If you service clients, it’s quite likely that you’ve faced some of the same pain points I have when trying to design a “product” out of your “service”. The words product and service in our industry tend to be interchangeable as our products are digital products.
Pricing for SEO, or any type of digital marketing service, has been written about quite a few times and there’s never been a real clear answer as to what the sweet spot is for pricing.
I actually do not believe there is a clear or semi-clear answer to pricing but what I do believe is that there is a clear path you can set for your company which makes many aspects of your business easier to automate and easier to manage. I refer to it here as “productizing” the business.
Where to Start
Some products can be priced more easily than others. If you are selling just your time (consulting) then you can do it by hour, obviously. I think the “future” of the SEO consultant has been here for awhile anyways. Many have already evolved into the broader areas of digital marketing like:
Broader Online Marketing Strategy and Execution
There are other areas like paid search, email marketing, and so on but the above covers a good chunk of what many of us having been doing on our own properties for awhile and client sites as well. As more and more of us service clients and perhaps start agencies it’s important to start from the beginning.
This will differ in analysis if you have a much larger agency, but here we are focusing on the more common freelancer and small agency. The steps I would recommend are as follows (this is in relation to pricing/products only, I’m assuming you’ve already identified your market, brand messaging, etc):
Determine a sustainable net profit. What do I want to earn as a baseline number?
Determine acceptable margins based on desired size of staff and potential cost of contractor work.
Determine the required gross revenue needed to achieve your net profit.
Why Do it This Way?
I do it this way because net margin is very important to me. I don’t want to become the Walmart of digital marketing where our margins become paper thin as volume goes up.
Here is an example of what I mean. Consider the following scenario:
I’m leaving my job as a dairy farmer here in rural Rhode Island and I want to make $1,500,000 per year.
So, you’re going to pay a little bit more assuming you are a single member LLC versus a traditional W-2 "employee" (again, keeping it very simple) because of the self-employment tax. Your CPA can go over the different options based on your business set up and such but the base calculations are the same as far as determining the core numbers go.
If you just look at just “earnings” you are missing the bigger picture. What you should want to achieve for short, mid, and long term viability are healthy margins. Here’s an example:
Jack’s SEO Shop had a net income of $1,000,000 dollars in 2011. Their overall sales were $5,000,000. In 2012 they had $1,500,000 in net income with $10,000,000 in sales.
Jill’s SEO Shop had net income of $500,000 dollars in 2011. Their overall sales were $2,000,000. In 2012 they had $1,500,000 in net income with $4,000,000 in sales.
In this case we look at a basic calculation of profit margin (net income/gross sales) and see that:
Jacks’ 2011 profit margin was 20%
Jack’s 2012 profit margin 15%
Jill’s 2011 profit margin 25%
Jill’s 2012 profit margin 38% (same net income as Jack)
Certainly 15% on 10 million isn’t something to necessarily sneeze at but I’d much rather be Jill in the current state of web marketing. A 38% profit margin does so much more for your overall viability as a company when you take into account being able to respond to competition, algorithmic changes, increased cost of quality labor, and so on.
In this example a conversation about simply “making” 1.5 million per year is quite misleading. Once we have these numbers figured out we can begin to “design” our “products and/or services” to somewhat fit a pricing model by backdooring it via preferred margins.
Setting Up Your Products
Many folks in the industry have had exposure and direct experience with a number of disciplines. At the very least, a lot of us know enough about “how” to execute a particular type of service without maybe the specific knowledge of how to go in and “push the buttons”.
There’s a tendency to do all types of service but a good way to start is to look at your core competencies and determine what makes the most sense to offer as a product. If you are just starting out you can start this from a blank slate, there’s not a big difference either way.
You will run across a couple different types of costs, direct and indirect. Let’s assume for the sake of simplicity you are a freelancer or just a solo operation. In terms of selling a service you will have 2 core types of cost:
Direct (utilization of outside contractors to accomplish a task)
Indirect (your time and any other overhead like office costs, insurance, tools, marketing costs)
There’s some debate as to whether you should include the estimated cost of your marketing as part of a per project cost to accurately determine your margins. I say why not, using it only makes it more accurate in terms of hard numbers.
Perhaps you whittled down your offerings to:
Technical SEO Audits
SEO Competitive Analysis Audits
We can assume that you might have the following tools in your toolbelt:
Screaming Frog SEO Spider (roughly 158$ per year if you are in the US)
Majestic SEO subscription (roughly $588 per year for the Silver plan)
Ahrefs subscription (roughly $948 per year for the Pro subscription)
Visual Website Optimizer subscription ($588 per year for the Small Business Plan)
Raven SEO Tools for competitive research, content marketing strategy and execution, SEO audit work ($1,188 per year)
Buzzstream for outreach and additional link prospecting ($1,188 per year)
There are more tools we could add but at a baseline level you would be able to produce quality products with these tools. Total cost is $4,658 per year or $389 (rounded up, per month).
The same formula (annual and monthly amounts) would be used for any other overhead you deem necessary but for the sake of simplicity let’s say you are spending $389 per month on “stuff”.
Knowledge + Tools = Win
Tools are only 1 part of a 2 part equation. Tools without knowledge are useless. There are a variety of costs one could associate with knowledge acquisition:
Building your own test sites
Going to conferences
Participating in online membership sites
The costs for knowledge acquisition can vary from person to person. You might be at a point where all three make sense or at a level where only 1 or 2 make sense. I would recommend looking at these options relative to your skill set and determining the cost, annually, of what makes sense for you. Take that number and just add it to the example cost I gave for tools I recommended earlier.
Breaking Out a Product List
The next step would be to look at each type of service you are offering and productize it. The first 2 areas are more likely to be your time only versus your time + outside contractor help. Conversion Optimization and Content Marketing will probably incur additional costs outside of your time for things like:
Programming for interactive content
When setting up products I use this:
GI is Gross Income
Tax is GI * (whatever your total tax percentage is)
NI is Net Income
GM is Gross Margin (E2/B2)
NM is Net Margin (G2/B2)
In that example I used $150 as my hourly rate and assumed 40 hours for an audit. Now I can play around with the direct cost and price to arrive at the margins I am looking for.
One thing to keep in mind with indirect cost is usually it’s something that can be divided amongst your current projects.
So I might revisit my pricing table from time to time to revamp the indirect cost based on my current client list. In this example I assume no clients are currently onboard and no income for my own properties so this audit eats up all the indirect cost against its margins.
You can design your products however it works for you but I usually try to find some type of baseline that works for me. In the areas I assumed earlier I would try to make sub-products out of each section:
Audit based on size and scope of site (total pages, ecommerce, dynamic, etc)
Conversion Rate Optimization based on total hours for ongoing work and a few different prices for the initial audit and feedback
Content Marketing based on the scale needed broken out into different asset types for easier pricing (videos, interactive content, infographics, whitepapers, and so on
SEO Competitive Analysis based on total hours needed for ongoing work and different prices based on the scope of the initial research (or just a one-off overview)
There are so many variables to each service that it is impossible to list them here but the general ideas remain the same. Start with a market and break them out into “things” that can be sold which cover “most” of your target market.
Manage Your Workloads More Efficiently
One of the reasons I mentioned direct cost as being your hourly rate is so you can set a baseline of how many hours you want to work per month to achieve the amount you'd like to earn. Combining what you want to earn with the hours you want to work will help you work out a minimum hourly rate which you can adjust up or down, along with desired revenue, to hit your pricing sweet spot.
Using your hourly rate in conjunction with designing specific products makes it pretty easy to assign hours required to a specific product. When you assign hours to each product you can do a few things that will help in managing your workload:
When a new project is being quoted you can quickly gauge whether, based on current projects in process, you have availability for the project
If you know ahead of time you are stretched out a bit and need to bring in outside help you can add those additional costs to your proposal and get outside help ready ahead of time
If you take on projects and you find your assumed hours are over or under the amount really necessary you can adjust that for future projects
Assigning your required hours to each product you sell will help you manage your workload better and give you more fluidity during peak times. Inevitably there will be periods of peaks and valleys in the demand for your service so if you are able to manage the peaks in a less stressful and more profitable manner the valleys might not be as deep for your financially.
Other Areas Where Productizing Helps
Custom quoting everything that comes through the door is a pain point for me.
Post-quoting you have things like contracts that have to get signed, billing that has to get set up, and task processes that have to get accomplished.
When you have specific products you are selling, it becomes much easier to automate:
Proposal templates that get sent out
New client onboarding into a CRM/PM system
Tasks that need to be completed and assigned
Setting up classes and jobs in Quickbooks to track financials per client or per job
It can be a pretty lengthy process but making your services into products really helps your business in a number of areas
The fundamental shift in the past couple of years has been more emphasis on what could be characterized as engagement factors.
I became convinced that Panda is really the public face of a much deeper switch towards user engagement. While the Panda score is sitewide the engagement "penalty" or weighting effect on also occurs at the individual page. The pages or content areas that were hurt less by Panda seem to be the ones that were not also being hurt by the engagement issue.
Inbound links to a page still count, as inbound links are engagement factors. How about a keyword in the title tag? On-page text? They are certainly basic requirements, but of low importance when it comes to determining ranking. This is because the web is not short of content, so there will always likely to be on-topic content to serve against a query. Rather, Google refines in order to deliver the most relevant content.
Google does so by checking a range of metrics to see what people really think about the content Google is serving, and the oldest form of this check is an inbound link, which is a form of vote by users. Engagement metrics are just a logical extension of the same idea.
Brands appear to have an advantage, not because they fit into an arbitrary category marked “brand,” but because of signals that define them as being more relevant i.e. a brand keyword search likely results in a high number of click-thrus, and few click-backs. This factor, when combined with other metrics, such as their name in the backlink, helps define relevance.
Social signals are also playing a part, and likely measured in the same way as brands. If enough people talk about something, associate terms with it, and point to it, and users don’t click-back in sufficient number, then it’s plausible that activity results in higher relevance scores.
We don’t know for sure, of course. We can only speculate based on limited blackbox testing which will always be incomplete. However, even if some SEOs don’t accept the ranking boost that comes from engagement metrics, there’s still a sound business reason to pay attention to the main difference between brand and non-brand sites.
Investing In The Return
Typically, internet marketers place a lot of emphasis, and spend, on getting a new visitor to a site. They may also place emphasis on converting the buyer, using conversion optimization and other persuasion techniques.
But how much effort are they investing to ensure the visitor comes back?
Some may say ensuring the visitor comes back isn't SEO, but in a post-Panda environment, SEO is about a lot more than the first click. As you build up brand searches, bookmarking, and word-of-mouth metrics, you’ll likely create the type of signals Google favours.
Focusing on the returning visitor also makes sense from a business point of view. Selling to existing customers - whether you’re selling a physical thing or a point of view - is cheaper than selling to a new customer.
Acquiring new customers is expensive (five to ten times the cost of retaining an existing one), and the average spend of a repeat customer is a whopping 67 percent more than a new one
So, customer loyalty pays off on a number of levels.
Techniques To Foster Loyalty
Return purchasers, repeat purchasers and repeat visitors can often be missed in analytics, or their importance not well understood. According to the Q2 2012 Adobe analysis, “8% of site visitors, they generated a disproportionately high 41% of site sales. What’s more, return and repeat purchasers had higher average order values and conversion rates than shoppers with no previous purchase history
One obvious technique, if you’re selling products, is to use loyalty programs. Offer points, discounts and other monetary rewards. One drawback of this approach is is that giving rewards and pricing discounts is essentially purchasing loyalty. Customers will only be “loyal” so long as they think they’re getting a bargain, so this approach works best if you’re in a position to be price competitive. Contrast this with the deeper loyalty that can be achieved through an emotional loyalty to a brand, by the likes of Apple, Google and Coke.
Fostering deeper loyalty, then, is about finding out what really matters to people, hopefully something other than price.
Take a look at Zappos. What makes customers loyal to Zappos? Customers may get better prices elsewhere, but Zappos is mostly about service. Zappos is about ease of use. Zappos is about lowering the risk of purchase by offering free returns. Zappos have identified and provided what their market really wants - high service levels and reasonable pricing - so people keep coming back.
Does anyone think the engagement metrics of Zappos would be overlooked by Google? If Zappos were not seen as relevant by Google, then there would be something badly wrong - with Google. Zappos have high brand awareness in the shoe sector, built on solving a genuine problem for visitors. They offer high service levels, which keeps people coming back, and keeps customers talking about them.
Sure, they’re a well-funded, outlier internet success, but the metrics will still apply to all verticals. The brands who engage customers the most, and continue to do so, are, by definition, most relevant.
Another thing to consider, especially if you’re a small operator competing against big players, is closely related to service. Try going over-the-top in you attentiveness to customers. Paul Graham, of Y Combinator, talks about how start-ups should go well beyond what big companies do, and the payback is increased loyalty:
But perhaps the biggest thing preventing founders from realizing how attentive they could be to their users is that they've never experienced such attention themselves. Their standards for customer service have been set by the companies they've been customers of, which are mostly big ones. Tim Cook doesn't send you a hand-written note after you buy a laptop. He can't. But you can. That's one advantage of being small: you can provide a level of service no big company can
That strategy syncs with Seth Godin’s Purple Cow notion of “being remarkable” i.e do something different - good different - so people remark upon it. These days, and in the context of SEO, that translates into social media mentions and links, and brand searches, all of which will help keep the Google Gods smiling, too.
The feedback loop of high engagement will also help you refine your relevance:
Over-engaging with early users is not just a permissible technique for getting growth rolling. For most successful startups it's a necessary part of the feedback loop that makes the product good. Making a better mousetrap is not an atomic operation. Even if you start the way most successful startups have, by building something you yourself need, the first thing you build is never quite right.....
Gamification has got a lot of press in the last few years as a means of fostering higher levels of engagement and return visits.
The concept is called gamification - that is, implementing design concepts from games, loyalty programs, and behavioral economics, to drive user engagement”. M2 research expects that US companies alone will be spending $3b per year on gamification technologies and services before the end of the decade
People have natural desires to be competitive, to achieve, to gain status, closure and feel altruistic. Incorporating game features helps fulfil these desires.
And games aren’t just for kids. According to The Gamification Revolution, by Zichermann and Linder - a great read on gamification strategy, BTW - the average “gamer” in the US is a 43 year old female. Gaming is one of the few channels where levels of attention are increasing. Contrast this with content-based advertising, which is often rendered invisible by repetition.
