Cheaper than Chips – pricing strategy

The other day I walked through town to buy lunch and also bought a pair of chinos. That evening I told my wife that I had spent more on lunch than on my new chinos; I had to calm her down by explaining that my lunch was a takeaway from Marks & Spencer, and a meal deal at that! Lunch cost £4 but the trousers, also from M&S, cost £3.99.

My wife’s reaction was interesting. She assumed the trousers would be sub-standard in some way. Indeed the salesperson at M&S issued a dire warning that these trousers could not be returned as they were a sale item (I said I’d use them to polish my car if they didn’t fit). In fact I began to doubt my decision until I wore them to go out to dinner with friends the following evening. The chinos felt fine and looked perfectly normal after I removed the offending £3.99 price ticket. They have already long outlasted the meal deal in utility value.

It made me think about that £3.99 price ticket. Originally the chinos had been £39.99 and probably hadn’t sold because they are an odd size ie my size. If they had been reduced to £19.99 or £10.99 I probably would have bought them without a second thought and believed I had bagged a bargain. But, £3.99 isn’t cheap as chips it is cheaper than chips by which I mean too cheap.

This trouser experience was a great reminder that all too often we lose business by being too cheap to be credible. It is worth remembering Gerald Ratner at an IoD Convention over twenty years ago when he explained that he could sell a silver tray with cut glass decanter more cheaply than a prawn sandwich because it was c**p. That is the assumption if you set your price too low.

If you are selling a quality product or service and want to have a sustainable business you need to set your prices at an appropriate level. For most of us the range of possible prices is set by the market in which we operate. You need to understand that range to optimise your prices and your resultant profits.

My chinos have created an immunity to the daily e-mails imploring me to buy five shirts for £100; in my new world that sounds blindingly expensive.

Four poor business practices

You may not have noticed my lack of postings this year; you won’t be short of reading material without my contributions! I am having a busy year and I know I am far from alone which is excellent for the UK economy and our personal business aspirations. However I am noticing that some very disturbing practices are becoming increasingly prevalent and I want to highlight four poor business practices because I think they threaten the principles of trust and respect that I believe underpin good business.


Writing instead of speaking

People are increasingly less willing to have a conversation and prefer to communicate by e-mail and text. Whilst that may provide a better audit trail, it does deny us the important non-verbal indicators that go with an actual conversation. Some of the worst offenders are our largest service providers, financial institutions and airlines. If you want an example of how not to do it try Jet2.


You may be familiar with the famous Milgram electric shock treatment experiments of fifty years ago where volunteer ‘teachers’ administered apparently increasing levels of electric shocks to ‘learners’ seated in an adjacent room who answered questions incorrectly; the learners could be heard but not seen by the teachers. The level of separation enabled the teachers to detach themselves from the ‘reality’ despite the aural indications. There is a bit of Milgram in the way people send e-mail and text messages, and particularly those who choose those media for alarming information such as redundancy notification, or intention not to pay an invoice etc. You don’t have to hear the reaction of the recipient let alone hear it. However it is rather spineless and certainly not good culturally for people to hide behind a keypad.


Not responding to web enquiries

One time that e-mail is very useful is when you are browsing a website out of hours and want to ask a question. Frequently the website will have a ‘contact us’ button that enables you to send a message to the business. However it is rare that those messages are picked-up and dealt with the following day, if ever. Here I must give credit to Neff for speedy and full responses to enquiries from its website.


Refusing to give advice

Professional service firms, trades-people, public sector bodies are increasingly good at avoiding the provision of advice and simply providing information. They are terrified of being sued but are failing to recognise that in the digital age there is no shortage of information and it is mostly free. What we are willing to pay for is advice based on our particular circumstances. If an organisation employs sufficient well trained people who have strong support systems and rigorous procedures they should be able to give advice without fearing negative consequences.



This may be a by-product of an age of instant gratification. Few people are willing (may be that few are able?) to deal with issues in detail and fully. Rather than provide all the information required they will provide some of it and ignore the rest or provide some ‘guesstimate’. Winners don’t adopt that approach and they are obsessive about the detail; it is about time that more of us decided to act like winners! An example of getting it right was the third engineer from Virgin Media who actually gave me his advice (see point above) and then explained in detail what was required to achieve my objectives; plus giving me his mobile number in case I needed to check back with him.


Is there really money available to fund SMEs?

Finance for SMEs is easier than you think. Yes, the high street banks are not as open for business as they were before we had to bail them out, but during the past seven years necessity has been the mother of invention and we have better and easier access to other funding sources.

Many businesses used to rely on bank debt finance to meet requirements that would be best suited to equity finance. Now the banks aren’t lending so willingly but there are more willing business angel networks, regional equity funds, and crowd funding solutions. Tax reliefs make equity investment into SMEs attractive to individual investors. 

