, be aware of the possibility of manipulation from other parties.
For example, social media is designed to keep us hooked and coming back for more, red notification bubbles tap into our innate sense of curiosity, knowing we won’t be able to resist finding out what’s waiting for us on the other side of that click.
Inner conflict between WANT and SHOULD
This is the inner conflict between;
What do I want?
What should I choose? what we ought to choose
If you’ve ever struggled with your weight, this scenario will be very familiar to you. You want that delicious looking chocolate cake, rather than the salad, but you know you should, for the good of your health, choose the salad.
Facing these kinds of choices, uses up your willpower, which will eventually run out and you’ll succumb to the temptations. So remove the temptations or remove yourself from them.
This approach also goes for distractions. If you’re productivity is being adversely affected by your Facebook activities, lock your phone away or lock yourself in a room free of social media connectivity, until your work is done.
Influence of beliefs and values
This is a biggie and I’m not going to go too deep into beliefs and values here, other than highlight their importance.
All behaviours are a reflection of our thoughts, and thoughts that are repetitive, fixed, and invested with a sense of ourselves, are what we call BELIEFS, they are our beliefs. Conditions and rules that are attached to these beliefs become our VALUES.
Beliefs in particular shape how we behaviour, how we interact with other people and the world around us. They affect our affiliations, or passions, what we pay attention to, what we buy, and how we live our lives.
Much of our beliefs come from social conditioning, they are largely built form assumptions, and inferences, rather than facts and evidence. They are stories we tell ourselves to make sense of the world around us.
We look to confirm our beliefs, ignoring or rejecting counter-argument, rather than trying to disprove them, which is the scientific approach. This is what is described as confirmation bias, if you want to find out more about it.
The best way to deal with beliefs and values is to question their origin, their basis and accuracy. It’s much more productive to consider beliefs as hypotheses, which you look to disprove rather than prove, like science does.
If you can’t prove something, consider it a best guess, until more evidence is discovered.
Avoid throwing your opinions and views around, until you know for sure what you’re talking about.
If someone tells you something ask “how do you know?”, and “where is the evidence?”
Unknown consequences and outcomes
Many decisions are made with knowing what the consequences or outcomes will be. Sometimes we just can’t know whether choice A is going to be better than choice B.
We should instead weigh the facts, as we know them at the time, and commit to whatever choice we make and make the best of it, living with the consequences.
We are not passive recipients of the decisions we make, we interact and influence them as time progresses. So by committing to them and stopping questioning and second guessing ourselves, we give ourselves the best chance of getting the results we are looking for.
Choice overload, too many choices
Too many choices can be paralyzing, and results in nothing being chosen, so be wary of thinking more options are better.
Difficulty in evaluating and comparing choices
It can often be difficult to pick one choice over another because they offer different advantages and disadvantages.
It helps to have a goal that you’re working towards, and decide which is most likely to get you closer to it. That way you have a direction you’re heading towards. But even then some things might just not comparable so what do you do in such circumstances?
Well you decide on one based on the facts, and commit to it.
Errors in THINKING
Dealt with below.
How to too make better decisions
We would all like to know how to do exactly the right thing at all possible times, making good decisions in all circumstances. Some help was given to us back in 1738 by Daniel Bernoulli. The equation he came up with has been translated as:
The goodness we can count on getting from a decision we make, which is based on:
The odds of gain
The value of that gain
Expected value = (odds of gain) x (value of gain)
In itself this equation offers an effective decision making framework, but we must be wary of miscalculating the odds of gain, and be mindful about how we value that gain when using it. As long as we sidestep the many errors and biases in our thinking (which we”ll discuss below), we should be good to go.
Much of our decision making, depends on us using memory and comparison in our assessment of PROBABILITY (when we’re working out the odds of gain) and likewise when trying to establish the VALUE of that gain.
For example, if I asked you, would you consider buying a burger for £10. You would likely make an assessment about what else could be purchased for the £10, along with checking your memory to see what you had paid for a similar burger in the past. If you considered the burger to be overpriced, you would likely not purchase, if you believed there to be other things more worthy to spend the money on, you may opt for them instead. What you’re doing here is you’re making use of comparison and memory to determine the burgers value.
Other factors also come into play, for instance, if you’re hungry you’re more likely to opt to buy the burger. How I frame the question, might also impact your answer. If all your friends were buying a burger, you might decide to buy, just to fit in. If you knew you weren’t going to get the chance to eat for a prolonged time afterwards you might again, opt to buy.
So while this is a pretty straight forward decision, to buy or not, there are still a lot of potential factors that come into play. Decision making is not always so clear cut, particularly if there are a number of choices available.
Let’s look at some of the pitfalls that can befall us if we’re not careful, they consist of errors in judgement and personal biases.
Let’s look at a couple potential errors in memory…
If I asked you “What is most common, dogs on leashes or pigs on leashes?”. You would most likely say dogs, largely because you have seen and remember seeing more dogs on leashes than pigs on leashes and because of this, memory is relied upon as more representative of fact. You are likely to be correct in your assessment, but unless you’re an authority about the world of pigs, and pig owners, you could easily be wrong.
If I asked you “Which is more common in the English language, words containing the letter “R” in first place or in third place?” You would probably be able to remember more words with the letter “R” in first place and would likely choose this as a result, when in fact there are more words with the letter “R” in third place. Because these are harder to recall we have a tendency to think there is less of them. These are examples of “Availability heuristic”.
Lets look at couple of examples of errors when we try to compare things,…
A £2000 Hawaiian vacation package is on sale for £700. You think it over for a week, but by the time you get to the ticket agency, the best fares are gone and the package will now cost you £1500. Would you buy it? Most people would say no. because they would not want to pay for something that was cheaper just a week before, even though the vacation is still well priced at £1500. If the price had just gone from £2000 directly to £1600 (without the drop to £700 in between) would you feel any differently even though the holiday is in fact £100 dearer in the second scenario? Many people would be inclined to opt for this situation given the choice.
Another example for you to consider. You are on your way to the theatre. In your wallet you have a ticket for which you paid £20, along with a £20 pound note. When you arrive at the theatre you discover that you’ve somehow lost the ticket. Would you spend your remaining £20 on a new ticket? Most people answer no. Let’s change the scenario and replace the ticket with another £20 note instead, so you now have two £20 pound notes, and this time you lose one of the £20 pound notes. In this circumstance people often change their answer to yes. Why is this? Well in the first scenario they say they do not want to pay twice for the same ticket, in the second scenario they take the opinion that just because they have lost £20, what difference does it make, they came to see the show and still want to see it.
In our last example, imagine you went to your local cinema and saw a small portion of popcorn for £3 and a large for £7, which would you choose? If a medium portion was then added for £6.50, which would you go for now? In tests, when the medium option was added, more people opted for the large portion than before, why? Because in comparison to the medium the large looked better value than it did before.
So you can see from these examples how easily errors can occur when relying on memory and comparison.
