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!
How much value do you place on your good reputation?
If we looked at it purely from a financial point of view, our reputations help us get work, make money, and be more influential. On a personal level, a good name is something of which you can be proud. It is something tangible that makes you feel good.
As it becomes increasingly easy for people to make their feelings known and published far and wide, many businesses are implementing reputation management strategies to help protect their good name.
This area used to be the domain of big business, who employed teams of PR and legal specialists to nurture, defend and promote established brands. Unlike small business, which didn’t have to worry about what someone on the other side of the country might have said about them as it didn’t affect business in their locality, larger entities were exposed nationally, and often internationally. It was also difficult for an individual to spread their grievance, unless it was picked up by mainstream media.
These days, everything is instant and international. Those with a grievance can be heard far and wide, without the need to get media involved. We hear about problems with brands across the other side of the country, or the world, just as easily as we hear about them in our own regions, or market niches. If someone is getting hammered in the search industry, you and I probably both hear about it, at roughly the same time. And so will everyone else.
Media stories don’t even have to be true, of course. False information travels just as fast, if not faster, than truth. Given the potential, it’s a wonder reputation problems don’t occur more often that they do.
This is why reputation management is becoming increasingly important for smaller firms and individuals. No matter how good you are at what you do, it’s impossible to please everyone all the time, so it’s quite possible someone could damage your good name at some point.
Much of the reputation management area is obvious and common sense, but certainly worth taking time to consider, especially if you haven’t looked at reputation issues up until now. When people search on your name, do they find an accurate representation of who you are and what you’re about? Is the information outdated? Are you seen in the same places as you competition? How does their reputation compare to yours?
Also, some marketers offer reputation monitoring and management as an add-one service to clients so it can be a potential new revenue stream for those offering consultancy services.
The Indelible Nature Of The Internet
In some respects, I’m glad the internet - as we know it - wasn’t around when I was at school. There were far too many regrettable nights that, these days, would be recorded from various angles on smartphones and uploaded to YouTube before anyone can say “that isn’t mine, officer!”
You’ve got to feel sorry for some of the kids today. Kids being kids, they sometimes do stupid things, but these days a record of stupidity is likely to hang around “forever”. Perhaps their grand-kids will get a laugh one day. Perhaps the recruiter won’t.
Something similar could happen to you, or your firm. One careless employee saying the wrong thing and the record could show up in search engines for a long time. If you’re building a brand, whether personal or related to a business, you need to look after it, nurture it, and defend it, if need be. We’ll look at a few practical ways to do so.
On the flip side, of course, the internet can help establish and spread your good reputation very quickly. We’ll also look at ways to push your good reputation.
Modern Media Is A Conversation
These days, no matter how big a firm is, they can’t hide behind PR and receptionists. If they don’t want to join the conversation, so be it - it will go on all around them, regardless. If they aren’t part of it, then they risk the conversation being dictated by others.
So a big part of online reputation management is about getting involved in the conversation, and framing it, where possible i.e. have the conversation on your terms.
Most us haven’t got time to constantly monitor everything that might be said about us or our brands. One of the most cost-effective ways to manage reputation is to get out in front of problems before they arise. If there is enough good things said about you, then the occasional critical voice won’t carry as much weight by comparison.
The first step is to audit your current position. Search on your name and/or brand. What do you see in the top ten? Do the results reflect what you’re about? Is there anything negative showing up? If so, can you respond to it by way of a comment section? This is the exact same information your customers will see, of course, when they look you up.
If you’re not seeing accurate content, you may need to update or publish more appropriate content on your own sites, and those sites that come up in the top ten, where possible. More aggressive SEO approaches involve flooding the SERPs with positive content in an attempt to push down any negative stories below the fold so they are less likely to be seen. This is probably not quite as effective as addressing the underlying issues that caused the negative press in the first place, unless the criticisms were malicious, in which case, game on.
Next, conduct the same set of searches on your competitors. How does their reputation compare? Are they being seen in places you aren't? Are they getting positive press mentions that you could get, too? How does your reputation stack up, relatively speaking?