In the world of debt finance we also have crowd funding which lenders find attractive given the lack of return on bank deposits, and borrowers find attractive because banks won’t lend or impose challenging covenants. Asset finance has come of age and is no longer seen as last resort finance any more than hire purchase and leasing: they are all valid and appropriate in the right circumstances. 

In Yorkshire and the North East we are fortunate to have the Business Enterprise Fund (‘BEF’).  BEF is a social enterprise that lends money to businesses that are unable to borrow from banks. It started trading in 2005 and, as a social enterprise has no shareholders, and any profits generated are reinvested into the business.  

Don’t ignore the government support that has developed in recent years. GrowthAccelerator has an Access to Finance stream which enables SMEs to get professional help at below full market price to identify finance needs and help towards becoming investment ready. Another source of finance is Business Start-up Loans. These loans of up to £25,000 per entrepreneur are at a flat rate of interest – 6% – repayable over up to five years. This relatively cheap debt finance could, for example, be used by each member of an MBO team to support their personal investment if they were effecting the MBO by creating a Newco to acquire the existing business. Other typical uses include supporting the acquisition of a franchise and, of course, conventional start-up situations.

A plea for SMEs to invest in good information systems

Some of the most frequently given advice to entrepreneurs is to engage better with customers and potential customers than your competitors. The very word ‘engagement’ means that you have a special relationship that has stickiness and cannot be destroyed very easily. As Grant Leboff of Sticky Marketing ( says ‘you don’t try the toilet door that shows an engaged sign’!

Whilst it is an important issue and one that deserves much attention, there is another area where most of us could improve our overall business performance. I want to make a plea for decision making to be based on better information. I know that many entrepreneurs tell us that they go by gut feel, taking the decisions that ‘feel’ right. I am certainly an advocate of not doing things that do not feel right. However I am less enthusiastic about taking positive action based on gut feel alone.

The decisions that interest me most are those that we claim to be making based on the facts and figures and for which indeed we have some data. How good is your data?  How much time do you invest in ensuring that your systems for collecting and analysing your data are robust, reliable and relevant?

Many entrepreneurs are control freaks whilst at the same time having little patience for systems, procedures and processes. So they want to make all the decisions personally yet are not masters of the data. I have just witnessed an MD extend the employment contract of a temporary salesperson on a ‘back of an envelope’ calculation of the ongoing revenue stream generated by the salesperson to date. He has made assumptions about the precise sales value, the margins achieved on these sales and the total cost of the salesperson. I think that he has over-estimated the benefit of this salesperson but the company does not have ready access to the data that would show the true picture. It isn’t rocket science to collect, analyse and share good data but it does require a level of self-discipline that can elude business leaders, particularly in the SME world.

In the world of politics the most convincing political leaders are the ones who have the facts readily available. Remember how Mrs Thatcher used to reel off all the facts and figures to silence the opposition? In business we can use the data to provide information that we can use to obtain a commercial advantage and it applies to all areas of the business.

Clearly the finance function will be more useful if it has detailed data eg credit limits, debtor days, stock turn. Sales can be much more effective if you know profitability by product or customer. Marketing needs to demonstrate exactly what your product or service is capable of delivering to your customers and by having good data you will enable the marketing spend to be directed at the most appropriate target audience through the most relevant channels of communication. HR is made easier by, for example, having staff performance measures on record. Negotiations with suppliers are more likely to be successful if you have more information about alternative sources and prices.

I could go on but hopefully I have made a good case for spending some time and money on getting good data which will provide reliable and timely information to help inform your decisions. Why take the completely unnecessary risk of relying on gut feel?

Bonkers Bankers

I despair at the way our major banks behave. Despite their major role in the deepest recession since the 1920s, their penchant for mis-selling every sort of financial service and their need to be baled-out by the government they don’t seem to have really changed.

They have mastered the art of superficiality and none more than Coop Bank advertising its commitments to ‘Ethics and Values’; fine stuff coming from a bank from which the last CEO resigned because he said it was ungovernable. Meanwhile HSBC has a sickly sweet advert based on a first date whereby it tries to imply that it will look after you, its customer, like a mother helping her son get ready for his first date – yuck!

However it is Barclays that has driven me to my keyboard with its press adverts. Whole pages in national newspapers to advertise that if you open an account with Barclays you can have a free coffee every day at Patisserie Valerie. I have nothing against Patisserie Valerie but do wonder which marketing guru thought this will be attractive. The small print points out that you need to be a Barclays Premier customer to get your free coffees and that means you need an annual income of over £75,000 or £100,000 of investments. Are they trying to tell us that these people can’t afford a daily coffee at a coffee shop of their choice? I don’t like being taken for an idiot and I think Barclays Premier Bank may find its customers think the same way. Thankfully there are some good banks that are not on the high street and concentrate on providing good service rather than coffee.