Poor assessment of Probability
Lets look at how our assessment of probability can result in bad decision making. There are two methods we use to assess probability these are:
“Representativeness heuristic” refers to estimating the probability of a particular sample of events based on their similarity to characteristics we feel are typical of the whole category population of those events. This may result in thinking some events are more likely than others, and that certain trends can be predicted. But if people fail to follow the true principles of representativeness, such as ignoring information on probability base rates or forgetting that small samples are less likely to be representative, then this can lead to false estimates as is seen with use of stereotyping. For example if we toss a coin, a sequence of HTTHTH is thought to be more probable than a sequence of HHHHH, even through they are equally likely
and secondly “Availability heuristic” (examples given previously) is based on estimating the probability of an event based on how easy it is to remember. This may lead to familiar, recent or popularised events being more available in memory and subsequently seen as more probable. For example murder might be thought to be more likely than other crimes because of its greater media coverage.
Faulty decision making
Rational decision making would involve taking account only of the odds of an expected outcome and expected value gain of each option. In fact, this is rarely the case, and is often influenced by some of these biases and errors in thinking:
Framing effects – how the problem is presented to us. This is particularly so with marketing messages and political messages which are aimed at getting us to react in a particular way. The way the information is presented often intensifies certain facts and downplays others, in the hope of pushing us towards a certain course of action. (check out our post on Hugh Rank’s Persuasion model)
Loss aversion – as humans we are wired through evolution to be more sensitive to loss than gain. As a result we want to protect what we have over reaching for more.
Elimination-by-aspects theory – this involves eliminating options by considering one relevant attribute after another.
Satisficing theory – choosing an option that has satisfactory attributes when it becomes available. Most commonly found when dating, we pick the first suitable mate that comes along, often rejecting others that come later, but that might be a better suit.
Conforming evidence trap – which involves seeking out evidence that justifies our choices and subconsciously ignoring contradictory evidence rather than looking at the whole picture.
The status quo trap – shifting deck chairs on the Titanic rather than jumping over while it’s sinking
The sunk cost trap – which involves throwing good money after bad in the hope of recovering losses rather than simply cutting losses, as evidenced by many gamblers and stock market investors.
Trial and error – where no decision can be considered correct unless it has been subjected to testing and scrutiny in order to accept or reject it. Which appears to be a rational approach, but is prone to subjectivity and influenced by the persons own values.
A few more to consider:
Compensatory rule – “we selected the security system that came out best when we balance the good ratings against the bad ratings”
Conjunctive rule – “we picked the security system that had no bad features”
Disjunctive rule – “we selected the security system that excelled in at least one attribute”
Lexicographic rule – “we looked at the feature that was most important to us and chose the security system that ranked highest on that attribute”
Affect referral rule – “everything they do is outstanding, so we decided to have them install our security system.”
Biases with Time
Time also plays a part in our decision making:
If I offered you £60 now or £50 now, you would likely go for £60 now.
2.If I offered you £60 now or £60 in a month most would go for the £60 now.
3.If I offered you £50 now or £60 in a month most would go for £50 now – because they don’t want to delay gratification.
4.If I offered you £50 in 12 months or £60 in 13 months many would elect to go for the £60 in 13 months because they think to themselves, what’s the difference between 12 or 13 months, I might as well hang on for another month and pocket an extra £10. But in reality the only thing that has changed between our third example and this one, is the time frame, and the fact that it is further away from the present moment. When we actually get to month 12 we will probably change our minds and wonder why we didn’t settle for the £50 in 12 months rather than wait and extra month for the extra £10.
What else plays a part in poor decision making outcomes
Decisions are made with our best interests at heart, and with positive intent, however we don’t always get them right as discussed. This is partly due to the “faulty thinking” we have talked about above but also other things play a part
External influences and pressure forcing our hand or influencing our decision making, such as time limit, peer pressure, salesmanship, fraudsters, threat
Luck plays a part in the final outcomes and we shouldn’t underestimate its role.
Unforeseen events and circumstances outside our knowledge at the time of the decision or after a decision is made. Unless we have a magic wand, there is little we can do about this. “With hindsight I would have….”
Deductive and Inductive Reasoning
We have included reasoning as part of this discussion on decision making, to highlight how we can easily stray away from accurate thinking, which can later impact our decision making effectiveness.
“Reason sits firm and holds the reins, and she will not let the feelings burst away and hurry her to wild chasms. The passions may rage furiously, like true heathens, as they are; and the desires may imagine all sorts of vain things: but judgement shall still have the last word in every argument, and the casting vote in every decision.”
— Charlotte Brontë
Reasoning or accurate thinking, as it is sometimes described, most commonly comes in the form of Deductive and Inductive reasoning and is often used in the search to find logical explanations for things around us. Why does this happen? How can I make this happen?
Inductive reasoning – is an hypothesis or idea about things we don’t know. It is built on arguments that do not have categorical support for the conclusion. We make many observations, discern a pattern, make a generalization, and infer an explanation or a theory. An example of inductive reasoning is:
Lots of people are interested in internet marketing, Mr Turner is a person, so Mr Turner likes internet marketing
The premise that “lots of people are interested in internet marketing” is true, as is “Mr Turner is a person”. The conclusion that follows “Mr Turner likes internet marketing” is logically correct, but may not be true. The reason for this is that while we have stated that lots of people are interested in internet marketing, Mr Turner may not be one of them.
Because inductive reasoning is based upon probabilities, conclusions are considered to be cogent, rather than true. This is because the probability exists that the two accepted premises may not truly lead to the acceptable conclusion.
Deductive reasoning on the other hand is when we have the facts or appear to have the facts and the arguments provide absolute support for the conclusion.
Deductive reasoning makes the strong assertion that the conclusion must follow the premises out of strict necessity. Denying the conclusion means that at least one of the premises is self-contradictory and thus not true. For example:
All human beings need oxygen to survive. Mike is a human being, therefore, Mike needs oxygen to survive.
For deductive reasoning to be effective the original premise needs to be true, as with the example used above. However check out the example below. Although the conclusion follows on logically from the premise, there is possible doubt over the validity of the original premise that “Every website that has an opt-in form on it, is collecting subscribers”. If this premise is invalid, the conclusion will also be invalid.
Every website that has an opt-in form on it is collecting subscribers, if I put an opt-in form on my website, I will get subscribers.
So the key to a creditable conclusion lies in the premise. If this is valid then so will the conclusion, if not, then neither will be the conclusion.
Another form of deductive reasoning is the Syllogism. A Syllogism consists of a minor premise and major premise and a conclusion and are of the form If A=B; and B=C; then A=C.
A=B (minor premise/specific instance) i.e. Patch is a dog
B=C (major premise/generalisation) i.e. All dogs can bark
A=C (conclusion) i.e. Patch can bark
There are a number of Syllogism fallacies that can producing faulty conclusions these include;
undistributed middle – some dogs (rather than all)
illicit major – last part (C) of the conclusion is broader than premise allows
illicit minor – first part (A) of the conclusion is broader than premise allows
Check out this article for a more in-depth analysis of Reasoning.
So as you can see, it is easy for poor reasoning techniques to impact our decision making effectiveness, and we should always be mindful of ensuring we are using accurate thinking in our decision making.
So as you can see there are many ways of making bad decisions. Below are more tactics designed at improving decision making.
Common Decision Making Methodology
There are often 3 levels of decision making that are generally employed:
The simplest THE REFLEX ACTION (knee jerk reaction. Unconscious, without considering the alternatives i.e. profits down – costs need to be reduced, or sales are slipping – prices too high. Here is a great example. A racket and ball together cost £1.10, Racket costs £1 more than ball, how much is the Racket? work this out for yourself, most people say £1, the answer is actually £1.05.