This is not to say everything must be turned into a game. Rather, pay attention to the desires that games fulfil, and try to incorporate those aspects into your site, where appropriate. Central to the idea of gamification is orienting around the deep desires of a visitor for some form of reward and status.
The user may want to buy product X, but if they can feel a sense of achievement in doing so, they’ll be engaging at a deeper level, which could then lead to brand loyalty.
eBay, a pure web e-commerce play dealing in stuff, have a “chief engagement officer”, someone who’s job it is to tweak eBay so it becomes more-gamelike. This, in turn, drives customer engagement and loyalty. If your selling history becomes a marker of achievement and status, then how likely are you to start anew at the competition?
This is one of the reasons eBay has remained so entrenched.
Gamification has also been used as a tool for customer engagement, and for encouraging desirable website usage behaviour. Additionally, gamification is readily applicable to increasing engagement on sites built on social network services. For example, in August 2010, one site, DevHub, announced that they have increased the number of users who completed their online tasks from 10% to 80% after adding gamification elements. On the programming question-and-answer site Stack Overflow users receive points and/or badges for performing a variety of actions, including spreading links to questions and answers via Facebook and Twitter. A large number of different badges are available, and when a user's reputation points exceed various thresholds, he or she gains additional privileges, including at the higher end, the privilege of helping to moderate the site
Gamification, in terms of the web, is relatively new. It didn’t even appear in Google Trends until 2010. But it’s not just some buzzword, it has practical application, and it can help improve ranking by boosting engagement metrics through loyalty and referrals. Loyalty marketing guru Fredrick Reichheld has claimed a strong link between customer loyalty marketing and customer referral.
Obviously, this approach is highly user-centric. Google orient around this principle, too. “Focus on the user and all else will follow.”
Google has always had the mantra of 'focus on the user and all else will follow,' so the company puts a significant amount of effort into researching its users. In fact, Au estimates that 30 to 40 per cent of her 200-strong worldwide user experience team is compromised of user researchers
Google fosters return visits and loyalty by giving the user what they want, and they use a lot of testing to ensure that happens. Websites that focus on keywords, but don’t give the user what they want, either due to a lack of focus, lack of depth, or by using deliberate bait-and-switch, are going against Google’s defining principles and will likely ultimately lose the SEO game.
The focus on the needs and desires of the user, both before their first click, to their return visits, should be stronger than ever.
According to Microsoft research, the average new visitor gives your site 10 seconds or less. Personally, I think ten seconds sounds somewhat generous! If a visitor makes it past 30 seconds, you’re lucky to get two minutes of their attention, in total. What does this do to your engagement metrics if Google is counting click backs, and clicks to other pages in the same domain?
And these metrics are even worse for mobile.
There’s been a lot of diversification in terms of platforms, and many users are stuck in gamified silo environments, like Facebook, so it’s getting harder and harder to attract people out of their comfort zone and to your brand.
So it’s no longer just about building brand, we also need to think about more ways to foster ongoing engagement and attention. We’ve seen that people are spending a lot of attention on games. In so doing, they have been conditioned to expect heightened rewards, stimulation and feedback as a reward for that attention.
Do you reward visitors for their attention?
If not, think about ways you can build reward and status for visitors into your site.
Sites like 99 Designs use a game to solicit engagement from suppliers as a point of differentiation for buyers. Challenges, such as “win the design” competition, delivers dozens of solutions at no extra cost to the user. The winners also receive a form of status, which is also a form of “payment” for their efforts. We could argue that this type of gamification is weighed heavily against the supplier, but there’s no doubting the heightened level of engagement and attraction for the buyer. Not only do they get multiple web design ideas for the price of one, they get to be the judge in a design version of the X-Factor.
Hopefully, this article has provided some food for thought. If we were going to measure success of loyalty and engagement campaigns, we might look at recency i.e. how long ago did the users last visit, frequency i.e. how often do they visit in a period of time, and duration i.e. when do they come, and how long do they stay. We could then map these metrics back against rankings, and look for patterns.
But even if we’re overestimating the effect of engagement on rankings, it still makes good sense from a business point of view. It costs a lot to get the first visit, but a whole lot less to keep happy visitors coming back, particularly on brand searches.
One of the problems with affiliate and Adsense has always been that it is difficult to lock in and build value using these models. If the customer is “owned” by someone else, then a lot of the value of the affiliate/Adsense middle-man lies in the SERP placement. When it comes time to sell, apart from possible type-in domain value, how much intrinsic value does such a site have? Rankings are by no means assured.
So, if these areas are no longer earning you what they once did, it makes sense to explore other options, including vertical integration. Valuable online marketing skills can be readily bolted onto an existing business, preferably to a business operating in an area that hasn’t taken full advantage of search marketing in the past.
Even if you plan on building a business as opposed to buying, looking at businesses for sale in the market you intend to build can supply you with great information. You can gauge potential income, level of competition, and undertaking a thorough business analysis can help you discover the hidden traps before you experience them yourself. If there are a lot of businesses for sale in the market you’re looking to enter, and their figures aren’t that flash, then that’s obviously a warning sign.
Such analysis can also help you formulate your own exit strategy. What would make the business you’re building look attractive to a buyer further down the track? It can be useful to envision the criteria for a business you’d like to buy, and then analyse backwards to give you ideas on how to get there.
In this article, we’ll take the 3,000 ft view and look at the main considerations and the type of advice you’ll need. We’ll also take a look at the specifics of buying an existing SEO business.
Build Or Buy?
There are a number of pros and cons for either option and a lot depends on your current circumstances.
You might be an existing owner-operator who wants to scale up, or perhaps add another revenue stream. Can you get there faster and more profitably by taking over a competitor, rather than scaling up your own business?
If you’re an employee thinking of striking out on your own and becoming your own boss, can you afford the time it takes to build revenue from scratch, or would you prefer instant cashflow?
The Advantages Of Building From Scratch
Starting your own business is low cost. Many online businesses cost next to nothing to start. Register the business. Open a bank account. Fill out a few forms and get a business card. You’re in business.
You don’t need to pay for existing assets or a customer base, and you won’t get stuck with any of the negatives an existing business may have built up, like poor contracts, bad debts and a tainted reputation. You can design the business specifically for the market opportunity you’ve spotted. You won’t have legacy issues. It’s yours. It will reflect you and no one else, at least to start with. The decisions are yours. You don’t have to honor existing contracts, deal with clients or suppliers you had no part in being contractually obliged to in the first place.
In short, you don’t have legacy issues.
What’s not to like?
There is more risk. You don’t yet know if your business will work, so it’s going to require time and money to find out. There are no guarantees. It can be difficult to get funding, as banks like to see a trading history before they’ll lend. It can be very difficult to get the right employees, especially early on, as highly skilled employees don’t tend to favor uncertain startups, unless they’re getting equity share. You have to start a structure from scratch. Is the structure appropriate? How will you know? You need to make a myriad of decisions, from advertising, to accommodation, to wages, to pricing, and with little to go on, apart from well-meaning advice and a series of hunches and experiments. Getting the numbers right is typically arrived at via a lot of trial and error, usually error. You have no cashflow. You have no customers. No systems. No location.
Not that the downsides should stop anyone from starting their own business. If it was easy, everyone would do it, but ask anyone who has started a business, and they’ll likely tell you that sure, it’s hard, but also fun, and they wouldn’t go back to being an employee.
There is another option.
On the plus side, you have cash flow from day one. The killer of any business is cash flow. You can have customers signed up. People may be saying great things about you. You may have a great idea, and other people see that it is, indeed, a great idea.
But if the cash flow doesn’t turn up on time, the lights go out.
If you buy an existing business with sound cashflow, you not only keep the lights on, you’re more likely to raise finance. In many cases, the seller can finance you. If that’s the case, then for a small deposit you get the cashflow you need, based on the total business value, from day one.
You’ve got a structure in place. If the business is profitable and running well, then you don’t need to experiment to find out what works. You know your costs, how much you need to spend, and how much to allocate to which areas. You can then optimize it. You have customers, likely assistance from the vendor, and the knowledge from existing suppliers and employees. There is a reduced risk of failure. Of course, you pay a price for such benefits.
To buy a business, you need money. Whatsmore, you’re betting that money on someone elses idea, not your own, and it can be difficult to spot the traps. You can, of course, reshape and respin the business in your own image. You can get stuck with a structure that wasn’t built to your specifications. You might not like some of the legacy issues, including suppliers, existing contracts or employees.
If you decide buying a business is the right thing for you, then you’ll need good advice.
10.5% of brokers said that more than 12 months was required to sell a business
Buying a business is more complicated than buying an asset, such as a website. You could buy only the assets of a business - more on that shortly - but often the businesses are sold as a going concern, which means you may take on all the potential liabilities of that business, too.
Hence the need for sound advice in three main areas. Assemble a team to cover legal, accounting and business advisory.
Buying is a business, like buying a house, is a legal transaction, consisting of a number of legal issues. They key issues are you want to know exactly what you’re buying and won’t be left with any unexpected liabilities. You also want to make sure the seller won’t compete with you by re-entering the market after you buy.
One of the first things I do with clients is make sure they understand what they are buying,....They need to be able to tell me if they are buying assets, such as customer list and equipment, or the business, with the warts and ugliness that come with it.
Among the things to worry about when you buy an existing business: undisclosed debts, overstated earnings, poor employee relations, overvalued inventory and pending lawsuits, to name a few. Hidden liabilities can exist in all sorts of areas - from land contaminated with toxic chemicals, to accounts receivable that look solid but prove to be uncollectible, to inventory that's defective or dated
If you buy only a corporation's assets, you don't assume its liabilities, including taxes.
If you buy a corporation's shares of stock, however, you end up with both its assets and liabilities - including known and unknown taxes. An example of an unknown tax debt would be one that resulted from an IRS audit that has not yet begun. The seller of the corporate shares is released from all corporate debts unless he personally guarantees them or agrees to be liable for them after the transfer
Which is an important distinction. However, most smaller business sales are likely to be asset sales, as they are often sole proprietorships or partnerships.
There are also financial implications in terms of tax writeoffs.
There are two main areas accountants look at when evaluating a business. The financial history, and the tax ramifications.
In order to know whether or not the asking price for the business is fair, it is very important that you look through the books of the company over a number of financial periods. Don't make the mistake of asking for just last year's accounts. You should have at least three and preferably five years of records for the business. If it is half way through the financial year, ask for an interim set of accounts for this year. You need to be assured that trading conditions have not deteriorated from the last financial year. If you are looking to put your hard-earned money (and other's equally hard-earned money) into a business, you want to make sure that the business is not going backwards. You need to look for evidence of year on year growth at acceptable margins. Remember, any company can show regular growth but it must be profitable. Fire sales can increase revenue with little or no impact on margin or worse, the revenue can be unprofitable
Property acquired by purchase. The depreciable basis is equal to the asset's purchase price, minus any discounts, and plus any sales taxes, delivery charges, and installation fees. For real estate, you can also include costs of legal and accounting fees, revenue stamps, recording fees, title abstracts/insurance, surveys, and real estate taxes assumed for the seller
After lawyers and accountants, the third member of your evaluation team should be a qualified business adviser who is familiar with businesses in your area of interest.
A thorough competitive analysis should be a first step. Where does this business sit in relation to existing competition? How easy is it for new competitors to enter the market? How much risk is involved?
Whenever you buy an existing business and look at its records, you're looking at the past. There's no guarantee things won't change going forward. If you're negotiating to buy a business and you think the seller is giving you a great deal, be very suspicious--there's probably something heading down the road at 90 miles an hour that will blow this business apart when it hits
That’s the same if you plan to build a business from scratch, the difference being you probably won’t have to risk as much up front.
It can also pay to go through a broker acting on your behalf, as opposed to the seller. ">Brokers can:
Prescreen businesses for you. Good brokers turn down many of the businesses they are asked to sell, whether because the seller won't provide full financial disclosures or because the business is overpriced. Going through a broker helps you avoid these bad risks. Help you pinpoint your interest. A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you. NegotiateThe negotiating process is really when brokers earn their keep. They help both parties stay focused on the ultimate goal and smooth over any problems that may arise. Assist with paperwork. Brokers know the latest laws and regulations affecting everything from licenses and permits to financing and escrow. They also know the most efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker reduces the risk that you'll neglect some crucial form, fee or step in the process.
When you are building your agency, you need to focus on getting clients that pay you 6 figures a year. It’s hard to build a profitable agency and provide great results when someone only pays you a few grand a month.
There’s a lot of competition in this market because there are no real barriers to entry. Anyone can call themselves an SEO and anyone can advertise such services. The result is that it can be pretty difficult to differentiate yourself.
The advantages of buying an SEO business are the same for buying any other type of business i.e. you get instant cashflow, a client list, and reputation. The standard analysis, as outlined in this article, applies. Evaluate financials, legal issues and position in the market, the same as any other business.
If you’re considering buying an SEO business you need to pay particular attention to reputation. It’s a market where, I think it’s fair to say, there is a significant level of hype. Customers are often oversold on benefits that don’t eventuate i.e. a focus on rankings that don’t result in leads or customers.
Reputable SEO businesses are unlikely to have a high level of customer churn. Look for customer lists where the customers has been with the agency for a good length of time, and are ordering more services. Look for locked in forward contracts. It’s pretty easy for other SEOs to poach other customers by offering them lower prices. Again, this is why reputation and evidence of high service levels are important.
One valuable aspect, as Neil alludes to in his article, is relationships:
In the short run you will lose money from business development, but in the long run you’ll be able to make it up. The quickest way for you to increase your revenue is to be the outsourced arm of bigger agencies. As an SEO company, look for ad agencies to partner with, as there are way bigger ad agencies than seo agencies. Feel free and cold call them, offer to help them for free with their own website, and if you do well they’ll drive a lot of clients to you
Look at how the agency gets work. If it comes from established, larger advertising agencies, then these relationships are valuable. They typically result in a steady flow of new work without the need for new advertising spend. Look at the promises that have been made to clients. For example, ongoing payment may rely on performance metrics, such as ongoing rankings.
Hopefully this has article has given you some food for thought. If you're capital rich and time poor, then buying an established business can be an attractive proposition. Here are some of the sources used in this article, and further reading:
In previousarticles, we’ve looked at the one-sided deal that has emerged when it comes to search engines and publishers. Whilst there is no question that search engines provide value to end users, it’s clear that the search engines are taking the lionshare of the value when it comes to web publishing.