Mortgage lenders’ myth

Harrogate hit the headlines again this week. Not only is it the happiest place to live in the UK but it also has high house prices, at over £2,000 per square metre, compared with most places outside London. No doubt these survey results are connected, but for many young people the cost of housing is making them far from happy.

Whenever the housing market gets frothy mortgage lenders try to find ways to restrict their lending to avoid potential defaults. Clearly they look at loan to value ratios to avoid negative equity. They also look more closely at applicants to assess their credit worthiness. Now they are looking at more than income multiples and enquire about spending commitments; no matter what you earn if it is committed to car or alimony payments it cannot service a mortgage!

The most difficult test for certain applicants is that relating to income. If you have a job that pays a fixed salary you should find it easy to get a mortgage. If you are self-employed it is much more difficult. At the start of the recession seven, yes seven, years ago self-certification of income for mortgages was abused and ‘liar loans’ were commonplace. However the pendulum may have swung too far the other way because lenders do not understand the world of self-employment and seem to discount the enormous risk of employment.

Mortgage lenders are financial institutions and their employees have contracts of service under which they are paid each month; they understand that situation and fail to see the inherent risk despite thousands of their peers having been made redundant during the last seven years. Every week one reads about another corporate employer re-organising by shedding staff or another one goes bust. However the mortgage lenders don’t regard people like them as a credit risk.

In the world of self-employment there are thousands of people who are resilient and focused on making a living without the apparent safety net of employment. Whilst their earnings may fluctuate from year to year, they are much less likely to be out of work and, most of them, are entrepreneurial enough to find ways to meet their financial obligations.

Mortgage lenders should reconsider their credit scoring algorithms and give more weight to the resilience and fortitude of the self-employed. They should look at their own vulnerability to see how illusory the world of employment is in the 21st century. If you were to ask me to lend money to either a self-employed plumber or an employed administrator in a large corporate I’d back the plumber every time! We all need plumbers but, thankfully, you cannot say the same for all administrators.

Learning Leadership from TV programmes

I must admit to a weakness for Sunday evening costume drama. I think that I learn more about leadership from those programmes than I ever do from so-called reality business programmes.

Watching ‘The Apprentice’ is an appalling way to spend an hour of your life. Aggression, bullying and a total lack of teamwork are the essential ingredients of the show. It is as far away from the real business world as it is possible to get – there is no planning, no research, no testing and not much else other than an overdose of testosterone from both the male and female competitors as they battle to work for one of the dinosaurs of the modern business world.

However let me commend ‘Mr Selfridge’ to you if you want to learn more about leadership. A delightful and gentle Sunday evening show in which Mr Selfridge is portrayed as a flawed person (aren’t we all?) and a highly effective leader. He commands enormous respect from his staff and they are highly motivated to achieve his vision which he shares clearly with them. Over recent episodes he has:

  • Expressed huge disappointment in his HR director who was failing; gently but firmly Mr Selfridge told the man to sort himself out or he would have to leave. No histrionics, just simple facts and a deadline for change. It worked and the HR director was soon showing Mr Selfridge his new system for record keeping (strangely not a cloud based system).
  • Desperately in need of something to draw in more customers as WW1 starts, Mr Selfridge persuades his former store design director, Henri, to re-join the company and makes it clear he’ll pay whatever it takes to get Henri back. Mr Selfridge knew the importance of design to his success and was prepared to invest in the very best resource to achieve his goal.
  • Avoided being caught in an argument between staff. When Miss Towler and the new head of department clashed over a promotional display Mr Selfridge smiled graciously at them both and said he was sure they would sort out their difference; thus relying on his high expectations of his people and their desire to succeed.
  • Speaking to the junior warehouse staff and actually knowing their names and something about them; people respond so well to someone who is genuinely interested in them. In fact Mr Selfridge goes one step further and is rarely found out of his office without having a smile on his face; impossible for most of us! But, it does create a happier, more relaxed and potentially much more productive workforce and does wonders for customer relations.

Do you have any favourite TV programmes that provide insight into good leadership?

Does Corporate Social Responsibility require too much of business?

There are only three sources of resources for the many deserving and needy causes in our society; the State, businesses and us as individuals.

Thirty years ago Margaret Thatcher espoused the US model and said that taxes should be lowered and businesses and individuals should choose what they wanted to support with their time and money. Meanwhile, elsewhere in Europe governments took on the increasing costs of supporting those unable to support themselves fully.