ALGORITHM or checklist. i.e. You come face to face with a tiger, You instantly go into flight or fight mode. You’re mind within a nano second asks itself, is it a big one? If the answer is yes, you run, if no, you ask yourself, do I have spear with me? If yes you might fight, if no, you run.
Using more sophisticated methods like, Cost Benefit Analysis and The decision matrix approach. Which involves listing alternatives and weighing the pros and cons of each, scoring them against each other and choosing the winner (see worksheet at bottom of post).
As individuals we usually make decisions using the first 2 of these. The first (Reflex action) is not recommended in most cases other than were you have no choice such as flight or fight/life or death situations. The second (Algorithm or checklist) takes the hastiness out of the situation and can help you to be more logical in your thought process. Most of the time we make decisions using our emotions and feelings and this can cause us all sorts of problems, it’s best to give yourself some space to remove the emotion from the situation and consider rationally the best course of action to take.The third option (decision matrix) discussed above is much more considered and allows analysis of the alternatives, but is likely to be biased by subjective preferences. You can ask for a second opinion as a type of check and balance, to help correct this.
More decision making tactics
Identify all factors that affect a decision (weight them against one another) for instance Cost versus Comfort plus emotional factors such as attractiveness felt by having/wearing etc. avoid letting emotions affect decisions. Write down the options and canvas opinion from trusted others.
Be aware of your perception of loss or gain. For instance offering people £20 or giving them £50, taking back £30 and offering a bet to win back the other £30. This framing effect will result in more people taking the latter option even though they would be getting the same thing. People will make bolder decisions to avoid loss (loss aversion)
We tend to post-rationalise decisions after the event. Avoid dressing up bad decisions.
Be aware of Priming – images/words/temperature/smells can colour peoples decisions later on. For example getting people to hold a hot drink can illicit warmer feelings towards someone soon after. So be aware of others trying to manipulate us.
Use a two-tiered approach with a small group of core people who set the standards that a larger group can implement with autonomy but within those standards
Tap into as much knowledge as possible (mentors and mastermind groups)
Ensure those carrying out the decisions are involved in the decision making process.
Harvard Business Review blog recommends using the Trick acronym to aid decision making.
Two – tiered approach (detailed above)
Rapport with strategic team and implementers
Involve all – from management to customer in the decision making process
Cause and effect reversals – to remove self limiting beliefs that are effecting how you approach strategy. i.e. Is your strategy impacting your success, or is you success impacting your strategy?
Kahneman perspective – 12 question checklist to identify and reduce bias
In his book “Think and Grow Rich” by Napoleon Hill he describes the using accurate thinking as being the foundation of all successful achievements.
He advises to separate important facts from unimportant facts. An important fact is one that aids you in the achievement of your goal, if it doesn’t do this consider it unimportant.
Be wary of opinions prejudice and biases that come with them. Look for proof of hard facts. Ask “How do you know?” and stand firm until they have answered to your satisfaction.
If someone has a negative attitude about someone or something, be wary of what they say because it is sure to be negatively framed.
Free advice is usually worth what it costs
Never accept anything as fact until proven
Negative attitude = negative framing
Don’t give away what you want the answer to be when you ask a question, cause people want to give people what they think they want to hear
Ask “how do you know” when you can’t identify if something is true
Check out his book on Amazon by clicking on the image below.
Personally I like to use the “Decision Making Matrix” template below and get other people involved to get some perspective and offset some of my biases. while it has served me well, I would suggest finding what works best for you, however if you check out my post on problem solving you will find a large list of tools and techniques to help in your decision making.
I suspect the biggest takeaway from this post will be in identifying the biases and errors in thinking that may affect many of the day to day decisions that you make. Hopefully by being more aware of these you will look more critically at the decisions you make and what might be motivating them. Decision’s are mainly made on a best guess basis and are sometimes influenced by factors outside our control and span of knowledge at the time we make them. We can only control the actions we take and by examining our biases and errors in thinking, try to improve our decision making strategies.
When we think about things in the distance future we have a view of them, but as we move closer to them we change our minds. Our brains have evolved from a very different world, where we needed immediate gratification to survive. We need to be more aware of these old habits which are no longer relevant to our modern way of living, and be more willing or open to, delaying gratification.
For a working excel spreadsheet version of the form above please join my mailing list. All the calculations are done for you, just enter your own data. Alternatively I’ve got an interactive online version you can check out here.
We encounter numerous problems throughout our lives, and in all areas of our lives. The people that insist on putting a positive perspective on life have renamed problems, “challenges”, but for the purpose of this post we are going to stick with tradition.
Although problems can be simple or complex, we can go through a step-by-step process to try to solve the problem and provide a solution to it. Tackling problems is often a better solution than burying-our-head in the sand and hoping it goes away, although “doing nothing” can be a valid solution in itself. Burying our heads relies mainly on luck to solve the problem and takes the power away from us. Confronting the problem empowers us and in itself can be life changing.
One of the skills required for solving problems is decision makingwhich is a topic in its own right, and is a crucial life skill that should be studied, and improved..
Stripping the problem solving strategy down to its basic components leaves us with 5 stages to go through.
1.Identify the problem and understand how it impacts your desired goal. I like to use the following equation to simplify this stage.
Example = (EP)Enough traffic to site to earn living – (RP) not enough traffic to site = (P) need more traffic to site
More specific example = (EP)1000 visits per day to site – (RP) 50 visits per day to site = (P) -950 visitors a day to site
Break the problem down – Evaluate the components of the problem and their relationship to one another so that you understand the problem from all angles. You must define it clearly. so that you can understand it.
Find possible solutions – Research the possible solutions and expected outcomes of those solutions. Weigh the pros and cons of each. Use your creative thought process for this. You are not guaranteed the outcomes will be as you expect, but you can only judge on the knowledge you possess at the time. Research the models, systems, habits and relationships of others that have overcome the problem(s) you are trying to overcome, where possible.
Decision making – Take action to resolve the problem. Evaluate the options and prioritise, moving on those solutions that you believe will solve the problem.
5.Review. Check that the problem has been solved. If not then go back to step one and re-evaluate, adding the information learned to the mix and begin the process again. Each failure to solve the problem takes an option off the table, and moves you a step closer to finding the right solution.
There are a number of tools and techniques available to help you solve different types of problems. Some have been designed to tackle particular types of problems, ,many of which can be modified to fit your needs. Here is a list below:
Pareto Analysis (80/20 Rule)
Pareto Analysis is a statistical technique in decision-making used for the selection of a limited number of tasks that produce significant overall effect. It uses the Pareto Principle (also known as the 80/20 rule) the idea that by doing 20% of the work you can generate 80% of the benefit of doing the entire job.
Force Field Analysis
Force Field Analysis is a method for listing, discussing, and assessing the various forces for and against a proposed change. It helps you look at the big picture by analysing all of the forces impacting on the change and weighing up the pros and cons.
Six Thinking Hats
Six Thinking Hats is a system designed by Edward de Bono which describes a tool for group discussion and individual thinking involving six colored hats
Starbursting is a form of brainstorming that focuses on generating questions about an idea.
Ishikawa Diagram (Cause and Effect Analysis)
The fishbone diagram identifies many possible causes for an effect or problem. It can be used to structure a brainstorming session. It immediately sorts ideas into useful categories.