That isn’t sustainable.
The more value stripped from publishing, the less money will be spent on publishing in future. In this respect, the search engines current business model undermines their own long-term value to end users.
In this ecosystem, the incentive is to publish content that is cheap to produce. Content might also be loss-leader content that serves as a funnel leading to a transaction. Some of the content might be advertorial, the result of direct sponsorship, and may well include paid links. Curiously, it has been suggested by a Google rep that "....you blur the lines between advertising and content. That’s really what we’ve been advocating our advertisers to do". Some of it might be "the right kind of native", courtesy of Google Doubleclick. Some of the higher value content tends to be a by-product of the education sector, however the education sector may be the next in line to suffer a commodification of value.
There is little return to be had in producing high value content and making it publicly available for free, with no strings attached, so naturally such content is disappearing behind paywalls and taking other forms.
Some YouTube producers are rebelling.
In a recent post, Jason Calacanis outlines the problem for video content producers. He maintains that Google’s cut of the rewards amounts to 45%, and that this cut simply isn’t sustainable for video producers as their margins aren’t that high.
Successful media businesses today have margins in the 20% to 50% range--if they hit profitability. That means if you give a partner 45% off the top, you have no chance of breaking even (emphasis mine). In fact, this absurd revenue is so bad that people have made amazingly clever strategies to skirt them, like VICE producing the Snoop Lion documentary and Grace Helbig becoming the face of Lowe’s Hardware. A full 100% of that money goes to the content creator -- boxing out YouTube. More on this later.
Sure, it can *feel* like you’re making money, but when you look across the landscape of YouTube businesses -- and I won’t call anyone out here -- it’s very, very clear they are losing millions and millions of dollars a year.
Since YouTube doesn’t have to create any content, just aggregate it, they don’t need to worry about the individual profitability of any one brand......With YouTube, as with their AdSense product, Google is trying to insert itself between publishers and advertisers and extract a massive tax. In the case of YouTube, it’s a 45% tax
In a subsequent post, Calacanis laments that whilst a lot of publishers got back to him in support of his views, he received no contact from YouTube, even though he is supposedly a high value “partner”.
And what do YouTube do for this 45% cut? Hosting? They’ve pretty much outsourced support and liability to the MCNs for no money down. I imagine running a video network is pretty expensive, although I wonder about the true costs for Google. Calacanis obviously doesn’t think they’re great enough to justify the cut.
PPC Not Immune
Paid search also extracts a high tax.
Let’s run the numbers. A site has an average order price of $100. The site converts at 1% i.e. a site makes a sale to one in every hundred visitors. Sales are $1 per visitor. If the total cost of providing the order is $50, then the profit is 50 cents per visitor. The site can pay the search engine up to 49 cents per click and make a profit.
Let’s say the site invested heavily in conversion optimization to raise the conversion rate. They redesign their site, they refine their offer to give users exactly what they want, they optimize the sales funnel, and they manage to double their conversion rate to 2%. Now, for every 100 visitors, they make $2 per visitor. They can now bid up to $1.99 and still make a profit.
But along comes the competition. They also invest heavily in conversion optimization, and copy, and process, and they double their conversion rates, too. These sites must then keep upping their bids to stay on top in the auction process. Who benefits?
The search engine does.
The search engine benefits from this content improvement in the form of higher bid prices. The producer improves the value of their sites to users, but whilst the competition is doing the same thing, the real winner is the search engine.
This is one reason the search engine spokespeople will advise you to focus on delivering value to customers. The more value you create, the more value you’re going to end up passing to a search engine. As publishing becomes easier, the more gets published, yet the amount of attention remains relatively static. The competition increases, and it is likely that those with the deepest pockets eventually win high value and/or mature verticals.
How To Deal With It
Whilst we’re waiting for a new paradigm to come along that swings the pendulum back in favor of publishers - and we may be waiting some time - we need to think about how to extract more value from each visitor. This is not meant as a beat-up on the search engines - I’m glad they exist and enjoy most of what they do - rather this is about trying to get a handle on the ecosystem as it stands and how to thrive in it, rather than be crushed by it. In long tail markets - and web content is a l-o-n-g tail market - most of the value flows to the person organizing the market.
The key to prospering in this environment - if you don’t have the deepest pockets and you don’t organize the market - is to build relationships.
SEO is built largely on the premise that a relationship doesn’t exist between searcher and publisher. If a relationship already existed, the searcher would go direct to the publisher site, or conduct a brand search. I’m sure that’s how most people reading this article arrived on SEOBook.
So, try to make the most of every search visitor by turning them into non-search visitors. The search engine gets to extract a lot of value on first visit, especially if they arrive via PPC, but if you can then establish an on-going relationship with that visitor, then you get to retain value.
1. Encourage Subscriptions
Subscriptions can be in the form of bookmarking, signing up to Twitter, on Facebook, email subscriptions, RSS, and forum subscriptions. Encourage users to find you, in future, via channels over which you have more control. If you’ve buried these subscription calls to action, make them overt.
2. Form Alliances
Share exit traffic with like-minded but non-competitive sites. Swap advertising. Make guest posts and allow others to do likewise. Interview each other. If appropriate, instigate affiliate programs. Invest in and grow your personal networks.
3. Invest In Brand
Define a unique brand. Push your URL and brand everywhere. Take it offline. Even down to the basics like business cards, pens, whatever, emblazoned with your logo and URL. If you don’t have a definitive brand in your space, pivot and build one. Own your brand search, at very least.
4. Widen Distribution Channels
Publish ebooks. Build apps. Publish white papers. Make videos. Think of every medium and channel in which you can replicate your web publishing efforts.
Once you establish a relationship, give people reasons to come back. Think of what you do in terms of a platform, destination or place. How would this change your current approach? Ensure your business is positioned correctly so that people perceive a unique value.
You can then treat search engine traffic as a bonus, as opposed to the be all and end all of your business.
Last week, I reviewed “Who Owns The Future?” by Jaron Lanier. It’s a book about the impact of technology on the middle class.
I think the reality Janier describes in that book is self-evident - that the middle class is being gouged out by large data aggregators - but it’s hard, having read it and accepted his thesis, not to feel the future of the web might be a little bleak. Laniers solution of distributing value back into the chain via reverse linking is elegant, but is probably unlikely to happen, and even if it does, unlikely to happen in a time frame that is of benefit to people in business now.
So, let’s take a look at what can be done.
There are two options open to someone who has recognized the problem. Either figure out how to jump ahead of it, or stay still and get flattened by it.
Getting Ahead Of The SEO Pack
If your business model relies on the whims of a large data aggregator - and I hope you realize it really, really shouldn't if at all humanly possible - then, you need to get a few steps ahead of it, or out of its path.
There's a lot of good advice in Matt Cutt's latest video:
It could be argued that video has a subtext of the taste of things to come, but even at face value, Cutts advice is sound. You should make something compelling, provide utility, and provide a good user experience. Make design a fundamental piece of your approach. In so doing, you’ll keep people coming back to your site. Too much focus on isolated SEO tactics, such as link building, may lead to a loss of focus on the bigger picture.
In the emerging environment, the big picture partly means “avoid getting crushed by a siren server”, although that's my characterization, and unlikely to be Cutts'! Remember, creating quality, relevant content didn’t prevent people from being stomped by Panda and Penguin. All the link building you’re doing today won’t help you when a search engine makes a significant change to the way they count and value links.
Fast forward and we’re all spending our days flying these things (computers). But are we doing any heavy lifting? Are we getting the job done, saving the day, enabling the team? Or are we just “flying around” like one of those toy indoor helicopters, putzing around the room dodging lamps and co-workers’ monitors until we run out of battery power and drop to the floor? And we call it work.”...More than ever, we have ways to keep “busy” with SEO. The old stand-byes “keyword research” and “competitive analysis” and “SERP analysis” can keep us busy day after day. With TRILLIONS of links in place on the world wide web, we could link analyze for weeks if left alone to our cockpits. And I suppose every one of you SEOs out there could rationalize and justify the effort and expense (and many of you agency types do just that.. for a living). The helicopter is now cheap, fast, and mobile. The fuel is cheap as well, but it turns out there are two kinds of fuel for SEO helicopters. The kind the machine needs to fly (basic software and electricity), and the kind we need to actually do any work with it (seo data sets, seo tools, and accurate and effective information). The latter fuel is not cheap at all. And it’s been getting more and more expensive. Knowing how to fly one of these things is not worth much any more. Knowing how to get the work done is
A lot of SEO work falls into this category.
There is a lot of busy-ness. A lot of people do things that appear to make a difference. Some people spend entire days appearing to make a difference. Then they appear to make a difference again tomorrow.
But the question should always be asked “are they achieving anything in business terms?”
It doesn't matter if we call it SEO, inbound marketing, social media marketing, or whatever the new name for it is next week, it is the business results that count. Is this activity growing a business and positioning it well for the future?
If it’s an activity that isn't getting results, then it’s a waste of time. In fact, it’s worse than a waste of time. It presents an opportunity cost. Those people could have been doing something productive. They could have helped solve real problems. They could have been building something that endures. All the linking building, content creation, keyword research and tweets with the sole intention of manipulating a search engine to produce higher rankings isn't going to mean much when the search engine shifts their algorithms significantly.
And that day is coming.
To avoid getting crushed by a search engine, you could take one of two paths.
You could spread the risk. Reverse-engineer the shifting algorithms, with multiple sites, and hope to stay ahead of them that way. Become the gang of moles - actually, a "labour" of moles, in proppa Enlush - they can’t whack. Or, at least, a labour of moles they can't whack all at the same time! This is a war of attrition approach and it is best suited to aggressive, pure-play search marketing where the domains are disposable.
However, if you are building a web presence that must endure, and aggressive tactics don’t suit your model, then SEO, or inbound, or whatever it is called next week, should only ever be one tactic within a much wider business strategy. To rely on SEO means being vulnerable to the whims of a search engine, a provider over which you have no control. When a marketing tactic gets diminished, or no longer works, it pays to have a model that allows you to shrug it off as an inconvenience, not a major disaster.
The key is to foster durable and valuable relationships, as opposed to providing information that can be commodified.
There are a number of ways to achieve this, but one good way is to offer something unique, as opposed to being one provider among many very similar providers. Beyond very basic SEO, the value proposition of SEO is to rank higher than similar competitors, and thereby gain more visibility. This value proposition is highly dependent on a supplier over which we have no control. Another way of looking at it is to reduce the competition to none by focusing on specialization.
Specialize, Not Generalize
Specialization involves working in a singular, narrowly defined niche. It is sustainable because it involves maintaining a superior, unique position relative to competitors.
Specialization is a great strategy for the web, because the web has made markets global. Doing something highly niche can be done at scale by extending the market globally, a strategy that can be difficult to achieve at a local market level. Previously, generalists could prosper by virtue of geographic limits. Department stores, for example. These days, those departments stores need to belong to massive chains, and enjoy significant economies of scale, in order to prosper.
Specialization is also defensive. The more specialized you are, they less likely the large data aggregators will be interested in screwing you. Niche markets are too small for them to be bother with. If your niche is defined too widely, like travel, or education, or photography, for example, you may face threats from large aggregators, but this can be countered, in part, by design, which we’ll look at over the coming week.
If you don’t have a high degree of specialization, and your business relies solely on beating similar business by doing more/better SEO, then you’re vulnerable to the upstream traffic provider - the search engine. By solving a niche problem in a unique way, you change the supply/demand equation. The number of competing suppliers becomes “one” or “a few”. If you build up sufficient demand for your unique service, then the search engines must show you, else they look deficient.
Of course, it’s difficult to find a unique niche. If it’s profitable, then you can be sure you’ll soon have competition. However, consider than many big companies started out as niche offerings. Dell, for example. They were unique because they sold cheap PCs, built from components, and were made to order. Dell started in a campus dormitory room.
What’s the alternative? Entering a crowded market of me-too offerings? A lot of SEO falls into this category and it can be a flawed approach in terms of strategy if the underlying business isn't positioned correctly. When the search engines have shifted their algorithms in the past, many of these businesses have gone up in smoke as a direct result because the only thing differentiating them was their SERP position.
By taking a step back, focusing on relationships and specific, unique value propositions, business can avoid this problem.
Advantages Of Specialization
Specialization makes it easier to know and deeply understand a customers needs. The data you collect by doing so would be data a large data aggregator would have difficulty obtaining, as it is nuanced and specific. It’s less likely to be part of an easily identified big-data pattern, so the information is less likely to be commodified. This also helps foster a durable relationship.
Once you start finely segmenting markets, especially new and rising markets, you’ll gain unique insights and acquire unique data. You gain a high degree of focus. Check out “Business Lessons From Pumpkin Hackers”. You may be capable of doing a lot of different things, and many opportunities will come up that fall slightly outside your specialization, but there are considerable benefits in ignoring them and focusing on growing the one, significant opportunity.
Are you having trouble competing against other consultants? Consider respinning so you serve a specific niche. To specialize, an SEO might build a site all about dentistry and then offer leads and advertising to dentists, dental suppliers, dental schools, and so on. Such a site would build up a lot of unique and actionable data about the traffic in this niche. They might then use this platform as a springboard to offering SEO services to pre-qualified dentists in different regions, given dentistry is a location dependent activity, and therefore it is easy for the SEO to get around potential conflicts of interest. By specializing in this way, the SEO will likely understand their customer better than the generalist. By understanding the customer better, and gaining a track record with a specific type of customer, it gives the SEO an advantage when competing with other SEO firms for dentists SEO work. If you were a dentist wanting SEO services, who's pitch stands out? The generalist SEO agency, or the SEO who specializes in web marketing for dentists?
Similarly, you could be a generalist web developer, or you could be the guy who specializes in payment gateways for mobile. Instead of being a web designer, how about being someone who specializes in themes for Oxwall? And so on. Think about ways you can re-spin a general thing you do into a specific thing for which there is demand, but little supply.
One way of getting a feel for areas to specialize in is to use Adwords as a research tool. For example, “oxwall themes” has almost no Adwords competition and around 1,300 searches per month. Let’s say 10% of that figure are willing to pay for themes. That’s 130 potential customers. Let’s say a specialist designer converts 10% of those, that’s 13 projects per month. Let’s say those numbers are only half right. That’s still 6-7 projects per month.