You can monitor mentions using services such as Google Alerts, Hootsuite, Tweetdeck, and various other tools. There’s another big list of tools here. Google runs "Me On The Web" as part of the Google Dashboard.
Monitor trends related to your industry. Get involved in fast breaking, popular trends and discussions. Be seen where potential customers would expect to see you. The more other people see you engaged on important issues, in a positive light, the more credibility you’re banking for the future. If you build up a high volume of “good stuff”, any occasional critical voice will likely get lost in the noise, rather than stand out. A lot of reputation management has to do with building positive PR ahead of any negatives that may arise later. You should be everywhere your customers expect to see you.
This is a common tactic used by authors selling on Amazon. They “encourage” good reviews, typically by handing out free review copies to friends, in order to stack the positive review side in their favor. The occasional negative review may hurt them, but not quite as much as if the number of negative reviews match the number of positive reviews. Some of them overdo it, of course, as twenty 5 star reviews, and nothing else, looks somewhat suspicious. When it comes to PR, it's best to be believable!
Create a policy for engagement, for yourself, and other people who work for you. Keep it simple, and principle based, as principles are easier to remember and apply. For example, a good principle is to post in haste only if what you are saying is positive. If something is negative, pause. Leave it for a few hours. If it still feels right, then post. It’s so easy to post in haste, and then regret it for years afterwards.
Seek feedback often. Ask people how you’re doing, especially if you suspect you've annoyed someone or let them down in some way. If you give people permission to vent where you control the environment it means they are less likely to let off steam somewhere else. It may also highlight potential trouble-spots in your process, that you can fix and thus avoid repeats in future. I’ve run sites where the sales process has occasionally broken down, and had customers complain. It happens. I make a point of letting them vent, giving them more than they originally ordered, and apologizing to them for the problems. Not only does going over-and-above expectations prevent negative press, it has often turned disgruntled customers into advocates. They’ve increased their business, and referred others. Pretty simple, right, but good customer service is all part of the reputation management process.
Figure out who the influential people are in your industry and try and get onside with them. In a crisis, they may well help you out, especially if they see you’re being hard done by. If influential names weigh in on your behalf, this can easily marginalize the person who is being critical.
In the space of one hour, my entire digital life was destroyed. First my Google account was taken over, then deleted. Next my Twitter account was compromised, and used as a platform to broadcast racist and homophobic messages. And worst of all, my AppleID account was broken into, and my hackers used it to remotely erase all of the data on my iPhone, iPad, and MacBook.
Explaining what happened and getting it published on Wired is a pretty good crisis management response, of course. When you look up “Mat Horan”, you find that article. Separate your social media business and personal profiles. Secure your mobile phone. Check that your privacy settings are correct across social media. Simple stuff that goes a long way to protecting your existing reputation.
What To Do If You Do Hit Trouble
We can’t please everyone, all the time.
A critical factor is speed. If you spot trouble, get into the conversation early. This can prevent the problem festering and gathering it’s own momentum. However, before you leap in, make sure you understand the issue. Ask “what do these people want to happen that is not currently happening?”.
Also consider who is saying it. What’s their reach? If it’s just a ranter on noname.blogspot.com, or a troll attempt, it’s probably not worth your time, and engaging trolls is counter-productive. Someone influential, of course, requires kid glove treatment. One common tactic, especially if the situation is escalating beyond your control, is to try and take it offline and reach resolution that way. You can then go back to the online conversation once it has been resolved, rather than having the entire firefight a matter of indelible public record.
It’s illegal for people to defame you, so you could also consider legal action if the problem is bad enough. You could also consider engaging some PR help, particularly if the problem occurs in mainstream media. PR can be a bit hit and miss, but reputable PR professionals tend to have extensive networks of contacts, so may get you seen where it might be difficult for you to do so on your own. There are also dedicated reputation management companies, such as reputation.com, reputationchanger.com, and reputationmanagementagency.com who handle monitoring and public relations functions. NB: Included for illustration purposes. We have no relationship with these firms.