Process Flow Chart
A flowchart is a picture of the separate steps of a process in sequential order.
Paired Comparison Analysis
Paired Comparison Analysis helps you to work out the importance of a number of options relative to each other. It is particularly useful where you do not have objective data to base this on.
The Stepladder Technique
The Stepladder Technique is a simple tool that manages how members enter the decision-making group. It encourages all members to contribute on an individual level BEFORE being influenced by anyone else. This results in a wider variety of ideas, it prevents people from “hiding” within the group, and it helps people avoid being “stepped on” or overpowered by stronger, louder group members.
A Venn diagram is a diagram representing mathematical or logical sets pictorially as circles or closed curves within an enclosing rectangle (the universal set), common elements of the sets being represented by intersections of the circles.
Grid Analysis (otherwise known as Decision Matrix)
Decision Matrix Analysis works by getting you to list your options as rows on a table, and the factors you need consider as columns. You then score each option/factor combination, weight this score by the relative importance of the factor, and add these scores up to give an overall score for each option. Check out more about the Decision Matrix/Grid Analysis on my Decision Making post.
The cost/benefit analysis is designed to summarize the overall value for money of a project or proposal. It looks at the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms.
The Risk/Rewards ratio is a ratio used to compare the expected returns of an investment against the amount of risk undertaken to capture these returns.
The ladder of inference
The kepner-tregoe matrix
Nominal group technique
The delphi technique
Ranking and rating
Solution effect diagram
I’m sure there will be many other tools and techniques available, if and when I come across a new one I will add it to this list. I will in the course of time add some posts specifically about each of these tools, and link from this post to them, so keep this post bookmarked.
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Quotes are a great way to draw inspiration, shift perspective and escape habitual thought patterns, here are a selection of problem-solving quotes I’ve collected over the years.
“Focus on the solution, not the problem.”
“Stop talking about your problems and start thinking about solutions.”
“If you don’t solve the problems from your past, they will follow you into your future.”
“Life is a continuous exercise in creative problem solving.” – Michael J. Gelb
“Every problem has a solution, you just have to be creative enough to find it.” – Travis Kalanick
“When solving problems, dig at the roots instead of just hacking at the leaves.” – Anthony J.D’Angelo
“Never bring the problem solving stage into the decision making stage. Otherwise, you surrender yourself to the problem rather than the solution.” – Robert H. Schuller
“Problems are nothing but wake-up calls for creativity.” – Gerhard Gschwantner
“You’re either part of the solution or you’re part of the problem.” – Eldridge Cleaver
“Solving problems is a practical art, like swimming or skiing, or playing the piano; you can learn it only by imitation and practice.” – George Polya
“People who believe a problem can be solved tend to get busy solving it.” – William Raspberry
“The best way to escape from your problems is to solve them.” – Unknown
“Running away from any problem only increases the distance from the solution. The easiest way to escape from the problem is to solve it.”
“We can’t solve problems by using the same kind of thinking we used when we created them.” – Albert Einstein
“Instead of thinking outside the box, get rid of the box.” – Deepak Chopra
“It isn’t that they cannot see the solution. It is that they cannot see the problem.” – GK Chesterton
“You can’t teach problem solving unless you are a problem solver.” – Jim Wilson
“Stay away from negative people. They have a problem for every solution.” – Albert Einstein
“The only way to get good at solving problems is to solve them.” – Seth Godin
“Problem-solving leaders have one thing in common; a faith that there’s always a better way.” – Gerald m. Weinberg
“It’s not that I’m so smart, it’s just that I stay with problems longer.” – Albert Einstein
“Any problem, big or small, within a family, always seems to start with bad communication. Someone isn’t listening.
“If a problem can be solved, there is nothing to worry about. If it can’t be solved, then worrying is useless.” – Unknown
“Sometimes problems don’t require a solution to solve them; instead they require maturity to outgrow them.” – Steve Marboli
“When people tell me “you’re gonna regret that in the morning” I sleep in until noon, because I’m a problem solver.” – Unknown
“To launch a business means successfully solving problems. Solving problems means listening.” – Richard Branson
“There are solutions; even to the hardest problems.”
“Problem-solving is hunting; it is savage pleasure and we are born to it.” – Thomas Harris
“Not everything that is faced can be changed. But nothing can be changed until it is faced.” – James Baldwin
“The important thing is to never stop questioning.” – Albert Einstein
“Abilities essential for academic success and productivity in the workforce, such as problem solving, reasoning and literacy, all develop through various kinds of play, as do social skills such as cooperation and sharing.” – Susan Linn
“Insanity; doing the same thing over and over again and expecting different results.” – Albert Einstein
“Problems we have cannot be solved at the same level of thinking with which we created them.” – Albert Einstein
“All life is problem solving.” – Karl Popper
“Leaders spend 5% of their time on the problem and 95% of their time on the solution.” – Tony Robbins
“It’s very important to have a feedback loop, where you’re constantly thinking about what you’ve done and how you could be doing it better.” – Eton Musk
“Problem, means that you are dwelling on a situation mentally without a true intention or possibility of taking action.” – Eckhart Tolle
“To solve our most difficult problems we must radically change our thinking.” – Stephen Covey
“Mental acuity of any kind comes from solving problems yourself, not from being told how to solve them.” – Paul Lockhart
“Hate has caused a lot of problems in this world, but it hasn’t solved one yet.” – Maya Angelou
“Our problems are not solved by physical force, by hatred, by war. Our problems are solved by loving kindness, by gentleness, by joy.” – Buddha
One of the first things I learned in business was the principle of adding value. Adding value is about bringing something to the table that customers will pay you for. In business it can involve adding convenience, by saving your customers’ time, money, resources, energy.
It can be closer-to-hand, on-demand, just-in-time. It can make things easier for customers, saving them effort, worry, frustration. It can provide them with expertise and knowledge to help them get better results. It can help people get closer to their goals by increasing efficiency, motivation and productivity or help them be more effective in their goal seeking. It can help them solve problems, such as medicines do for the ill, or losing weight, being healthier and fitter, or unblocking bottle necks from their production processes. It can make people feel better about themselves by adding prestige and luxury to their lives. Adding value can involve increasing quality, reliability, durability to something they purchase.
List of value added characteristics
Newness – satisfying an entirely new set of needs that customers previously didn’t perceive because there was no similar offering. i.e. cell phones
Performance – improving product or service performance i.e. PCs
Customization – tailoring products and services to the specific needs of individual customers.
“Getting the job done” – helping customers get certain jobs done i.e. rolls Royce servicing jet engines for airlines
Design – getting a product to stand out with superior design
Brand/status – finding value in the simple act of using or displaying a specific brand i.e. wearing a Rolex watch signifies wealth.
Price – offering a similar value at a lower price to satisfy the needs of price sensitive customer segments.
Cost reduction – helping customers reduce costs is an important way to create value. i.e. salesforce.com sells a hosted CRM application. This relieves buyers from the expense and trouble of having to buy, install and manage CRM software themselves.
Risk reduction – reducing the risk of purchasing products of services. i.e. for a used car buyer, a one year service guarantee reduces the risk of post purchase breakdowns and repairs.
Accessibility – making products and services available to customers who previously lacked access to them. i.e. netjets popularised fractional private jet ownership.