Having decided to specialize in a clearly defined, narrow market segment, and having good product or service knowledge and clear focus, you are much more likely to be able to spot the emerging pain points of your customers. Having this information will help you stand out from the crowd. Your pitches, your website copy, and your problem identification and solutions will make it harder for more generalist competitors to sound like they don’t know what they are talking about. This is the unique selling proposition (USP), of course. It’s based on the notion of quality. Reputation then spreads. It’s difficult for a siren server to insert itself between word of mouth gained from good reputation.
Differentiation is the aim of all businesses, no matter what the size. So, if one of your problems is being too reliant on search results, take a step back and determine if your offer is specialized enough. If you’re offering the same as your competitors, then you’re highly vulnerable to algorithm shifts. It’s hard to “own” generalist keyword terms, and a weak strategic position if your entire business success is reliant upon doing so.
Specialization lowers the cost of doing business. An obvious example can be seen in PPC/SEO. If you target a general term, it can be expensive to maintain position. In some cases, it’s simply impossible unless you’re already a major player. If you specialize, your marketing focus can be narrower, which means your marketing cost is lower. You also gain supply-side advantages, as you don’t need to source a wide range of goods, or hire as many people with different skillsets, as the generalist must do.
Once you’re delivering clear and unique value, you can justify higher prices. It’s difficult for buyers to make direct comparisons, because, if you have a high degree of specialization, there should be few available to them. If you are delivering that much more value, you deserve to be paid for it. The less direct competition you have, the less price sensitive your offering. If you offer the same price as other offerings, and your only advantage is SERP positioning, then that’s a vulnerable business positioning strategy.
If you properly execute a specialization strategy, you tend to become more lean and agile. You may be able to compete with larger competitors as you can react quicker than they can. Chances are, your processes are more streamlined as they are geared towards doing one specific thing. The small, specialized business is unlikely to have the chain of command and management structure that can slow decision making down in organizations that have a broader focus.
Specialized businesses tend to be more productive than their generalist counterparts as their detailed knowledge of a narrow range of processes and markets mean they can produce more with less. The more bases you cover, the more organisational aspects come into play, and the slower the process becomes.
There are benefits in being a generalist, of course, however, if you’re a small operator and find yourself highly vulnerable to the whims of search engines, then it can pay to take a step back, tighten your focus, and try to dominate more specialist niches. The more general you go, the more competition you tend to encounter. The more competition you encounter in the SERPs, the harder you have to fight, and the more vulnerable you are to big data aggregators. The highly specialized are far more likely to fly under the radar, and are less vulnerable to big-brand bias in major verticals. The key to not being overly dependent on search engines is to develop enduring relationships, and specialization based on a strong, unique value proposition is one way of doing so.
Next article, we’ll look at differentiation by UX design and user experience.
If you run an SEO business, or any service business, you’ll know how hard it can be to scale up operations. There are many constraints that need to be overcome in order to progress.
We’ll take a look at a way to remove barriers to growth and optimize service provision using the Theory Of Constraints. This approach proposes a method to identify the key constraints to performance which hinder growth and expansion.
We had no legs to stand on to maintain our current customer base let alone acquire and keep new business. This was not an ideal position to be in, particularly in a down economy when we couldn’t afford to have sales reduce further
The results were striking. The number of days to decide food stamp eligibility dropped from 15 to 11; phone wait times were reduced from 23 minutes to nine minutes. Budgetary savings have exceeded the $9 million originally cut
It’s one way of thinking about how to improve performance by focusing on bottlenecks. If you’re experiencing problems such as being overworked and not having enough time, it could offer a solution.
First we’ll take a look at the theory, then apply it to an SEO agency. It can be applied to any type of business, of course.
Theory Of Constraints
Any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it
If there weren’t constraints, you could grow your business as large and as fast as you wanted.
You can probably think of numerous constraints that prevent you from growing your business. However, the theory holds that most constraints are really side issues, and that organizations are constrained by only one constraint at any one time.
A constraint is characterized as the “weakest link”.
The weakest link holds everything else up. Once this constraint has been eliminated or managed, another “weakest link” may well emerge, so the process is repeated until the business is optimized. Constraints can be people, procedures, supplies, management, and systems.
In Dr. Eli Goldratt’s book, "The Goal", Golddratt identifies the five steps to identify and address the constraint:
Identify the constraint
Exploit the constraint
Subordinate everything else to the constraint
Elevate the constraint
Go back to step 1
1. Identify The Constraint
What is the biggest bottleneck that holds back company performance? What activity always seems to fall behind schedule, or take the most time? This activity might not be the main activity of the company. It could be administrative. It could be managerial.
By repeatedly asking the question “Why” (five is a good rule of thumb), you can peel away the layers of symptoms which can lead to the root cause of a problem. Very often the ostensible reason for a problem will lead you to another question. Although this technique is called “5 Whys,” you may find that you will need to ask the question fewer or more times than five before you find the issue related to a problem
2. Exploit The Constraint
Once the constraint is identified, you then utilize the constraint to its fullest i.e. you try to make sure that constraint is working at maximum performance. What is preventing the constraint from working at maximum performance?
If the constraint is staff, you might look at ways for people to produce more work, perhaps by automating some of their workload, or allocating less-essential work to someone else. It could involve more training. It could involve adopting different processes.
3. Subordinate Everything Else To The Constraint
Identify all the non-constraints that may prevent the constraint from working at maximum performance. These might be activities or processes the constraint has to undertake but aren’t directly related to the constraint.
For example, a staff member who is identified as a constraint might have a billing task that could either by automated or allocated to someone else.
The constraint should not be limited by anything outside their control. The constraint can’t do any more than it possibly can i.e. if your constraint is time, you can’t have someone work anymore than 24 hours in a day! More practically, 8 hours a day.
Avoid focusing on non-constraints. Optimizing non-constraints might feel good, but they won’t do much to affect overall productivity.
4. Elevate The Constraint
Improve productivity of the constraint by lifting the performance of the constraint. Once you’ve identified the constraint, and what is limiting performance, then you typically find spare capacity emerges. You then increase the workload. The productivity of the entire company is now lifted. Only then would you hire an additional person, if necessary.
The final step is to repeat the process.
The process is repeated because the weakest link may now move to another area of the business. For example, if more key workers have been hired to maximize throughput, then the constraint may have shifted to a management level, because the supervisory workload has increased.
If so, this new constraint gets addressed via the same process.
Applying The Theory Of Constraints To An SEO Agency
Imagine Acme SEO Inc.
Acme SEO are steadily growing their client base and have been meeting their clients demands. However, they’ve noticed projects are taking longer and longer to finish. They’re reluctant to take on new work, as it appears they’re operating at full capacity.
When they sit down to look at the business in terms of constraints, they find that they’re getting the work, they’re starting the work on time, but the projects slow down after that point. They frequently rush to meet deadlines, or miss them. SEO staff appear overworked. If the agency can’t get through more projects, then they can’t grow. Everything else in the business, from the reception to sales, depends on it. Do they just hire more people?
They apply the five steps to define the bottleneck and figure out ways to optimize performance.
Identify the constraint. What is the weakest link? What limits the SEO business doing more work? Is it the employees? Are they skilled enough? How about the systems they are using? Is there anything getting in the way of them completing their job?
Try asking the Five Whys to get to the root of the problem:
1. Why is this process taking so long? Because there is a lot of work involved.
2. Why is there a lot of work involved? Because it’s complex.
3. Why is it complex? Because there is a lot of interaction with the client.
4. Why is there a lot of interaction with the client? Because they keep changing their minds.
5. Why do they keep changing their demands? Because they’re not clear about what they want.
Exploiting the constraint. How can the SEO work at maximum load?
If an SEO isn’t doing as much as they could be, is it due to project management and training issues? Do people need more direct management? More detailed processes? More training?
It sounds a bit ruthless, especially when talking about people, but really it’s about constructively dealing with the identified bottlenecks, as opposed to apportioning blame.
In our example, the SEOs have the skills necessary, and work hard, but the clients kept changing scope, which is leading to a lot of rework and administrative overhead.
Once that constraint had been identified, changes were made to project management, eliminating the potential for scope creep after the project had been signed off, thus helping maximize the throughput of the worker.
Subordinate the constraint. So, the process has been identified as the cause of a constraint. By redesigning the process to control scope creep before the SEO starts, say at a sales level, they free up more time. When the SEO works on the project, they’re not having to deal with administrative overhead that has a high time cost, therefore their utility is maximised.
The SEO is now delivering more forward momentum.
Elevate the performance of the constraint. They monitor the performance of the SEO. Does the SEO now have spare capacity? Is the throughput increasing? Have they done everything possible to maximize the output? Are there any other processes holding up the SEO? Should the SEO be handling billing when someone else could be doing that work? Is the SEO engaged in pre-sales when that work could be handled by sales people?
Look for work being done that takes a long time, but doesn’t contribute to output. Can these tasks be handed to someone else - someone who isn’t a constraint?
If the worker is working at maximum utility, then adding another worker might solve the bottleneck. Once the bottleneck is removed, performance improves.
Adding bodies is the common way service based industry, like SEO, scales up. A consultancy bills hours, and the more bodies, the more hours they can ill. However, if the SEO role is optimized to start with, then they might find they have spare capacity opening up so don’t need as many new hires.
Goldratt stressed that using the Theory Of Constraints to optimize business is an on-going task. You identify the constraint - which may not necessarily be the most important aspect of the business i.e. it could be office space - which then likely shifts the weakest link to another point. You then optimize that point, and so on. Fixing the bottleneck is just the beginning of a process.
It’s also about getting down to the root of the problem, which is why the Five Whys technique can be so useful. Eliminating a bottleneck sounds simple, and a quick fix, but the root of the problem might not be immediately obvious.
In our example, it appeared as though the staff are the problem, so the root cause could be misdiagnosed as “we need more staff”. In reality, the root cause of the bottleneck was a process problem.
Likewise some problems aligned with an employee on a specific project might be tied to the specific client rather than anything internal to your company. Some people are never happy & will never be satisfied no matter what you do. Probably the best way to deal with people who are never satisfied is to end those engagements early before they have much of an impact on your business. The best way to avoid such relationships in the first place is to have some friction upfront so that those who contact you are serious about working with you. It can also be beneficial to have some of your own internal sites to fall back on, such that when consulting inquiries are light you do not chase revenue at the expense of lower margins from clients who are not a good fit. These internal projects also give you flexibility to deal with large updates by being able to push some of your sites off into the background while putting out any fires that emerge from the update. And those sorts of sites give you a testing platform to further inform your strategy with client sites.
How have you addressed business optimization problems? What techniques have you found useful, and how well did they work?
I’ve skimmed across the surface, but there’s a lot more to it. Here’s some references used in the article, and further reading...
In the search ecosystem Google controls the relevancy algorithms (& the biases baked into those) as well as the display of advertisements and the presentation of content. They also control (or restrict) the flow of marketable data.
For example, a publisher might not get keyword referral data on organic search, but Google passes that data on via advertisements & passes a large amount of data on through their ad network to other ad networks. Consider this:
a DoubleClick tag on the site sent data to two other companies that collect it for various purposes -- Rubicon and Casale Media, representing a "hop." In a subsequent hop, Casale transferred the IMDB data to BlueKai, Optimax and Brandscreen, while Rubicon pushed it to TargusInfo, RocketFuel, Platform 161, Efficient Frontier and the AMP Platform. AMP then sent the data on to AppNexus and back to DoubleClick.
For about a decade being relevant & focused created efficiencies that more than offset any "size = quality" biases that the Google engineers created. However across many verticals that window is closing & it is never a good idea to wait until it is fully closed to adjust. ;)
This shift from relevancy to "size = quality" can be seen in the stock performance of mid-market companies like BankRate & Quinstreet.
Those companies were laser focused on the markets that have significant consumer intent & traffic value, but Google has eroded the affiliate base & ad networks of many of the direct marketing plays for a couple years straight now.
If Google's algorithmic biases are strong enough to literally move the market on companies worth hundreds of millions to billions of Dollars, one is naive to swim against the tide. The market is becoming more bifurcated.
This is why it is so hard to find a great SEO to recommend for small businesses. If that SEO really knows what they are doing & understands the market dynamics, then they probably won't serve the small business end of the market very long, or if they do, they will do so in a way where their continued flow of payments is not tied to performance. It is hard to have a sustainable business operating in a closed ecosystem if you are swimming in the opposite direction of that ecosystem.
In terms of our membership site here, a good slice of our customer base is the expert end of the market.
It is a tiny sliver of the market, but it is a segment that is somewhat well aligned with independent affiliate types & the sort of direct marketing relevancy-minded folks that Google has spent a couple years trying to marginalize as they cater to branded advertisers. We could try to shift our site to make it more mass market, but I prefer to run a site where we both learn & teach, and fear that moving to lower the barrier to entry and push more mass market will destroy what makes the membership site unique & valuable in the first place.
Currently, the predominant business model for commercial search engines is advertising. The goals of the advertising business model do not always correspond to providing quality search to users. For example, in our prototype search engine one of the top results for cellular phone is "The Effect of Cellular Phone Use Upon Driver Attention", a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving. This search result came up first because of its high importance as judged by the PageRank algorithm, an approximation of citation importance on the web [Page, 98]. It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers. For this type of reason and historical experience with other media [Bagdikian 83], we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.
Perform that same cellular phone search today & that original cited page is nowhere to be found. Today that same search includes Wal-Mart, T-mobile, Samsung, Amazon.com, Best Buy & other well known brands. Search for the more common phrase cell phones & you get the same brands plus local results and shopping results. Awareness is replacing precision.
Closed platforms increase the chunk size of competition & increase the cost of market entry, so people who have good ideas, it is a lot more expensive for their productivity to be monetized. They also don't like standardization ... it looks like rent seeking behaviors on top of friction
As Google makes search more complex & mixes in more signals, it is becoming harder to win at the game if your operation is singularly focused on SEO & it is becoming easier to win if your business already has a strong footprint in many other channels which bleeds into your search profile. The following chart is conceptual, but it aims to get the issue across.
If one company is spending significant capital & effort trying to combat the Panda algorithm & another company automatically sees a ranking boost from Panda, then the company with the boost is typically going to see greater ROI from any further investments in SEO.
Having spilled all the above digital ink, back in 2007 we decided to shift away from an ebook model to run a membership site. On and off over the years we have done a bit of consulting outside of running this site, but haven't put significant emphasis on it over the past couple years as we were pushing hard to keep up with the algorithms & keep this site growing. With all the above shifts in place we recently decided to offer SEO consulting again.