Practical examples of constructive responses to negative criticism can often be seen in the Amazon reviews.
For example, a writer can respond to any reviews made about their book. A good approach to negative statements is to thank the reviewer for taking the time to provide feedback, regardless of what they said, and address the issue raised in a calm, informative manner. Future customers will see this, of course, which provides yet another opportunity to sway their opinion. One great example I’ve seen was when the writer did all of the above AND offered the person providing the negative review an hour of free consulting so the reviewer could get the specific information he felt he was missing! One downside of this strategy, however, might be more copycat negative reviews aimed at getting the reviewer free consulting!
The same principle applies to any negative comment in other contexts. When a reader sees your reply, they get editorial balance that would otherwise be missing.
It’s obvious, yet important, stuff. If you’ve got examples of how you’ve handled reputation issues in the past, or your ideas on how best to manage reputation going forward, please add them to the comments to help others.
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Place gun to my head. Pull trigger.
How many times have you come across corporate-speak and thought “who are these people trying to kid”? Yet, when many business people sit down to write, that is the sort of thing they invariably come up with.
Because they are business people. They are talking about business. That is how business sounds.
Well, it’s how they think business should sound, because that’s the way it has always sounded - a monotone drone of description, chest puffed out. These people are stuck in the business-speak echo chamber.
No one sounds like business-speak in real life. If you ask someone how their job is going, a lot of them will invariably say “it sucks”, "too busy", "it's okay". These same people might work for the firm that has says they were nominated “best place to work”. The image and the reality don't match. At best, people will ignore business-speak. No one really believes it.
There are better ways to communicate.
A lot of business-speak fails to communicate because it isn't rooted in truth.
I once worked at a Telecommunications Company. The marketing team was having a meeting about a new brochure and came up with the slogan - I am not making this up - "(Company Name) - first in service!". Once I stopped wondering how any of these people ever managed to land a job in Marketing, I asked how we knew we were "first in service"? It seemed a reasonable question, but I may as well have asked the Pope if he really believed in God.
Apparently, it was self-evident we were first in service! There was no basis of truth in it, of course. Just an empty slogan, meaning nothing. No measurement. It was a phrase that "sounded positive!"
I doubt any customers believed it, especially those waiting in call queues.
Do you notice how some small companies try to appear large? They list multiple offices, when in, reality they consist of two guys who have a call forwarding service. I’m not quite sure why a company would pretend to be any bigger than it actually is, because as soon as they get a customer, they are going to get found out. The feeling they’ll likely leave with that customer is that they are fundamentally dishonest.
Which is a strange approach to take.
Many customers consider small to be an advantage. Small can mean you are more connected with your customers as there is no barrier between you and the customer. They can talk directly to you. They can email you. They can see you Twittering. Many customers love that. Big companies have “policies”. They have call centers. They have barriers to entry. It’s no wonder they talk in business-speak. It’s just another means to keep people at a distance.
Small companies sometimes try to appear big because they think they need to be big in order to attract big companies as clients. This is sometimes true, but mostly false. It is true that big companies often like to deal with other big companies, mostly so they can successfully sue them if they stuff up. It is false because smart big companies will know a great idea when they hear one, and size simply won’t be a consideration so long as the small company has got something the big company wants.
For example, I mentioned I’d been reading “The Pumpkin Plan” recently. There is a story about a tiny two person company. They came up with a new way of marketing pharmaceuticals.
One major problem many pharmaceutical companies face is that they need to change their marketing approach in different regions, even though they are marketing the exact same product.
In some areas, they have to market based on price (Los Angeles). In other markets they need to influence the cardiologists (Boston). In other areas they must talk directly to African-American patients (Atlanta). Exact same product, different marketing strategy for each city. Get the strategy wrong, and they waste a lot of money and lose market share.
Two guys came up with a way to crunch the numbers that tell pharmaceutical companies exactly what the biggest driver of performance is in each territory.