Convenience/usability – making things more convenient. i.e. ipod and itunes offered unprecedented convenience searching, buying, downloading and listening to digital music.
Adding Value in Relationships
In a personal situation, adding value can be done through friendship, by supporting, listening, understanding, caring, encouraging, not putting friends down or making fun of them, or defending them when someone else does. Being fun to be around, and adding to others’ lives rather than taking away from them. Friendships are about connecting emotionally, being empathetic, and authentic. Keeping your word, keeping a secret when you are asked to. It’s about giving them your time, attention, your love and sincerity.
Adding Value for Strangers
Add value to strangers by smiling at passers-by and saying hello, being considerate, friendly, courteous, pleasant. Holding a door open for someone struggling with shopping, letting someone go in front of you when you can see that they are rushing.
The Bottom Line
At the most basic level, adding value is about adding something of value to another person’s life. No matter how large or small that value may be. It’s about making people feel better about their lives even just a moment of their life. Move them towards a better state of being. Move them away from worry, pain, frustration, unfulfilled, disappointment, feeling conflicted, angry, useless, resentful, dissatisfied, struggle, lack of.., limited, confused and towards pleasure, love, completeness, success, their goal, wealth, the realisation of something, triumph, progress, accomplishment, expansion, abundance, freedom, a breakthrough, a work-around, to survive or even thrive. Go out into the world and make it a better place for yourself and others by being a giver and not just a taker.
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Add Value Quotes
“Stop Selling, Start Helping.” – Zig Ziglar
“My mission is to add value. My attitude is of active curiosity, and my method is through relationships of trust.”
“Key to wealth: Provide more value than anyone else.”
“Try not to become a man of success, but rather try to become a man of value.” Albert Einstein
“I learned the value of hard work by working hard.” – Margaret Mead
“Add value to everyday. Sharpen your skills and your understanding.”
“If your presence doesn’t add value, your absence won’t make a difference.” – Zero Dean
“Find your passion, learn how to add value to it, and commit to a lifetime of learning.” – Ray Kurzweil
“Smiles ADD VALUE to our face, love ADDS VALUE to our heart, respect ADDS VALUE to our behaviour and friends and family ADD VALUE to our life.”
“The more value you add to the lives of others, the more valuable you become.” – Hal Elrod
“Price is what you pay, value is what you get.” – Warren Buffett
“Strive not to be a success, strive instead to be of value.” – Albert Einstein
“innovation is change that unlocks new value.” – Jamie Notter
“Never waste your feelings on people who don’t value them.”
“You add value to people when you value them.” – John C. Maxwell
“Too many people overvalue what they are not and undervalue what they are.”
“We make a living by what we get, but we make a life by what we give.”
“Be the type of energy that no matter where you go, you always add value to the spaces and lives around you.”
“Once you realize your worth, it will be easy to get go of those that don’t.”
The aim of writing a sales letter isn’t to impress the reader with stylish prose, but to present your sales pitch as clearly and logically as possible. Ask yourself, what your product does for the customer:
What problems does it solve?
How does it do this?
How can I prove its benefits?
What exactly does the products do?
Make notes, then write a list of the reasons why someone should buy your products. Use this list to form the spine of your writing and provide a seductive sequence of emotional and logical reasons why your readers should say “yes”.
Know who your customers are
It is critically important to understand who your customers are and who you are writing to, so that you can gauge how to pitch your words. You need to understand your customers motivations, what makes them happy, what makes them angry or fearful and what aspects of their life they want to improve, what they want to gain or avoid. The psychological triggers that make people buy are based on either
Logical motivations e.g. saving time, money or improving how they perform a task
Emotional feelings e.g. being more successful, popular or wealthy
When structuring your writing you need to identify how you can appeal to both these triggers.
How can you make the reader feel that buying your product will make them more popular or successful?
What are the practical reasons why it will be money well spent?
If you’re able to satisfy both triggers your writing will be able to tap into the powerful mental process that motivates people into buying products and services.
know the difference between your products benefits and features
knowing the difference between benefits and features will help you to aim your communication at the core issue in your customers mind, the underlying need or want, which will leverage your message to give maximum impact and move your customer into buying mode. Product features are simply the characteristic of a product, the things the product actually does or has, The features of a car might be having
air conditioning as standard.
economical on fuel
having Rolls Royce branding
anti lock brakes or ABS
while these are important to mention, they are simply the “means to the end ” they aren’t the underlying reason a customer buys. Using the feature list above we can identify the benefits:
Having ‘air conditioning as standard’ means being comfortable even on very hot and sunny days (comfort)
Being ‘economical on fuel’ means keeping more of your money to enjoy on the things that are important to you (enjoying more wealth)
Having “Rolls Royce branding ‘ means looking successful and wealthy (prestige)
Having ‘anti lock brakes or ABS’, means you and your loved ones are safer when you’re out on the road (safety)
A handy trick to find the benefits, is to add the phrase “which means…” to the end of each feature. The benefits from the list above are comfort, prestige, greater wealth, safety and security, and by highlighting the benefits, you are giving prospects a reason to want what you have to offer. So having done this preparation lets get on with how to structure your writing.
Structure – AIDA
Attention – the headline
In basic terms, your headline should clearly promise a benefit the reader will gain. This could be the promise of valuable information, how your product can solve a problem or how you can enrich the reader’s life.
“On average, five times as many people read the headlines as read the body copy. It follows that, unless your headline sells your product, you have wasted 90 percent of your money.” – David Ogilvy
You might be a copywriting genius, and composed a sales letter that can sell ice to eskimos. But if you can’t pull the reader into your writing then your compelling copy will merely be a waste of words.
Whether on the cover of a magazine, in a sales letter or on a web page, headlines are the most important element of persuasive writing. It’s your headline’s job to hook readers with the promise of a tasty reward that will reel them into devouring your copy. So let’s be clear: your headline must be able to attract the reader’s interest if your writing is going to have a chance of selling your product
“If you can come up with a good headline, you are almost sure to have a good ad. But even the greatest writer can’t save an ad with a poor headline.” – John Caples
Interest = benefit + curiosity
People are, by nature, motivated by pursuing their own objectives in life and what can benefit them personally. So they’ll only read your copy if they think there’s something in it for them.
This means your headline needs to offer the promise of a benefit the reader will gain from reading what you have to say. People are also curious, and headlines should feed on people’s curiosity by hinting at the benefits your writing offers. So whether it’s the promise of valuable information, solving a problem or a full proof money making scheme, your headline needs to offer the promise of a benefit and build curiosity if you’re going to reel in readers.
You’ll need to write as many benefit and curiosity laden headlines as you can. Some copywriters will write out over 100 before they settle on one they’re happy to use to bait their sales letter.
After you’ve settled on a winner, you can use your second and third choices as subheads to break up your copy and highlight your argument’s key points. A few headline ideas to get you started. Here are a few tried and tested headline formulas you can adapt:
Make a bold promise with a guarantee e.g. ‘Play the Piano in Seven Days or Your Money Back’
Provoke curiosity with a question e.g. ‘Do You Make These Mistakes in English?’ (Maxwell Sackheim)
Explain clearly what benefit your offering e.g. ‘How to Win Friends and Influence People’ (Dale Carnegie)
Use a strong verb and a commanding tone of voice to suggest what action the reader can take e.g. ‘Win At Poker With These Strategies Used By The Pros’
Make a bold attention grabbing statement e.g. ‘Amazing Secret Discovered By One-Legged Golfer Adds 50 Yards To Your Drives, Eliminates Hooks And Slices…And Can Slash Up To 10 Strokes From Your Game Almost Overnight!’ (John Carlton)
Make a no frills news announcement e.g. ‘New Dimoxnyl Hair Tonic Grows Back Your Hair and Youthful Looks Overnight!’