Some FAQs on that front...
If we work with you, who will be working on our project? The same people who write on the blog & run the community: Peter Da Vanzo, Eric Covino & Aaron Wall.
How many clients will you work with? Just a handful at any given time. We prefer to have a deep integration with a few clients rather than a bulk model.
Who are ideal clients? Those who know the value of search traffic & already have some general awareness & momentum in the marketplace. Examples of companies we have worked with in the past include: large ecommerce companies, tier 1 web portals, strong start ups & hedge funds invested in the web. Many of these clients already had an in-house SEO team & some were just actively beginning to leverage search.
I have a tiny company with a small budget. Could I still work with you? In some cases there might be a fit, but if you feel our consulting is beyond your budget you can of course still join our membership website. Consulting is for those who want a deeper engagement than we can provide through our current membership site model.
Can you name some past clients? For the most part, no. Our consulting projects typically come with nondisclosure agreements.
Can you fill out an RFP? Most likely not. If you are still shopping around for an SEO, we are probably not going to be a great fit. But if you have known of us for years & know you want to work with us, do get in touch.
Are you planning on starting a new website but want to gauge how profitable the industry sector is before you do? Are you optimizing a site for a client but want to gain a better understanding of the industry in which they operate? Conducting an industry analysis will help identify advantages and any weaknesses a business may have in that industry, and clarify the forces that shape that industry. The better we understand the industry, the more likely we are to grasp the opportunities others may miss.
If a business has a weak position relative to their competitors then optimization efforts might be ineffective as customers will simply click a few different search results and compare offerings.
Then again, a business may enjoy advantages in areas that aren't currently being exploited. Focusing your optimization and positioning efforts in these areas will likely pay higher dividends than optimizing in areas where competitors are strongest. Understanding the forces at work in the industry will help reveal these areas.
I like to analyze industries prior to the optimization process as I find I get a lot of ideas just by breaking the industry down into component parts. Where is the profit in this industry? Is this industry growing quickly? If so, should the emphasis be on acquiring new customers? Or is it stagnant, in which case should the emphasis be on taking market share from competitors? What areas do competitors focus on? What areas do they miss? Where are competitors most vulnerable?
There are various frameworks for conducting an industry analysis. You may have heard of a SWOT analysis, but today we’ll take a look at Porter’s Five Forces analysis.
Why Industry Analysis Is Useful
If you were examining the web design industry, you’d soon come across crowdsourcing sites, such as 99designs.
The existence of these types of sites signal a power imbalance in the design industry. The customer has significant power in that they can request that professional designers submit near-finished work in order to compete for their business.
Some may argue that this is a marketing cost for designers - a way to advertise and get in front of people, but however we look at it, it soon becomes clear the profitability of the web design industry is constrained by two forces: the power of buyers and the low barrier to entry to new competitors. Just about anyone can set-up shop as a web designer. Since suppliers are plentiful, the buyers can easily play the suppliers off against one another - quite literally, in the case of 99designs!
Once we understand these industry forces, we could alter our plan of attack if we were marketing a web design agency. One possible approach would be to focus on geographical advantages. If you’re a web designer based in New York, you’re probably going to get more work out of New York based firms than if you lived in Oklahoma. A marketing campaign that emphasizes the unique selling point of physical location might work well in that it mitigates a force that is strong and operates against them i.e. the number of competitors. If they focus on local, they’ll be competing with local designers, not designers from all over the country, or around the world. Such a business might make a big deal of the fact they’ll come and see their clients face-to-face, their centrally located offices, their geographic location, and the fact they have local knowledge and contacts.
That unique selling point is determined once we’ve made an effort to understand the forces at work in the industry.
The Five Forces
The five forces are:
The Power Of Suppliers
The Power Of Buyers
Barriers To Entry
The Availability Of Substitutes
If there are unfavourable power imbalances in a few of those forces, then the industry as a whole is likely to have profitability problems that need to be countered. Here is a further breakdown of these areas, as well as a five forces worksheet.
Let’s compare our web design agency against those five forces.
Power Of Suppliers? Suppliers being people who supply the web businesses with anything they need to produce their output. Suppliers, such as graphics software vendors, have virtually no power in the web design industry. A web designer needs a computer, office space and software, all of which are commodity items. Supply risk is therefore not a significant threat to the profitability of web designer businesses.
The Power Of Buyers? High. Buyers have a lot of choice as the industry is saturated with suppliers.
Barriers To Entry? Low. Anyone with a computer, design skills, and an internet connection can compete.
Competitive Rivalry? Medium/High. There are a lot of agencies chasing prestige work and may take a loss to land work from name companies. This gives them bragging rights and the association may help future marketing efforts.
The Availability Of Substitutes? Medium. A website is a marketing channel. A company could decide to spend money on other channels. They could substitute web design spend for some other marketing spend.
This industry clearly has profitability challenges. By emphasizing local, and a high touch service, a design firm could counter the competitive rivalry force and the barrier to entry force to some degree, and thus limit the power of buyers by focusing on buyers who place high value on face-to-face meetings. That’s just one idea, I’m sure you can think of a few more, but notice how easily these ideas spring to mind once you have a good idea of the forces at work in the industry.
How To Make A Five Forces Analysis
Define The Industry:
What are the geographic boundaries of this industry?
What products and/or services are in this industry?
Define The Players:
Who are the buyers?
Who are the suppliers?
Who are the competitors?
What are the substitutes?
Who are the potential entrants?
What are the drivers of each competitive force? Grade them on relative weakness vs strength. Make a note of why they are either weak or strong.
Determine Industry Structure
Why is this industry profitable?
What forces make it profitable?
Are some competitors better positioned in terms of the five forces than others?
Which forces are changing now, or likely to change in future? Can your business bring about any of these changes? Can your competitors?
A common mistake when undertaking this analysis is to define competition too narrowly. Competition is often deemed to be “the other guy who offers the same service”, and that’s the end of it.
By examining each force, we gain a more thorough understanding of how competition works in the industry. This can be useful when constructing an seo/sem campaign, as you may be able to find weak forces in one or more areas that you can exploit. For example, one opportunity might be substitute products. What is your clients product or service a substitute for? You could then target the existing customers of another substitute product or service and encourage them to switch.
The five forces help determine the potential of an industry as they keep us from focusing on any one element. We need to consider all elements in order to get a better idea of industry profitability.
For example, we may note that an industry is growing quickly, but if we disregard the fact there is no barrier to entry, we might overestimate the profit potential. The search marketing industry has been growing quickly, but there are no barriers to entry, so this shifts a lot of power to the buyer and away from suppliers. It’s also an industry where numerous substitution options exist i.e. there are numerous internet marketing channels, and it’s possible some customers will get more bang for their buck using other channels.
The five factors strategy helps us see how much profit is bargained away to customers and suppliers. We focus on structural considerations as a whole, as opposed to isolated factors.
Defining The Industry
It can often be difficult to determine the industry boundaries.
An industry can be defined too broadly or too narrowly. For example, an analysis of the web marketing industry may determine it is global, however marketing is often highly dependent on cultural aspects. A more narrow industry definition, including regionality and geographical factors, might be more applicable when it comes to quantifying the level of competition. The marketing industry in the USA is a different “industry” from the marketing industry in France as most marketing activity undertaken in the US is conducted by US based marketing companies, and very little by suppliers from France. Therefore, the supplier in France and the supplier in the US are in "different" industries from a competitive standpoint. One does not compete directly with the other as their focus is likely to be on their own geographic markets.
There are two main factors in deciding industry boundaries:
Scope of the products or services
Geographical boundaries. Does competition take place globally, or is it regional?
You can use the five forces to help determine the industry boundaries. If the industry structure is the same i.e. same buyers, same suppliers, barriers to entry, and so on, then treat it as the same industry. If the industry forces are different, then treat it as a separate industry for the purposes of this analysis.
Are soft drinks for the home and soft drinks for corporate buyers - such as McDonalds - the same industry for the purposes of analysis? Possibly not. Soft drinks to consumers are heavily marketed on b2c channels and packaged in small, individual containers. Distribution needs to be very wide to get each of these small containers physically close to the consumers. Into vending machines, for example. Sales of soft drinks to corporate buyers, however, are likely to occur via b2b channels, where purchasing is done strategically and delivery is in the form of bulk syrup. The forces are quite different, even though product is exactly the same.
Barrier To Entry
When the barrier to entry is low, incumbents must hold down their prices or boost investment to deter new entrants. The way to counter a low barrier to entry force is attempt to raise it.
Anyone can make a burger, and anyone can get into the burger making business, but few could compete with McDonalds. McDonalds counter the low barrier to entry force by buying up well-positioned locations, operating at significant scale to keep prices low, and investing heavily in brand awareness. This raises the barrier to entry for anyone trying to offer something similar to McDonalds.
Many SEO companies spend a lot of time at conferences and keeping their names “out there”, which goes some way to counter the low barrier to entry in a business where just about anyone can call themselves an SEO. Software companies will likely invest heavily in features, R&D or service levels to ensure new entrants have a steep hill to climb in order to compete.
If the barriers to entry are low, then the threat of entry is high, which in turn limits profitability unless demand in the industry is growing faster than supply. Some businesses, like McDonalds, will counter this force with sheer scale, driving down the cost per unit. You can only compete with McDonalds pricing and convenience advantages if you do so at scale, and that scale is expensive. New entrant competitors in the burger business often position in areas where McDonalds are weakest i.e. offering gourmet burgers that that might cost more, but aren’t generic. Competitors could make a big deal about being small.
The advantages of economies of scale can be found throughout the value chain and the reason why companies tend to get bigger - they have to - else they put themselves at ongoing risk from new entrants.
The downside risk for these companies is that they can’t change and adapt quickly. It’s like trying to maneuver a container ship, whilst the small business can change direction on a whim. The small business is like the speedboat, the big business is like a container ship. This is the reason small companies tend to focus on new, innovative areas of the market. The big companies may not be able to make money out of these areas (yet) due to company cost structures and/or they can’t adapt quickly enough to seize these opportunities.
Another benefit of scale that we see often on the web is demand-side economies of scale, otherwise known as network effects. Anyone can start a social network, but few can compete with Facebook. Their competitive advantage is largely due to network effects - the more people on a social network, the more value it has, and the more people will be willing to join. These demand side economies of scale erect a barrier to entry, thus retaining and increasing profitability, because customers are unwilling to sign up to smaller networks. This demand side barrier has been so effective for Facebook that even the likes of Google have trouble countering it.
We could even apply this type of analysis to the search results. If some serps are “easy” to get, then you may experience profitability issues. If they are easy for you to get, they are easy for some new entrant to get, too. As Google raises the bar, and makes it more expensive to compete, the threat from new entrants and/or those with less funding diminishes. Those who have more to spend, and/or are bigger businesses will likely find the serps more profitable than in the past as they no longer suffer the structural problem of a low barrier to entry. If you have the funds, then Google making it harder to optimize actually works in your favour.
Almost everything has a switching cost whereby it costs a customer to change services. The more entrenched a product or service, the higher the switching cost, and therefore the higher the barrier to competitors. Microsoft Office has hung around in the enterprise, despite being less than ideal, because the switching cost - involving staff training and industry document standards - is high.
If you want to run a search engine to rival Google, then the capital requirements are significant.
However, if the return is there, capital is typically available, especially if the capital can be turned back into cash if the business doesn’t work out.
For example, the bank might be happy to lend on a hotel as they can still convert their capital back into cash by selling the asset. If a business relies on a large advertising spend, however, then capital may be more difficult to come by as it can’t be converted back into cash if things go badly. Capital alone is not a significant barrier to entry.
Incumbency can counter low barriers to entry. It’s easy to start a search blog, but difficult to draw attention away from the incumbents in this space. The established sites have built up loyal audiences over time. To beat incumbents, you’ve usually got to do something remarkably superior, complementary, or be prepared for a long battle.
Application Of Five Forces Theory
Start by evaluating your position against the five main criteria and identify where forces are strong and where they are weak.
If the buyer is in a powerful position, and switching costs are low, then sending them to a landing page where your prices are high but your features are the same as the competition is unlikely to work. The buyer will likely click back and compare. In order for a conversion to take place in this scenario, the business would need to justify the higher prices by, say, focusing on the additional value offered.
If your prospective customers do face switching costs, then perhaps the copy could focus on how the business will help the customer absorb this cost. For example, a landing page could highlight trial offers and special deals if the buyer is switching from a competitors product.
Keep in mind that buyers are less price sensitive if your pricing represents a fraction of their total spend, but very price sensitive if you supply them with something that makes up a lot of their operating cost. If you offer an SEO service and you target small companies or individuals, then obviously the price structure needs to reflect this. Likewise, if you’re pitching to a company that spends millions on marketing a month, you’re more likely to focus on the value proposition as they are unlikely to care about a few thousand here and there as search marketing isn’t a large part of their operating cost.
Could your service make a major difference to your buyers costs? Can you lower the cost of their supply chain? If so, then the buyer will be less sensitive to price and more interested in value. If all your competitors are focusing their efforts at one step in the supply chain, could your advertising be directed a different step in the chain?
Drug companies now advertise their product to the end consumer when previously the advertising has been directed at the decision maker - their doctor. “Ask your doctor if (product) is right for you!”. Pressure is then put on the doctor to prescribe that brand over others because the patient is specifically requesting it.
Rivalry will likely be strongest when there isn’t one clear market leader, competitors are similar in size, and they make similar offers. It’s also likely to be strong if the industry is low growth as one competitor will likely try and grab another competitors share, whereas if the industry is growing quickly, this isn’t so much of a problem.
Try to ascertain the character of the rivalry. Is ego and empire building a major factor? Consider the flagship Apple stores. It’s possible these shops run at a loss in terms of their retail offering, but are valuable in terms of brand awareness and recognition. This can be difficult to determine, of course. Any industry where there is intense rivalry bound up with ego will face profitability issues, at least in the short term, as one competitor might be trying to run another out of business as they are engaged in a loss making war of attrition.
One of the easiest comparisons to make is price. Price wars often happen when there is low switching cost and sellers are offering generic product. Rental cars fall into this category. Any industry battling fiercely on price will have structural limits to profitability as margins are cut to the bone and passed onto customers in the form of low prices.