What has happened?  Well, France is struggling with ever increasing taxes and an exodus of talent (well Gerard Depardieu anyway). Here in Blighty we are enjoying lower taxes, economic growth at last and a burgeoning expectation from Generation X and Generation Y staff that employers will arrange for them to contribute to their communities in work time through CSR policies and activities. What happened to the contributions by individuals? Rotary, Round Table, Inner Wheel etc. are losing members as younger people choose not to join.

Maybe this isn’t selfishness but rather a symptom of us demanding more than ever from our people to the extent they cannot commit to out of hours community activity – they have very few hours that they aren’t working.

Whatever the reason we do need to engage the younger generations in employment into community activities; it is good for the donors and the recipients. There is a valuable role to be carried out by the Rotarians and Round Tablers and that is to identify the needs in their communities and package those requirements in a way that can be accessed by employers for their staff.

Can you have a free lunch?

It is often said there is no such thing as a free lunch, yet human nature seems to lead us to look for one. We don’t like paying for services that we perceive as being generally available free of charge. The biggest service industry that developed business models that satisfied this greed was the Financial Services sector. We have seen it with financial advice where for decades investment, insurance and pensions advice was seemingly free to the consumer. Did it lead to best advice?  Recently we have had the Retail Distribution Review and the concept of Treating Customers Fairly which may, eventually, clean-up this sector and make charges transparent; if you want advice you’ll pay for it just like advice from a lawyer or accountant.

Banking also plays the ‘free service’ game with personal bank accounts. There is a cost involved in running current accounts for customers yet most of us expect free banking. Shock, horror, it isn’t free but you just can’t see how it is paid for. Could it be something to do with the paltry rate of interest you get on your deposit account? The banking crisis blew up in 2007, we bailed out the banks but in reality we have seen very little change in the way the banks operate. The refreshing news is that some of the newer players are making hay; for example Handelsbanken which, ironically, uses a very traditional model including charging personal customers for accounts and local decision making.

Mobile telephony has some of the same characteristics with the apparently free phone given with a mobile phone contract. We are beginning to realise that the tie-in to a high charge for 24 months means that the hand-set is far from free!

But I think there is one type of free that really is free. ‘Freemium’ pricing models for IT applications are just that. You can subscribe for the basic app for free. The producers hope you will then become sufficiently hooked on the app to want some of the additional functionality that is available at a price and you then become a paying customer.

Does this mean that there can be a free lunch?

Lifestyle businesses

I keep hearing the phrase ‘lifestyle business’ used as a derogatory term. Should that really be the case? By lifestyle business I do not mean one that owns a yacht, but I do mean businesses that enable their owners to achieve fulfilling lives over a long period of time.

The beancounters and bankers who sneer at lifestyle businesses do appear to be the same people who have been running the majority of the recent failures on our high streets. Perhaps their views are somewhat disingenuous?  What is so wrong with a lifestyle business?

We are told that the UK should be more like Germany with its Mittelstand; private family businesses that are at the heart of its manufacturing sector. These companies are resilient and long term in their focus. I believe that is because many of them are lifestyle businesses.

I work with 15-20 SMEs each year and I always start my engagement with a simple question; what is the purpose of this business? I am sometimes surprised by the length of time it takes to elicit a cogent response and often the answer is very mundane. In dynastic family businesses the directors frequently see themselves as custodians of family wealth whose mission is to preserve and, if possible, increase that wealth for the next generation. In self-made businesses there is frequently a desire to provide financial security for the next generation but perhaps by trade sale to leave the family with the equivalent of a lottery win. In most cases there is a desire for personal financial freedom and usually there is real passion for the product or service being provided.

Rarely do the owners of these SMEs find themselves attracted by the private equity investors who are seeking a short investment period (say 3 – 5 years) and high internal rates of return. This is because the requirements of professional investors are focused entirely on the financial performance of the business and there is little passion for anything other than the bottom line – EBITDA rules OK.

There is an analogy here. The private equity backed business is like an F1 race car which is optimised to run at 18,000rpm on a race circuit. It takes 100% commitment and absolute dedication from an expert team to run the car and it can only run on a circuit and in certain conditions. There is no slack, no excess capacity, and no room for error; if it has to wait on the starting grid for more than a few moments it will overheat and then blow its engine. It runs only on high octane fuel and can only be driven by a handful of people. The optimised company is highly geared with cash flow managed ultra-carefully and therefore, as we have seen many times, cannot cope with the bumps created by recession.

A lifestyle business is more akin to a diesel powered Range Rover (a car much favoured by lifestyle business owners). The engine is unburstable; it is happy on tarmac and on the bumpy stuff and will survive on any fuel you give it. It doesn’t take genius to fix it and it can be driven by most people most of the time.

By all means let us push the boundaries with cutting edge business practises but don’t sneer at the lifestyle businesses that provide long term employment for so many of us. We need to support lifestyle businesses to ensure they don’t die when their owners no longer want that lifestyle.