Interest – the problem
After you’ve pulled the reader into your writing, you need to continue building interest in the promise you’ve already made.
This means stirring up the reader’s emotions, and poking at the pain you’ve offered to cure. Start by using emotive language to describe the reader’s problem. Create an image in the reader’s mind of the annoyances, inconveniences and shear pain the problem causes them in daily life.
You could open with stats and figures to show how the problem is more common than the reader might think. This can also help to create a sense of inclusion and to build the reader’s confidence that you know what you’re writing about. Describe how you or someone you know has had to cope with the problem . This will help to build a bond with them and a sense of empathy for their plight.
After you’ve finished stirring up the reader’s emotions, make a compelling promise of the tonic you have to sooth their pain and to entice their curiosity into reading further.
Desire – the solution
Now that you’ve created interest, you need to make good on your promises by explaining why your product is the answer to the reader’s problem. Work through the list of benefits you composed in earlier, Describe the emotional and logical rewards the reader can gain from your product.
Use the power of storytelling to describe how your product has improved someone’s life, such as saving them time, money or making them more successful. Heap benefit onto benefit, and provide logical reasons why they should buy what you’re selling, and why it’s superior to the other options available.
Explain the reasons why they need your product in a logical, rational sequence. And provide evidence, whenever possible, to add concrete to your claims. Remember that readers need logic to backup their emotional impulses.
When you’ve finished explaining all the benefits, provide the social proof of your offer with testimonials, stats and real world examples. And when you think your reader is wavering, throw a guarantee onto the pile to tip their indecisiveness in your favour. A limited time offer or money back guarantee might seem like cutting your profits. But guarantees are a powerful way of removing the sense of risk the reader might have that’s stopping them clicking on ‘buy’. Whilst you might receive a few refund requests, the number of additional sales you can attract with a guarantee should keep the bean counter weighed in your favour.
Action – telling the reader what to do next
After you’ve built the reader’s excitement about the rewards to be gained if they just say ‘yes’, you need to clearly tell them exactly what to do next. Whether it’s entering their email address, calling your sales team or buying that instant, make sure you tell the reader what to do if they want to reap the benefits you’ve promised.
Finally, you could end your sales letter or web page with a postscript (abbreviated to P.S.), thought to be the most read part of a sales letter after the headline. You can use the postscript to restate your offer, remind the reader you’re on their side and to add an additional benefit if they respond today (such as a discount or free eBook).
So, that’s the AIDA principle used by professional copywriters to structure their sales letters and web pages. The way in which it uses psychology to appeal to people’s personal motives makes it a powerful tool indeed. So use it wisely and responsibly.
How to Write Sales Letters that Sell is a great book for further reading on the subject of writing sales letters. Please be aware that all the books I recommend are books I have read myself. Although this link is my affiliate link, meaning I get paid a commission if you click through and buy, I only feature great books, that I believe, you will find interesting and offer great value for money. If you do click through and buy something from Amazon, let me thank you for your support.
Thanks for dropping by, hope you found the blog interesting..
When it comes to pricing your products and services, there are many ways to go about it, two of the most common pricing methods used are cost-plus pricing and contribution margin-based pricing, but if you check the list below, there are many more options open to you. We will go through a long list of them in this article.
Contribution margin-based pricing
Marginal cost pricing
Odd value pricing or Psychological pricing
Skimming (unique product/service and sell at high price),
Captive product pricing
Optional product pricing
Product Line Pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
Price = Cost of Production + Margin of Profit.
Absorption pricing is a method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs. It is a form of cost-plus pricing.
Contribution margin-based pricing
Contribution margin-based pricing maximizes the amount of profit derived from an individual product, and is based on the margin between the product’s price and its variable costs, otherwise known as the contribution margin per unit. To calculate the figure you have to assume how many units of the product you are likely to sell at that price. There is an assumption to be made regarding the relationship between the product’s price and the number of units that can be sold at that price. The product’s contribution to the firms total profit (i.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).
Premium Pricing is used where there exists a uniqueness regarding the product or service and where a substantial competitive advance exists. Premium pricing is used by such luxury brands as Savoy Hotels, Rolls Royce and Prada.
Competition-based pricing comes about when setting the price based upon prices of the similar competitor products. Competitive pricing is based on three types of competitive product:
Products which have a lasting distinctiveness from competitor’s product. Here we can assume
The product has low price elasticity.
The product has low cross elasticity.
The demand of the product will rise.
Products have perishable distinctiveness from competitor’s product, assuming the product features are medium distinctiveness.
Products have little distinctiveness from competitor’s product. assuming that:
The product has high price elasticity.
The product has some cross elasticity.
No expectation that demand of the product will rise.
Marginal cost pricing
Marginal cost pricing is the practice of setting the price of a product equal to the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labour. This is often done by businesses during periods of poor sales. If, for example, an item has a marginal cost of £10 and a normal selling price is £20, the firm selling the item might wish to lower the price to £11 if demand is slow. The business would choose this approach because the incremental profit of £1 from the transaction is better than nothing at all.
Predatory pricing is an aggressive pricing strategy intended to drive competitors out of a market. It is illegal in some places.
Odd value or Psychological pricing
Psychological Pricing is used when the business wants consumers to respond on an emotional, rather than rational basis. For example selling for £9.99 instead of £10, this is evident in most supermarkets and retail outlets.
Dynamic pricing is a flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
Dynamic Pricing has a number of variants such as:
Yield Management – depends on inventory and time of purchase. i.e. hotel rooms or airline seats.
Real time Market – based on supply and demand.
Skimming is selling a unique product or service at a high price, and sacrificing high sales in preference to high profits, therefore ‘skimming’ the market. Usually employed to reimburse the cost of investment of the original research into the product – commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target “early adopters” of a product or service. These early adopters are relatively less price-sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can come with some setbacks as it could leave the product at a high price to competitors.
Penetration pricing is the opposite of skimming, where a product is sold with a low price to gain market share.
Limit Pricing is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as strategic behavior is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm’s best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labour for a long period of time.
Loss Leader Pricing
Loss Leader pricing is illegal under EU and US Competition rules. Larger players in a market may use loss leaders as part of an overall pricing strategy, such as using it to draw customers into their establishment and encourage them to buy other products once there. Loss leadership can be similar to predatory pricing or cross subsidization; both seen as anti-competitive practices.
Target pricing is a pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like car manufacturers. Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
Economy pricing include things like the no frills lines found in supermarkets.
Promotional Pricing is used to promote a product and is very commonly used. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).
Captive product pricing
Captive product pricing is seen in cinemas when you are forced to buy refreshments from the foyer, or blades for razors, or ink cartridges for ink jet printers, where the ink is often more expensive then the initial printer cost.
Optional product pricing
Optional product pricing is seen when you buy an airline ticket and are charged extra for seat next to window, extra baggage or speedier check-in.