If a product is perishable, it will be vulnerable to price cutting. We often think of perishability in terms of food use-by dates, but many industries suffer perishability problems. Mobile phones can become obsolete, information can become outdated and hotel rooms can’t be sold once the clock ticks over to a new day. Products and services will be vulnerable on price if they are ending their useful life. Brand, image, service levels, and features are a lot less vulnerable to price as they aren’t perishable.
Dull established industries with high barriers to entry and high switching costs, such as big business software systems like SAP are likely to be profitable compared to most Silicon Valley internet startups where the dead body count is high. Are these two really in the same industry? It doesn’t help that we only tend to hear about the outliers, such as Instagram, that make the high-tech industry sound like a certified gold mine. The internet industry has significant structural problems affecting profitability, typically in terms of the level of competition, low barriers to entry and access to capital.
Also consider the role of complements. Complements are products used to help provide a service. For example, Adwords is a complement to a PPC marketing campaign. Without Google, a PPC campaign is significantly diminished in terms of reach. So, Google has considerable clout in this space as they have few competitors. There is supplier risk because Google may stop campaigns and/or suspend accounts.
Another way of looking at complements is the sum value is greater than the parts. For example, a smartphone is near useless without software, but with software, it transforms from being a phone to being a computer in your pocket. Complements may affect demand for your product or service. If you produce iphone apps, then your future is linked to that of Apple and their market penetration. Apple also owns the supply chain. Apple, therefore, can exert a lot of control and this has an impact of potential profitability for vendors. It’s best for mobile apps publishers, from a profitability point of view, when there are multiple providers of smartphones and market share is split between them. The likes of Apple would have less power to demand high fees from software vendors and would more likely incentivise production by passing on more profit to the application developer.
Shifts Over Time
This analysis is done at a fixed point in time, but as we all know, industry is fluid.
In the case of the online industry, significant changes can occur quickly. Take, for example, the rise of mobile computing. More tablets and mobile phones are being sold than laptops and desktop computers, therefore the entire paradigm is changing.
Makers of hardware are on notice. Anyone who depends on that hardware is on notice. Software vendors who don’t adapt to mobile computing risk competitors jumping into that market and eating their market share.
As far as search marketing goes, just what is the optimal marketing channel on mobile? Do people really sift through large lists of search results on their tiny screens? Perhaps other forms of pay-per-click will rise and SEO will diminish?
Buyer and supplier power can also change. At present, the power of internet content suppliers is rock bottom. Technology in general, and the search engines in particular, have played a part in devaluing content and shifting revenue to themselves. One consequence is that a lot of quality content is disappearing behind paywalls and into Amazon publishing. As Amazon makes it easier to publish and monetarize written content, and as more people take up tablets and mobile computing, then the utility of search engines may start to dwindle as content producers focus on other channels.
Being aware of the five forces helps us size up profitability and potential for opportunity. It is particularly valuable if the industry is on the verge of strategic change in one or more areas as this presents new opportunity to gain strategic advantage against incumbents.
Using Strategy Analysis For Positioning
Look for areas in an industry where forces are weakest and position accordingly.
In Competitive Strategy: Techniques for Analyzing Industries and Competitors by Micheal Porter, outlines a great example of positioning in the trucking industry.
Using the Five Forces analysis framework, he determined the trucking industry is characterized by operators who run large fleets. They have an incentive to drive down the price of trucks as trucks are a major part of their costs.
Most truck suppliers built near identical trucks to a set of industry standards, so pricing is fierce. This is a very capital intensive business. So how has one supplier managed to charge a 10% premium for their trucks and maintain 20% market share for decades?
Paccar, a truck manufacturer based in Washington, focus on one group of customers: owner-operators. Owner-operators buy their own trucks and contract directly with suppliers. Because these buyers aren’t buying fleets, they don’t have much leverage when it comes to price, and as it turns out, aren’t as price sensitive as we’d expect.
These buyers take a lot of pride in their trucks, so choose to spend money on customization. The trucks are made-to-order and include sleek exteriors, plush seating, noise insulation, high end stereo systems, and other enhancements. They’re aerodynamic, which reduces fuel consumption, they maintain re-sale value, they have a roadside assistance program, a high-tech spare parts system - all key considerations for lone owner-operators.
By focusing on one sector of the market where price forces are weakest (lone operators), Paccar have side-stepped a sector where price forces are strongest (fleet buyers). Their entire value chain is aligned with the owner-operator sector of the market.
Companies can influence competitive forces. They can address supplier power by making generic parts and inputs, thus making it easy for them to switch suppliers and thus negate the power of unique suppliers. To counter price cutting rivals, companies can offer more unique and valuable services. To limit new competitors, companies can heavily invest in R&D and sophisticated systems.
Industry Analysis Is Always Changing
I hope this article has given you food for thought. I find this type of analysis useful for search marketing indirectly. It gets me thinking - broadly - about where the untapped opportunities in an industry might lay, and where the competition is likely to be strong and difficult to counter.
This article makes a good point that industry analysis is getting even more challenging as industries fracture and fragment:
Among the paradoxes they observe is that market segments in many industries are fragmenting, even as global firms require increasingly large markets to drive growth and profitability. Combining those "profit pools" is like trying to combine the water in thousands of bathtubs — there are profits to be had, but how do you combine them so that they become material?
But as they also point out, the most important competition for many organizations today comes from firms who aren't even technically competing in the same business. Netflix going into the production of its own proprietary TV programs? Best Buy doing sophisticated analysis for health care providers to see how well their cardiac treatment projects are going? Who would have predicted those shifts?”
Great opportunities are discovered using “out of the box” thinking :)
A common new years resolution is “quit the rat race and be your own boss”. In this article we’ll take a look at what is involved in starting up your own search marketing business, the opportunities you could grab, and the pitfalls you should avoid.
But first , why are people leaving SEO?
Is SEO Dead?
There’s no question Google makes life difficult for SEOs. Between rolling Pandas, Top Heavies, Penquins, Pirates, EMDs and whatever updates and filters they come up with next, the job of the SEO isn’t easy. SEO is a fast moving, challenging environment.
It’s true that SEO isn’t as easy as it once was. You used to be able to follow a script: incorporate this title tag, put this keyword on your page, repeat it a few times, get links with the keyword in the link text, get even more links with keywords in the link text, and when you’ve finished doing that - get a lot more links with keywords in the link text.
A top ten position was likely yours!
Try that script in 2013, and.....your mileage may vary.
There are plenty of examples of sites that follow Google’s exhaustive rules and get absolutely nowhere.
But let’s say you’ve figured out how to rank well. Your skills are valuable, because top ten rankings are valuable. Another bonus, given Google is making life more difficult, is that it creates a barrier to entry. There will be less threat from newcomers who have just bought a book on How To SEO.
For those with the skills, the outlook remains positive.
We do struggle to fill some of our positions, with SEO being a particularly tough one to find good people that have relevant experience,” said Chris Johnson, CEO of Terralever in Tempe.
Consultants in SEO and marketing in general have seen a huge uptick in job openings in the past few years. An October study by CNNMoney and PayScale.com place marketing consultants, which include SEO specialists, as the second-best positions in the U.S. based on pay and industry growth. According to the survey, they comprise more than 282,000 jobs with a 41.2 percent growth rate over the past 10 years.
SEMPOs 2012 report projects the search industry to grow to 26.8 billion in 2013, up from 22.9 billion in 2011.
So, the demand is escalating, SEO/SEM is getting more challenging, yet more people than ever seem to be throwing in the towel.
The nature of SEO is changing. Trends for 2013 - which are also highlighted in the SEMPO report - show that whilst lead generation and traffic acquisition are still favoured, areas such as brand awareness and reputation management are on the rise:
Survey responses show a drop in the blunt objective of driving traffic, but it remains a key goal for search engine optimization (SEO). Perhaps more interesting is the doubled number of agencies citing brand/reputation as a goal, up from 5% in 2011 to over 11% in this year's survey
SEO for the larger businesses appears to be where the game is moving. The advantages of business scale and brand reputation in the search engine results pages are not to be underestimated.
The SEO approach for smaller businesses needs to be about a lot more than just SEO, it needs to be more about SEM - with strong emphasis on the “M” (arketing) in order to avoid the fate outlined in the link above. Google looks deficient if people can’t find the big brand names, but few will notice if a small, generic operator falls out of the index as another relative unknown will take their place.
Of course, gaps in the algorithms will always exist, and this is the territory of aggressive SEO, but this is getting increasingly difficult to apply to legitimate sites that can’t afford to burn and replace sites.
The SEO these days needs to think about the fundamental value that SEO has always delivered - qualified prospects, leads, and positioning in the buyers minds. That might mean approaching what was once a technical exercise from a more holistic marketing angle.
Why Work In Search?
Search remains a very interesting business.
John Wanamaker, a merchant in the 1860’s was quoted as saying “Half the money I spend on advertising is wasted; the trouble is I don't know which half!”. I think he would have liked the search marketing business, as it allows you to do three very important things: get inside the mind of the customer, only talk to the people who are interested in what you offer and track what they do next.
Using search, you know where 100% of your budget is going. It won’t be wasted so long as you target correctly. Targeting is what search marketing does so well. If you enjoy figuring out what people want, matching them up with a page that allows them to do that thing, and beat your competition at doing so, then search marketing is a good game to be in. Whether you do that using SEO, PPC, social media, or likely a mix of all three, the demand for qualified visitors will always exist.
The next question is whether you want to do it for someone else, or do it for yourself. There are obviously pluses and minuses for both options, so let’s compare them.
Work For Someone Else Or Work For yourself?
Some people feel frustrated working for someone else and not being the master of your own destiny, especially if the boss is an idiot. Then again, some people like the routine and predictability of working for others, and they might be lucky enough to have a great boss who nurtures and respects them.
So, what type of person are you?
If you like a regular routine, regular hours, and task specialization, then looking for a SEM job within an established search marketing firm might be the way to go. If you prefer a high degree of control, variety and the knowledge that all the rewards will flow to you for the successful work you undertake, then starting your own business might be a good way forward.
Only you know for sure, but it pays to spend a bit of time taking a good look at yourself, your existing skills and what you really like doing before you decide if “working for someone else” or “working for yourself” is the right answer.
You should also establish your goals.
Be specific. If your reward is monetary, set a measurable goal i.e. I want to make $X per month in the first year, $X per month in the second, and $X per month in the third. Being specific about measurable goals will help you construct a viable business plan, which I’ll cover shortly.
Your goals need not be monetary. It could be argued the greatest rewards from a job or business aren't monetary reward, but the satisfaction you derive from the work.
When it comes to working for yourself, it’s hard to underestimate the freedom of picking your own areas of working to your own timetable. These are real benefits. If your goals align more closely with a job i.e. a regular income and a regular time schedule, then you might decide that getting a job with an employer will suit you best. If you value autonomy, then running your own business might suit you better.
Split your goals into short term, medium term and long term. Where do you see yourself in five years time? How about this time next year? In the case of search marketing, who knows if it will be around in five years time, and if so, in what form?
Your one year plan might be focused on SEO, but your five year plan might be to provide the very same things SEO provides today - qualified visitor traffic - no matter what form the source of that traffic will take in five years time. The value proposition to the client, will be much the same. So, your five year plan might include learning about general marketing concepts and studying new digital marketing channels as they arise.
Being clear about what you like doing and your objectives will make your decision about whether to get a job or strike out on your own much easier.
Another way to think about it is to consider doing search marketing part time, at first. It may prove to be a lucrative second income if you already have a job. One of the biggest factors in running your own business is the risk, and having a steady income reduces this risk significantly. It also means you can start slow and build up without the pressure of having to hit regular targets. The disadvantage is that you don’t have as much time to devote to it, and working two jobs might tire you out to the point you’re not doing both well. You’re also unlikely to be available to clients during business hours when they need you.
Of course, be careful not to compete with your existing employer and check out the non-compete clauses in your contract.
Another thing to think about if you're cash rich but time poor, especially with many people leaving the SEO game, is to buy an existing SEO business. You’re buying existing contracts and/or a client list, and you may be able to pick up some skilled employees, too. Buying a business is a topic in itself and outside the scope of this article, however it’s an avenue to think about especially if you are capital rich and time poor. You may be able to manage such a business part time, as you have less pressure to develop new business from scratch and the existing employees can handle the work at the coal face and deal with clients during the day.
Few business plans ever survive contact with the real world as the real world is constantly moving.
But this doesn't mean you shouldn't write one.
It’s essential to have a plan, just as you need directions to get to a travel destination. You could wing it without a map, and you might arrive in your destination, but chances are you won’t. You’ll most likely get lost. A business plan helps you assess where you are, and remind you where you’re going.
Having said that, a business plan is always subject to change, because as you encounter the real world - the rapidly fluctuating market - you will start to see opportunities and pitfalls you could never see whilst you were creating an abstract plan in your head. The plan needs to change with you, not lock you into a rigid framework. Treat it as a living document subject to change.
Entire books have been written about business plans, but unless you’re chasing bank financing and/or need to present formally to an external agency, it pays to keep business plans brief, clear and simple.
Crafting a business plan also enforces an intellectual rigour that will help test and challenge your ideas. In crafting your business plan, various questions will occur to you. How many clients do you need to get in order to meet your financial goals? How many staff members can you afford based on those goals? If you allocate all your time to existing clients, how will have time to acquire new clients? Do you have a marketing budget to get new clients?
These type of questions are addressed by the business plan.
A typical business plan covers the following:
Business Concept - describes what the business will do, discusses the search marketing industry in general, and shows how you’ll make the business work.
The Market - identifies your likely customers, and your competitors. Explains how you’ll get these customers, and how you’ll beat the existing competition.
Finances - shows how much it will cost to do what you plan to do, and how much money you plan to make from doing it.
Break these sections down as follows:
What is your current position? What is your background? What is the purpose of your business? What is your competitive advantage? Who are your competitors? How will you exploit their weaknesses, and counter their strengths? How will you increase capability and capacity? How do you plan to grow?
Describe the search marketing industry. If you’re unaware of the trends, refer to industry reports from the likes of SEMPO, Market Research.com and Nielsen.
Identify your target market and show how you will reach them. Describe what your search marketing service will do and highlight any areas where you have a clear advantage over competitors.
2. Business Strategy
Define the market you’re targeting. How big is it? What are the growth prospects? What is the market potential? How does your business fit into this market? What are your sales goals? What is your unique selling proposition?
Be specific about your objectives and goals i.e. make $x profit in the first year, as opposed to “be profitable”. They must be measurable, so you can see exactly how you’re doing.