Product Line Pricing
Product Line Pricing is where there is a range of products or services and the pricing reflects the benefits of parts of the range. For example car washes. Basic wash could be £2, wash and wax £4, and the whole package £6.
Geographical Pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.
Drip pricing is agreeing an initial price, with a customer only to add extra charges when the customer is about to buy. It works because once lured by the initial price and into a sense of ownership, a consumer attaches more value to the goods in question. This “endowment effect” makes them more likely to accept later charges as people hate the idea of losing £5 much more than they like the idea of gaining £5. Extra charges also only become apparent after the customer has invested time and effort, which they don’t want to waste, in the sales process. Anchoring helps here (“it doesn’t cost £200, it only costs £x” – £200 is the anchor). Make the pricing structure complex, create a sense of social approval – “everyone is buying” – then chuck in something free and its job done.
Price leadership is seen with regards to oligopic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, that the others soon following.
Value pricing is generally used when external factors such as recession and competition pressure sales. This focuses on prices you believe customers are willing to pay, based on benefits your business offers them. Companies try to increase profits and get the maximum value out of their scarcity and are interested in who is willing to pay more, rather than who can afford to pay more.
Imagine that you dealt with every customer as an individual, and knew exactly how much they valued any possible version of your offering and that the price charged to any customer remained unknown to all the others. Develop a pricing scheme which gets as close as possible to this ideal. There are some attempts to make use of this pricing system:
First degree price discrimination – seen as unfair and unpopular
Tactic used by car salesmen and estate agents
Supermarkets use discount cards which are needed to take advantage of sales prices
Money on – Amazon used to tailor prices based on customer profile using “cookies” to display different selling prices to different customers.
Group discrimination – more accepted form of price discrimination
OAP and student discounts
Discounts for local customers who purchase regularly
Self discrimination – getting customers to confess they are sensitive to price, while still taking advantage of those willing to pay a premium price
So there you have it, there are lots of pricing options open to you. Use a method that best suites you and your business circumstances. Cost-plus pricing and contribution margin-based pricing are the most commonly used methods historically although some form of price discrimination is the ideal in most instances, although is very difficult to implement effectively for smaller, less technically endowed businesses.
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Having run a number of businesses over the years I have come accustomed to dealing with the day to day challenges that come along and the reactionary style owners often adopt in dealing with them. One of the key challenges I have found is to remove myself from a state of “fire fighting” and into working on the business and not in it.
Working on a business involves some strategic (eyes glaze over) thinking and planning. As a business owner I am constantly looking to increase profit and in doing so must look three areas:
In this article I’m going to cover what is often considered the most boring of the three topics “reducing costs“, But saving money within your business is probably easier to achieve then increasing sales, where you need to spend more on advertising or communication with existing customers all of which will involve some form of expenditure, and increasing prices which can be a scary proposition, with research showing it causes much anxiety amongst entrepreneurs and business owners alike. Taking costs out of your business will directly impact the bottom line and increase profits, if done correctly.
There are two ways to reduce costs:
Reduce costs as percentage of sales. For example higher sales on the same costs or costs rising less than sales are rising
Simply cost cutting – However simply cutting costs is not always the answer as it may adversely impact sales and margins. If efficiency or output is reduced as a result of cutting costs than some analysis of the risks and rewards needs to be undertaken first.
5 step plan
Go through this 5 step plan in the sequence I have laid them out, this will prevent you feeling overwhelmed.
Eliminate waste and spare capacity. Use your time wisely, don’t waste hours and hours trying to save a few pounds.
Consider your position on a long term view versus a short term view. Set the level of investment spending where you want it to be.
Make sure your pricing is set correctly, failure to do this prevents you from knowing the potential of the business. (Check out my pricing strategy article here)
Understand your product offerings. what products haven’t been costed properly, what products aren’t valued by your customers but weigh heavily on costs. What parts of your business have moved away from your core activity and do these contribute sufficiently to profits
Strategic review. The business is the wrong shape. Going small and more niche or larger to cover cost base by pursuing better margin areas of your business.
Below is a list of other areas to consider:
One of the first things that businesses look to cut when making cost savings are with regards to employees, because generally employees are one of the biggest costs and biggest headaches (in an admin sense) for companies. This can be done a number of ways, by reducing staffing levels, introducing short time working, imposing salary freeze, and or reducing pension service costs. However taking this approach can cause an adverse effect on company morale, efficiency, staff absence and turnover levels and may cause issues with supplier relationships, where supplies reduce credit arrangements for fear of not getting paid by a company that is perceived to be struggling. Another way of dealing with such costs rather than simply cutting is to improve productivity.
Improving the productivity of employees is a more positive way of reducing costs per employee, and should involve the employees in the formulation of this process. If they are involved in the development process they will have ownership of it and will be more likely to follow through on initiatives. You don’t need to introduce productivity incentive bonuses to improve productivity, creating a happy working environment where employees are valued and feel they are contributing is beneficial for all.
If you’re increasing capacity, employ an extra shift before adding more space to increase output. This will make it easier if capacity drops again so that you’re not stuck with the cost of a long lease and under capacity.
Outsource all non-core tasks. If you do certain things infrequently look to get things off the books and done by a specialist on a freelance basis..
Supply chain management
Look for bulk purchase discounts, or source cheaper suppliers (but be wary of the risk of supplier failures or enforced single sourcing), reduce stock levels, cut excess production capacity in tougher times. Reduce inventory levels and move to a “just in time” supply or materials
Cut capacity, such as closing business units (stores, website etc),
Sale of business units, such as Clapham house selling Tootsies
Oversees shifts – moving operations to cheaper lower cost locations (be wary of weakening of control over quality)
Asset value write downs – (none cash write downs, cleanse the balance sheet and give clear picture of the trading position, setting a new base to build on. This is more of an accountancy issue rather than something that physically impacts the business.
The general rule of debt management is to pay off your debts, such as your mortgage, loans and credit card bills, before you start to save money. This is because the amount of savings income you can get is almost always dwarfed by interest rates you pay on your debts. To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.
Pay down debt levels to reduce debt service costs when surplus income cannot be utilized better through investment or purchase of assets.
If times are really desperate, consider a Company voluntary arrangement (CVA), which would release it from certain liabilities to its landlords.
14 Savings on Purchases
Don’t buy impulsively!
Do your research – do your research to find out when the industry is on the downside of the demand curve and buy, buy, buy.
Know about the secondary market – returns or refurbished
Understand that retailers are in business to make a profit on you – Retailers always have to move through product to make room for the next batch.
Don’t be an ‘early adopter’!
Don’t be afraid to ask for a discount
Buy during off-peak times
Don’t give in to the fashion trends
Always be ready to walk away.
Expose your purchase to competition – Squidbid.com is a Demand Driven marketplace which has developed a cool concept.
plan needs (no impulse buys)
shop for value
ask for discounts
examine receipts and bills
So there you have it, cutting costs doesn’t need to be boring. In fact saving costs is tax free, in many cases doesn’t require any capital and doesn’t rely on any marketing activities. It’s often the easiest way to put money back in your pocket so should be the first area of consideration when looking to increase profits. Check out the other two areas by clicking on the links below.
Anyone that’s running a business wants to make more profit. There are only two ways to do this:
Sell more goods and services (volume).
Make more profit per £1 of sale (margin) either by increasing prices or reducing costs or increasing prices while reducing costs.
For the purposes of this article we’re going to concentrate on the “Increase Prices” part of the model (above) in our quest to increase profit margins.
Many business owners are afraid to charge “more” for fear of losing custom and putting people off buying from them, but the flip side of this is you may be leaving money on the table that could be in your bank account rather than in the customer’s pocket. I once heard this sentence and it changed the way I thought about pricing, it goes “Unless you are the most expensive in your field you can always afford to put up your prices”.
Well not everyone is comfortable about increasing prices, and as business owners we should be wary about the way we edge them up. There are a number of tactics we can employ to ease price increases into our business
Introduce a new pricing structure for new customers only, look after your loyal customers, but let them know that you will honour the old price structure for as long as they stay with you. Should they leave and come back at a later date they will have to go on the new pricing model. Let them know you value their loyalty and are rewarding it, make it a good PR exercise.
Begin to shift your overall product sales mix towards higher profit margin products and services, and start phasing out your lower margin items. Introduce higher margin new products that are perceived as higher value solutions for customers.
Decrease the level of discounts you’re currently offering customers.
Increase your minimum order volumes so that customers have to reach a higher threshold before they qualify for discounts.
Increase your delivery charge and start charging for any additional special services related to delivery.
Charge your customers for any engineering and installation services that you previously included as standard.
Increase prices to cover for overtime or additional time needed to deliver rushed or very short notice orders.
Start collecting and charging interest on overdue accounts from the last few months.
Begin to write stiffer penalty clauses into all of your contracts. Think about it – your suppliers will almost certainly be doing this to you, so there’s no reason why you can’t be commercially more hard-nosed as well.
Find ways to decrease some of the physical features or characteristics of your product, but continue to charge the same prices.
Times are tough, but we have to make sure we are getting a fair price in exchange for our services/products. Make sure you’re maximising profits so that you can continue to provide for your customers in the years ahead.
If you have any additional ways you have increased prices please put them in the comments. Hope you found this post interesting please subscribe to my newsletter so that you get to hear about my newest content as soon as it’s published.
When I first started off in business, I found cash flow one of the harder things to get my head around. I figured as long as I had my prices right and was making a profit, I would be fine.
However cash flow is one of the most important aspects to a business, the lifeblood of it, in fact. Without good cash flow, your business is dead in the water, unless you have access to enough cash reserves or funding.
Cash Flow doesn’t mean “Cash”, as in paper money
Just something to bare in mind here, when we are using the term ‘cash’ we are not literally talking about cash-in-hand, as in paper money, but referring to money actually entering or leaving your bank account in whatever form either through electronic payments, cheques, or cash.
How cash flow impacts business
Below is a simple example of how cash flow impacts a business, and why careful consideration needs to be given to it, particularly when you are starting off and in periods of growth.
Cash flow projections
I have tried to keep the numbers very simple and constant for illustration purposes only, of course revenue and costs will vary from month to month in the real world especially for a business start up, usually building up over time. As we see in example 1, revenue of £10,000 is coming into the business each month, with costs for that period of £7000, this leaves the business trading at a profit of £3000 during each month. The business is profitable. If you want to imagine how this would work for a larger business, just add more zeros to the end of each of the figures in the table.
Now lets assume that the business is trading in exactly the same way in example 2 as it is in example 1 with just one big difference, revenue is not coming into the business during that particular month, but is being delayed a month. This wouldn’t be uncommon if you were a business dealing with other businesses where standard payment terms tend to be 30 days from date of invoice, and can even be as much as 90 days when dealing with some larger organisations.
The business is still trading at a profit technically from a profit and loss point of view. But from a cash flow basis, it doesn’t look as healthy as example 1. The revenue earned in month one is not actually coming into the business until sometime in month 2 which means that due to costs of £7000 in month one which had to be paid in month 1, there was a shortfall of £7000 in month 1. This would have to be paid otherwise you would have problems with your landlord, utility companies, suppliers etc. So you have to find £7000 in financing to cover the shortfall, maybe from the bank, maybe an overdraft facility or your savings or from friends and family.
Now when it comes to month 2 you are trading with revenue from month 1 coming in, the trading pattern of revenue, costs and profit is the same for month 2 in example 2 as it was for example 1, but because you had a shortfall in month 1 of £7000 you are able to put £3000 of your profit into paying off some of this, but it still leaves you £4000 down overall (see the accumulated profit row above). In fact it takes to month 4 to pay all of the initial £7000 deficit in full.
Now this doesn’t necessarily cause your business a problem as long as you have prepared for it, which is why as part of doing a business plan you should do a cash flow statement which tries to predict how money comes in and out of the business during each month. It is a great way of predicting where you will need to finance shortfalls in cashflow.
Understanding the Cash Cycle
There are various things we can do to reduce the ‘cash cycle’. The cash cycle is a great way of measuring the way relationship between incoming and outgoing payments.
Cash cycle is:
Time that elapses between the delivery of inventory and its conversion into sales (1 week)
PLUS time that elapses between the sale of goods and services to customers and receipt of monies due from these accounts receivable (nil – payment terms are cash on delivery)
LESS time that elapses between the receipt of goods and services from suppliers and subsequent payment to these accounts payable (4 weeks)
= 1 week + 0 weeks – 4 weeks = -3 weeks
The -3 weeks above refers to the fact that in this example you would have delivered your goods or services to your customer and received payment for them 3 weeks before you would actually have had to pay your suppliers for them. This is good cash flow. It effectively means your customers are financing your business. They are paying you to pay your suppliers.
To improve the cash cycle look to get better terms from your suppliers (increase creditor days). There are a number of payment terms such as pre-paying for supplies, or paying cash on delivery, beyond that you may have 30/60/90 day terms. Try to get the best possible deal for you business. The rule of thumb is try to arrange to pay you bills as late as you possibly can. Don’t do this in a unethical way. Such as telling a supplier the cheque is in the post, but negotiate with them a deal that satisfies you both. If you mislead supplies they may refuse to deal with you again, which can cause you damage to your business and reputation.
On the other side of the equation are “customer payment terms”, it is good practice to look at reducing debtor days wherever possible. Getting money up-front, or cash on delivery is the best you can aim for. Try to avoid giving your customers credit for 30/60/90 days unless you know you can deal with the lack of cash coming in. Generally it is difficult to dictate terms outside your industries norms, unless you are particularly valuable to your supplier or customers, but try to get the best deal for your business that you can.
There are other things you can do within your business to help improve your cash flow position. I have myself used interest free credit periods on credit cards to get me over difficult periods. If your business holds stock you can look to reduce stock levels by improving inventory control and using warehousing to store inventory from suppliers to improve bulk buying margins
Increase stockturn (less stock levels moved quicker) on the basis of forward cover (reduced volume of stock order, order more frequently), or Improve IT ordering system to help control stock levels and avoid holding too much stock and running out of inventory.
Rationalize outlets by scaling down outlets by closing not profit making outlets or by move away from cyclical sectors into more non-cyclical sectors.
Cash flow isn’t an easy subject to master, mainly because when you start to talk about the subject most peoples eyes start to glaze over. But lets be clear, it is one of the most important aspect of running a business you should understand, other wise your business life could be short lived.