Outline your pricing strategy. Here are a few ideas on how to price without engaging in a race to the bottom. Outline how you’re going to sell. What sort of advertising and marketing will you do? Outline your core values. What do you believe? What are your principles? Outline the factors most critical to your success. What are the things you must do in order to succeed?
Prepare a brief SWOT analysis. It sounds convoluted, but SWOT simply means strengths, Weaknesses,Opportunities, and Threats in terms of marketing.
Include any Market research you have done. Outline your distribution channels. Outline any strategic alliances you have. Outline your promotion plan. Prepare a Marketing budget. How will you appear credible in the eyes of your target market?
4. Management Structure
Who is involved and what are their skills? Do you plan to hire more staff? At what milestones? What plans do you have for training and retention? You need not solve this problem in house, of course. Your plan could involve using contractors as and when required.
Who are your advisors? i.e. your accountant, lawyer, mentor and financial planner, if applicable. This section is especially important if you’re seeking financing as banks will want to see that you’re operating with professional guidance.
Describe any staff management systems you plan to implement.
These can be hard to estimate, so calculate a best case scenario, a worst case scenario, and something in the middle. This gives you a range to think about, and how you might deal with various outcomes should they arise.
Cashflow is by far the most important consideration. You can have customers lined up, they are buying what you have, they are placing more orders, but if you can’t meet your bills, then your business will crash. Consider what line of credit you may need in order to maintain cashflow.
Restate the main aspects of your plan, highlighting where you are now and where you’re going to take the business. As business plans are always up for review, make a note of when you’ll review it next.
You might think a business plan is tedious and not worth the effort. However, it can save you a lot of time, effort and money if it shows you that your business won’t fly. It’s great to model a business on paper before you sink real money into it as there is no risk at this point, yet it will be clear from the business plan if the business has a chance of making money and growing. If the numbers don’t add up on the plan, they won’t do so in real life, either.
What do you want people to think of when they think of your company? Your name must create an immediate impression.
One of the problems with a crowded industry, like search marketing, is that generic, descriptive names won’t stand out. “Search Marketing Agency” may describe what you do, but such a name makes it difficult to differentiate yourself. A quirky name, like “RedFrog”, make be memorable, but may do little to convey what you’re about.
You'll also need a name that doesn't stomp on anyone else's registered trademark, else you’ll likely get into legal trouble. It also helps if the exact match domain name is available. If you get stuck, there are plenty of branding experts who can help you out, although they do tend to be expensive.
Keep in mind that is easy to rank for a unique brand name. If it’s unique, it tends to be memorable. So my two cents for anyone in a crowded industry is to go for the unique over the generic and descriptive. You can also tack on a byline to the end of your name to remove any uncertainty.
And get a great logo! Check out 99designs. Keep in mind that a logo should work for both on-screen color display and print, which might be in black and white.
Search Business Models
There are a few different search marketing models on which to base a business.
Perhaps the most obvious search marketing model is that of the consultant whereby you help other businesses with their search marketing efforts. Think about the demand for external consultants and where that demand may come from.
Large companies tend to want to deal with large agencies. Large companies may have their own internal search team. There comes a point where it is cheaper to hire someone full time that hire an external consultant, and that point is the average full time salary plus employment costs.
Larger companies will hire one-man bands or small consultancies if they need what you have and what you have is difficult for them to get elsewhere. A lot of search marketing consultants won’t fill this brief, although some are brought in to help train and mentor their internal search teams.
A lot of the demand for external consultants comes from smaller businesses who don’t have the expertise in house and their low level usage of search marketing wouldn't make it financially viable.
One of the great upsides of the consultancy model is you get to see how other people run their businesses.
The affiliate positions a site in the top ten results, gathers leads and traffic, and then sells them to someone else. The display advertiser publishes content in order to provide space for advertising, and typically makes money on the click-thrus.
Keep in mind that the competition can be fierce as any lucrative niche will likely already have many competitors. Also keep in mind that Google is likely gunning for you, as there have been clampdowns on thin-affiliates in recent years i.e. affiliates who don’t provide a great deal of unique and useful content.
The downside is that unless you’re diversified, your income could dry up overnight if Google decides to flick their tail in your direction. And to be truly diversified, you need diversification across markets AND strategies. Without that, there is a good chance you’ll then have to start from scratch at some point. Algorithm shifts tend to be great for consultants with deeper levels of client engagement, as the change can create new demand for their consultancy services. For consultants who sell low margin consulting across a large number of clients, the algorithmic updates can actually be worse than they are for affiliates, because you may suddenly have a lot of angry customers all at once & unlike an affiliate who prioritizes a couple key projects while ignoring many others, it is not practical to ignore most clients when things go astray. To each & every client their project is the most important thing you are working on, & rightfully so.
Some search marketers mix up their affiliate with consulting to even out the risk, provide greater variety, and deal with the inevitable slack that comes with many consulting-based business models.
There is a huge community of search professionals. They need software tools, data, advice and other services. Obviously, SEOBook follows a hybrid of this model. We provide premium tools, while also engaging in consulting through our community forums. Those who don't value their time are not a good fit. But those who do value their time can get a lot out of the community in short order, without the noise that dominates so many other forums. The barrier to entry is a feature which guarantees that the members are either a) already successful, or b) deeply understand the value of SEO, which in turn increases the level of discourse.
Think about areas that are a pain for you in your current search marketing work. These areas are likely a pain for other people, too. If you can make these pain points easier, then that is worth money. The search community tends to be generous about getting the word out when truly useful tools and services spring up. The hard part is when more service providers enter a niche it becomes harder to maintain a sustained advantage in your feature set. As that happens, you need to focus on points of differentiation in your marketing strategy.
A lot of SEOs/SEMs do a mix of work.
PPC and SEO fit quite nicely together. It’s all search traffic. The skills are pretty similar in terms of choosing keywords and tracking performance. They differ in terms of technical execution.
Affiliate and display advertising can balance out client work, providing income from a variety of different sources, which lowers risk.
The main benefit of an integrated model is you get to see a lot of different areas. Many people in the search industry talk the talk, but if their primary purpose is to sell, they're less likely to have the chops. If you’ve got your own sites, and you win/lose based on how well they do, then you’ll likely have an understanding of algorithms that a lot of sales-oriented talking heads will never have. The downside is that you might spread yourself too thin over a number of projects, and thus become a master of none.
Clearly Defined Niche
The trick with any of these approaches is to find a niche, preferably one that is growing quickly. Okay, the SEO consultant market is swamped due to low barriers to entry, but perhaps the SEO provider market in your home town isn't.
Perhaps there are web design companies who can’t afford a full time SEO, but would like to offer the service to their clients. Get three or four of these agencies as “clients” and you’ll likely create one full time job for yourself. This is a particularly good model if you don’t like sales, or don’t have time to do a lot of sales work. The design agency will do the selling for you, and they already have a customer base to whom they can sell.
Design agencies often like such arrangements because they get to add an additional service without having the overhead of another staff member. They also get to click the ticket on your services. Your billing is also more streamlined, as you’re likely be billing the agency itself.
Be very specific when choosing a niche. Who would you really like to work for? What, specifically, would you really like to do? “Search marketing” is perhaps a too wide of a niche these days, but how about exclusive search marketing for tourism businesses?
It doesn't pay to try and be all things to all people, especially when you’re a small operation. In fact, the advantage of being small is that you can target very specific areas that aren't viable for bigger marketing companies who run high overheads. Consider your own interests and hobbies and see if there’s a fit. Do companies in your area of interest do their search marketing well? If not, you've got a huge advantage pitching to them as you already speak their language.
Keep the customer firmly in mind. What problem do they have that they desperately need solving? Perhaps the restaurant doesn't really need their website ranking well, but they do need more people phoning up and making a reservation. So how about running a restaurant reservation site in your town, using SEO and PPC to drive leads, providing customers copies of each restaurant's menu? Charge the restaurant for placement and/or on leads delivered basis.
Trip Advisor started with a similar idea.
Doing The Deals
One of the biggest transitions from a regular job to running your own business, if you’re not used to working in sales, is that you will need to negotiate deals. Those working 9-5, especially in technical roles, don’t tend to negotiate directly, at least not with prospective clients and suppliers.
Negotiation is a game. The buyer is trying to get the best price out of you, and you’re trying to land more business.
Possibly the single most important thing to understand about negotiating is that negotiations should be win-win ie. both sides need to get something out of it and not feel cheated. This is especially important in search marketing consulting as you’ll be working with your clients over a period of time and you need them on your side in order to make the changes necessary.
It’s easy to assume the buyer has all the power, but this isn’t true. If they’re talking to you, they have already indicated they want what you have. You are offering something that grows their business.
However, you need to understand your relative positions in order to negotiate well. If you’re offering a generic search marketing service and there are ten other similar providers bidding for the job, then your position is likely very weak unless you’re the preferred supplier. Personally, I’d avoid any bidding situation where I’m not the preferred supplier.
This is where niche identification is important. If you have clearly identified a niche in which there isn’t a great deal of competition, you have a clearly articulated unique selling point and you know what buyers want, then your position in negotiation is stronger. This is why it’s important to have addressed these aspects in your business plan. Failure to do so means you’re very vulnerable on price, because if you’re up against very similar competitors, then your last resort is to undercut them.
Price cutting is not the way to run a sustainable business, unless you’re operating a WalMart style model at scale.
You need to set a clear bottom line and walk away if you don’t get it. This can be very difficult to do, especially if you’re just starting out. The exception is if you’re simply trying to get a few names and references on your books, and don’t care so much about the price at this point. In this case, you should always price high but say you’re offering a special discount at this point in time. Failure to do so means they’ll just perceive you as being cheap all the time.
Start any negotiation by letting the customer state what they want. then you state what you want. If you both agree, great! Win-win. Chances are, however, you’ll agree on some points, and disagree on others. Fine. Those points you agree on are put off to one side, and you’re focus on trying to find win-win positions on the points you disagree with. Keep going until you find a package that both meets you needs.
Starting your own business is a thrill. It’s liberating. However, in order for it to work, you must approach it with the same rigor and planning you do with your search marketing campaigns. Keep in mind you’re swapping one boss for many bosses.
Perhaps the best piece of advice is to dive in. A lot about running your own business isn’t knowable until you do it. so if one of your new years resolutions was to quit the day job and strike out on your own, then go for it!
Best of luck, and I hope this article has given you a few useful ideas:)
How do you best determine the price to charge customers?
Do you look at the competition and price the same as they do? Undercut them a little? What happens if you do undercut them, then the customer still demands further discounts?
Pricing can be difficult to get right. We don’t know exactly how much the other party is prepared to pay, but we need customers in order to sustain and grow our businesses. So how do we ensure money is not left on the table, yet we still make the sale?
This guide looks at a few fundamental pricing techniques, ideas and strategies. We'll look at how to avoid getting caught in the “race to the bottom” scenario of endless price cutting.
Many people believe that when the buyer and seller agree on a price, then the market has arrived at the optimal price.
This is not strictly true.
What it means is the buyer and seller agreed on a price at a point in time. The seller might be desperate to land the next deal simply to make payroll for one more month. He almost feels sick when he accepted such a low offer, but he’ll worry about the fact he’s running into the red next month. Things will be better by then. Hopefully.
Meanwhile, the buyer now has an expectation she can always get discounts if she pushes hard enough. She makes a note to go even harder on price next month. After all, she got the distinct impression the seller had even more room to move.
Getting pricing right is about more than two parties agreeing on a price at a point in time. Pricing is also strategic. Pricing is about the long-term sustainability of a company.
But ultimately, pricing is about value.
What Do Your Customers Value?
Business is about providing and creating value.
You provide a valuable service or product the buyer can’t provide themselves. They then use your product or service, from which they derive, or add, value, and on-sell that value to their customers.
In order to set appropriate prices, you need to understand what your customers value.
How does one restaurant charge more than another in the same area? Why is that one restaurant always packed? It’s probably because they understand what people value. It might be the type of food they serve, or how they serve it, or they have a great view of the sea. Perhaps they do all three well. Their competitors do not.
They probably couldn’t charge what they do if they were two blocks back and overlooked a parking lot. The restaurant that is two blocks back with a view of the parking lot better figure out something else customers will value, or they are out of business.
The first step in determining pricing is to find out what your customers value, then adjust your service, where necessary, to provide that value. In this way, pricing can be seen as intrinsically linked to your positioning strategy. Perhaps customers value a free and easy returns policy (convenience) over price. Perhaps they want individual items packaged together (individual commodity tools packaged together in a stylish box becomes a toolbox gift idea). Perhaps they didn’t want to buy a handbag at all, they just wanted to rent one (bagborroworsteal.com).
The aim of value based pricing is to shift the focus from price to questions of value.
Move To Value Based Pricing
Value based pricing means pricing based on the value you deliver to a customer.
You figure out the value of your product to to the customer, then take a slice of that value to arrive at your price. Your production cost might be $10 per unit, but if each unit provides $1000 worth of value to your customer, then $500 might be a fair price to charge.
In order to price based on value, you need to understand exactly what your customer values and your point of differentiation to your competitors. Your value proposition combined with your price point must be differentiated. After all, it would be difficult to price at $500 if your competitors were pricing at $300, and both provide the same value to the customer.
The Problem With Cost-Plus Pricing
Cost-plus pricing is when you figure out your total costs, then add a percentage, which is your profit.
It may cost you $X to produce and sell a service and make a profit, but if buyers don’t value what you offer, then your price will always be too high. Also, if you use cost-plus pricing and your customer derives considerable value from what you offer, then the customer may love you, but you’re leaving a lot of money on the table. You could be making more profit and using that to invest in your business.
But what if you’re selling the same stuff as everyone else?
The internet can be a hostile place for commodity sellers as price comparisons are only a click away. This type of environment works well for big players who can compete on price when selling commodity items, yet still make money off thin margins and fat volume.
Low-volume competitors would be wise to consider a shift of focus to value-added services, such as higher service levels, if they can’t compete on price.
Best Interests Of The Customer
It might be in the best interests of your customer to pay higher prices if this means the value they seek can be reliably delivered on an on-going basis. If an industry is run into the ground due to price cutting, then where will the customers get the services they really do value in future?
Part of the process of getting pricing right is customer education i.e. ensure they can see the value. Demonstrate what is involved in arriving at your price points. For example, who pays $70 for an ipad cover when you can get them for $10?
DODOcase demonstrate what goes into producing their cases. They’re selling the experience and craft values as much as they are selling the product itself, so this is also a way to differentiate the product. Their customers value the idea of supporting artisan crafts, which is part of the value they’re paying for, but this wouldn’t be obvious if their customers were comparing one case against another on price alone. DodoCase have shifted the debate away from price and made it about value. Well, values.
So, customers like to see what goes into the product. It helps them determine value. Transparency is a big part of pricing, particularly high-end pricing. To be credible and survive scrutiny, high end pricing has to to be accountable and make sense.
Knowing what price to set is knowing what the customer values, or can be made to see value where previously they saw none. Always ask questions and refine your offer based on the answers. Do you need to change how you present your existing offers in order to demonstrate value? Do you need to change your offerings to meet the market?
Skim pricing is when you set a higher price than your competitors.
In order to set pricing in this way, your customers need to perceive that your offer provides them with greater benefits than they will find elsewhere. Apple use skim pricing.
Customers perceive that Apple products are superior to the competitors, so it is therefore worth paying a premium. Whether this is objectively true or not is irrelevant - so long as the customers perceive that value, then it exists. This justifies the higher price. It could be argued the customer also gains social value by paying a high price, as they have something exclusive.
In order to skim price, you need to offer something the customer can’t easily get elsewhere. The customer must place a high value upon your service.
Consultants with proven reputations can use skim pricing, although maintaining a reputation over and above everyone else in crowded, maturing markets can be difficult. Where there are high margins, competitors will soon enter the space offering similar value.
The benefit of skim pricing is that you get to pick off the price-insensitive top-of-the-market clients. Who wouldn’t want this situation?
The downside is that other competitors can move into the price gap, slightly beneath the skim level, then bump up the value they offer in order to challenge the skim price competitor. They may create greater efficiencies, which means their profit margins are the same, if not higher. The value proposition to the customer remains strong, yet they undercut the leader on price.
It is only so long before the leader is forced to drop prices, refine their value proposition, or collapse. Skim market pricing can lead to a rapid erosion of market share if the leader does not stay well ahead of the market in terms of providing value. This happened to Apple in the 1980’s, and we might be seeing this again on tablet devices.
Analysts expressed concerns that Apple risked losing ground to Nokia smartphones in China, while failing to keep pace with Google in the tablets market.....Traders were also spooked by a report from research firm IDC forecasting that Apple’s share of the tablet market will slip to 53.8pc this year from 56.3pc in 2011, while Google’s share will increase to 42.7pc from 39.8pc.
It added that Apple’s tablet share will slip below 50pc by 2016, as total global tablet sales more than double to nearly 283m units in four years as consumers increasingly opt for them rather than personal computers
Apple could skim price when they were early to market with a product no one else had i.e. iphones and iPads. However, as competitors catch up, and make similar products at lower prices, then Apple’s current pricing strategy may hit problems. Apple get around this, to some extent, by using versioning.
Neutral pricing is when you set your pricing at a comparable level to your competitors.
You’d use this pricing method if you want customers to consider other aspects, besides price, when they contemplate a purchase i.e. they can get SEO software tools from company X, but compay Y offers the same tools but with extra support. Neither company wants to engage in a price war, so they will keep layering on more value in order to make their offer more compelling.
If these companies started cutting prices in order to compete, then they’ve got a “race to the bottom” problem. If customers don’t want to pay for the services they provide, that’s fine, but the customer is unlikely to get them somewhere else, so long as these services cost a certain amount to provide. In so doing, this market sector retains value for all players, so long as they deliver genuine value to customers.
This is an especially good pricing model to use if you want your customers to focus on the features of the offer. If you offer more features for the same price, you will likely win.
Penetration pricing is when you set a relatively low initial entry price, hoping people will switch from a higher priced vendor.
Companies looking to gain market share tend to use penetration pricing. Penetration pricing has been a popular pricing model for internet companies, reasoning if they build the audience, they’ll figure out how to make money later. So long as customers place some value on the service, then the company should build their customer base quickly.
There are obvious problems with acquiring customers on a low-price basis. The customers you land are price-sensitive and will likely become non-customers the minute someone else lowers their price, or you increase your price.
You’re still vulnerable to competitors who offer something better, who are more efficient, or have more venture capital to blow through. Even if you set a low price, they can still undercut you.
There’s More To Price Than Price
Some buyers accept that buying on price alone may be a poor strategy.
In the example I gave earlier, the buyer is screwing down the vulnerable vendor to the point where he may go out of business. Let’s say she derives significant value from his company that she can’t readily get somewhere else. Perhaps he’s been a supplier to the firm at which she works for a few years and he really knows their systems. Any new supplier will have to spend time coming up to speed, and this could affect the productivity of our buyer.
The buyer likely has a switching cost.
As a seller, he should have made more effort to understand his value to the buyer, and be able to articulate it in such a way that she saw it, too. A buyer who understands long-term value is less likely to focus exclusively on price. It is to their advantage to nurture the relationship for mutual benefit.
Many buyers crave highly functional partnerships with vendors. If a search marketing vendor invests significant effort to add value to the company to which they supply services, then it is less likely they’ll be replaced on price alone. The longer the vendor works with the company, and the more success they bring to that company, the less likely they are to be replaced.
Sometimes, these customers will still try to play you. They will try to get a lower price. They know they need what you’ve got, they’re happy with the relationship, but they still want to see if they can get you to move on price. They may say they are reviewing arrangements. They may put you up against other suppliers in the form of a, RFP. Some of those suppliers will bid low amounts, which the buyer will then put pressure on you to match.
The way to counter this is to know your value relative to the competition. You can always match with a lower price, just so long as the customer accepts that you will be reducing your features to match those on offer from your competitors. The buyer will either go for it it, meaning price really was an issue, or accept your higher price, meaning value was the main issue. More on this shortly.
You must also understand your bottom line and stick to it. Some customers simply aren’t worth having. If you land them, and make little money or even a loss, with hopes you’ll raise prices later - what happens? The minute you raise prices they go back out to tender again. They’ll just find another low-priced bid.
This is what happens to vendors who can’t differentiate on value.
Make Your Offering More Flexible
If we don’t offer what the market values, then pricing strategies won’t help much.
Businesses must innovate in order to capture new markets and meet demand. Create new products and services. Relying on price increases alone to drive growth is unlikely to work unless people can’t get what you offer anywhere else, and what you’re offering remains in high demand.
One solution is to provide multiple products or service levels. If some buyers are genuinely price oriented, that’s fine, but they get the lower service level. Contrary to popular opinion, most buyers are actually value oriented, and will choose higher value services, so long as they perceive genuine value, or can be shown that by using you then profitability will be increased.
The "Choice Of Three" Strategy
One price methodology involves creating three levels. One low priced offer, one mid priced offer, and one high priced offer. Many buyers, when faced with the “choice of three” will pick the middle offer.
Appliance stores often price this way. They’ll stock two or three very high end, expensive refrigerators. They’ll also stock some basic, cheap refrigerators. Most customers will use those two points as price guides, and buy somewhere in the middle. If the store didn’t carry the high end refrigerators for the purposes of comparison, then the mid-range refrigerators become the highest price offering, and people’s price expectations will adjust - downwards - accordingly. The middle is seen as the “sensible” choice.
So, try pricing your top level offering at skim pricing levels. Include all the bells-and-whistles. Most people won’t pay this price, but between this and the lowest price offer, it helps set buyer expectations. The middle bundle is actually your full price offering, possibly neutrally priced vs competitors, but buyers may see it as the sensible middle ground compromise. Funnily enough, you’ll be surprised at how many people still go for the bells-and-whistle option!
Getting Differentiation Right
Differentiation between bundles (product or service levels) also helps you identify price buyers and value buyers. For this to work, you need to create clear and logical demarcation between offerings, otherwise customers may try to pay the low price, but get you to include high price features.
In service businesses, one way of preventing a customer from trying to get the expensive bundle for the low-cost price is to be transparent about your pricing. Yes, they can have the extras, but they involve X more hours. How many of those hours do they wish to purchase? This is transparent. It makes logical sense. There is no arguing with this position, as everyone understands that time is money.
However you do it, ensure that the transition between price points makes sense. The transition can’t appear arbitrary. The more expensive bundle is more expensive because it has more input costs, demonstrably delivers more value, or both.
Companies who get this wrong typically create arbitrary price settings between bundles. There isn’t a lot of distinction in terms of value between the jumps, or the core offering is not included at the low level.
Companies typically put their core offerings in every package, and add “nice-to-have” features at higher price levels. All customers will want the core offering. Price sensitive customers will settle for the core offering and nothing else. Value customers will likely add the nice-to-haves so long as these extras provide the value they seek.
Once a customer is on board at the low-value level, then they may wish to add extras later, once value has been demonstrated. Many software-as-a-service companies use this pricing strategy. The core product, if it is commodity, is often free. This hooks you into using it, but doesn’t cost the company much to deliver. It’s a loss leader sales-tool.
If you want to use it more - say, add more people or use advanced features - then you move up the scale to higher price points. It’s very difficult for competitors to compete with this strategy, because the core offering is free and the switching cost, whilst possibly not high, still exists. In order to compete, competitors must offer better services or more features, and probably lower prices. This is also the reason the first-mover needs to constantly innovate i.e. add and enhance services in order to stay ahead of the game.
One way to make the middle tier offering even more compelling is to load it with features vs the entry-price option.
The low price offering provides the core product and nothing else. The mid-priced offering, however, is packed full of features. The buyer may not even use many of the features, but they reason that there appears to be a lot more value at that level than the entry level, so opt for the higher price. This is most effective when the low-price option and mid-price option are reasonably close. You often see this approach used with “but wait, there’s more!” offers. They keep loading on the features, so the buyer perceives more and more value.
Pricing Strategies For Software & Information Products
The very first copy of a Windows release costs billions. The customer pays around $40 for that first copy.
Most of the costs in software development and information products are upfront, but the advantage of these types of businesses is that the cost of producing each additional copy is marginal. Microsoft can produce many millions of copies for a few cents each. How does a software business, or information product, go about pricing a product?
Typically, these companies set a low price in order to build momentum, thus adopting a penetration approach. Once the user is hooked in, they then add additional higher value services on top. A good example of this type of strategy is used by the likes of WordPress and Silverstripe. The core product is free, but if customers want enterprise hosting, support of custom development, then they pay a fee.
It can be pretty difficult to stick to your guns, especially if you really need the business.
However, pricing is really a question of value. So long as you’re certain you provide the customer with value they can’t get elsewhere, then you’re in a strong negotiating position.
Know what the customer values. If the customer values the same things from another competitor, and you can provide no added value, then you are vulnerable on price. However, if you can identify something you have the buyer values over the others, then that is your trump card.
You demonstrate your value to the customer. If the customer still refuses to see it, and still screws you down on price, then you can play your trump card. Sure, they can have the lower price, but they can’t have the high value aspects of your service. They can have the basic core service. You could still make the sale, but you should remove valuable features.
For example, service level agreements tend to be structured at various levels and price points. If the customer wants immediate attention 24/7, then they pay top dollar. If they don’t care about receiving immediate attention, that’s fine - they pay the lower price. Give the customer options, demarcated by obvious value, and they can decide for themselves. If you know they really need high value service X, and can’t get it from somewhere else, then you’ll force them to buy on value and drop their low price demand.
As customers, we value sellers differently, unless we’re buying pure commodity. Yet your customers might try to convey the idea that sellers are all the same to them, it’s only about price.
It seldom is. Find out what they value most.
If your primary purpose is to gain exposure in a market, it will be useful to acquire customers who can help spread your message. I know of one SEO service provider who started out by providing five large companies free search marketing services for a year simply so the SEO service provider could be associated with those companies, thereby gaining credibility in the market as a “leading supplier”. They then skim priced for 2-nd tier companies, which were their real targets. The twist here is that the seller places a value on the buyer.
Pricing changes can depend on where in the product life-cycle you are, and what your competitors are doing. If you are the market leader, and using skim pricing, but you competitors overtake you, and offer more value, then it might be time to rethink your pricing. A shift to neutral pricing might be in order, as well as a revision of the offer to match competitors.
If new entrants move into the market and offer low prices, then adopting a penetration strategy might be useful in order to get rid of them i.e. make part of your offering low cost or free. This is a strategy that has been used by airlines facing threats from low-cost competitors. They start up their own subsidiaries and use these to starve the competitors out of the market as a rear-guard pricing strategy.
Know Your Relative Value
Ensure you’re differentiated. List all the products, services and activities you offer. Make a note of what your value is to the customer next to each product or service.
Next, identify your competitors. Identify those who are similar, those who are better and those who are worse. Evaluate their offerings. What are their value propositions? If you can, find out their price points. Where would a customer see value in their offering?
List your offerings in terms of value i.e. High value, medium, and low value. Then grade the level of differentiation when compared with your competitors. i.e. high differentiated, similar, or weaker. Anything high value and differentiated can likely be skim priced, anything similar can be neutrally priced, and anything low consider penetration pricing, or dropping.
Review your margins. Is it even worth offering low priced services? Should you be focusing on delivering more features at a higher pricing level? Should you be moving to a highly differentiated offering? Only you know the answer to these questions, but it's a quick strategic pricing assessment well worth doing.
But what, after all is said and done, the customer still wants a lower price?
But what if the customer still wants to pay the lowest price, even after you’ve made certain they value what you provide?
Some customers simply aren’t profitable. What is worse, they take up your time, meaning you’ve got less time to dedicate to your profitable customers.
So cut them loose.
There is a rule called the 20-255 rule. It’s a revision of the 80-20 rule, and it goes like this:
In an article published in the Harvard Business Review, Cooper and Kaplan reported the astonishing case of a heating wire company which analyzed its customer profitability and discovered that the famous 20 - 80 rule, which would suggest that 80% of profits came from 20% of customers, had to be revised: "A 20 - 225 rule was actually operating: 20% of customers were generating 225% of profits. The middle 70% of customers were hovering around the break-even point, and 10% of customers were losing 125% of profits
Make a list of your customers from most profitable to least. Contact the least profitable clients and try to renegotiate terms. Some will agree to this, others won’t.
Cut those who don’t. This instantly increases your profits and serves as a reminder not to sell to people in future who don’t adequately value what you do.
I hope this article has provided some food for thought on pricing strategy. Pricing is a huge topic, so can't be covered in one article, so if you've got some pricing strategies and philosophies you've found useful, please add them to the comments!