Through a network of colleagues, they managed to land a meeting with a pharmaceutical company. Not just any meeting - they go straight to the top floor, and talk to the Chairman Johnson & Johnson Pharmaceuticals. They barely get five slides into their presentation when the Chairman stops them to call in his VP of marketing. They both love the idea! This solves a big problem for Johnson and Johnson. The result is that this two person company lands 500K worth of business on the spot, $4m worth of business in the first two years, and $14.2m by year four. They expand, of course.
So, they were two guys pitching to one the biggest pharmaceutical businesses in the world. They landed millions of dollars worth of business because Johnson and Johnson like their idea. They didn’t need to convince Johnson and Johnson they were anything more than two guys with a good idea. It didn't require any business-speak about mission statements, just a focus on finding and solving a real problem.
Tell A True Story About You (And Them)
If you’re ever tempted to write business-speak, try telling a story instead. Turn your pitches into stories. Turn your proposal into stories. Turn your presentations into stories. Make them true stories. Tell them in your authentic voice. People love to be told a story as stories are both familiar and revealing. A string of facts is never going to have the same impact. Business-speak will invariably leave an audience focused on their smartphones.
A story can be about how you solved a problem in the past. A problem just like the one your prospective clients are having. What was the problem? Why was it painful? What did you do to solve it? What was the result?
Easy and memorable. You can structure almost anything as a story. Stories move from the status quo, straight into a crisis (business problem), then the crisis is resolved, and a new status quo is reached. Start with a problem. Explain why it is painful. Bring in the hero - you - and tell them what you did to solve the problem. Then tell them the result - the new status quo.
Are you more likely to recall the text of my opening paragraph, or the story about the two guys pitching to Johnson and Johnson?
Stories can be so much more effective than business-speak.
The Google example demonstrates that no one can be good at everything, even if they do hire a lot of smart people and have billions in the bank. People, like companies, are good at doing some things, and are okay, or poor, at everything else. Not because they can’t do other things, but because they don't have the time, inclination or disposition.
This truth has led to specialization. Individuals specialize. Companies specialize. Countries specialize. In economics, this is the principle of comparative advantage and it is the basis of trade. We do the things we’re good at, and buy in the things we’re not so good at, or don’t want to do.
We Can’t Be Good At Everything
Like Google, we can’t be good at everything.
Many small businesses make the mistake of trying to do everything, mainly due to lack of resources. However, the opportunity cost of trying to do everything can mean they end up being not very good at doing any one thing. This approach can make them uncompetitive.
Just because we can do something doesn’t mean we should.
Like many web professionals, I can do some coding. Some web design. A bit of this. A bit of that. But I know there are people who are way better at those things that I am, so I let them do it. If I focus on what I’m good at, then I can make money doing that, and buy in the skills I need.
There are many benefits to specialization. For starters, it’s much easier to build a reputation or brand. Who is the go-to guy for Search Engine News? Many people would answer Danny Sullivan. Who is the go-to guy for search patents? That would be Bill.
Another advantage is that specialization leads to omptimized and more efficient processes, and therefore lower costs. The specialist can optimize and improve their approach to a niche activity in a way a generalist seldom can because their focus means they are more likely to see the details.
Most of us occupy very crowded marketplaces, which makes it difficult to stand out as a generalist. Brands, and reputations, can get confused and diluted if businesses spread themselves over multiple service areas. Virgin gets away with it - mainly because of the brand that is Richard Branson - but they are an exception, not the rule.
Not that this article is about the merits of specialization vs being a generalist. More a case of optimizing a business to focus on those areas that are most lucrative, and literally weeding out everything else.
Weeding Out Clients
A lot of companies, like a lot of people, live paycheck to paycheck. They don’t want to turn down any business, because the more clients, the better, right? The more opportunities, the better?
Not all clients are equal. Not all opportunities are a good fit. A client who costs a lot to service, who doesn’t pay their bills on time, who makes life difficult for you is probably not a client worth having. Sure, they might help keep us going to the next paycheck, but this is not an optimal way to run a sustainable business long term. Such clients present an opportunity cost i.e. we could be working with better clients, be making better money, and honing our service around mutual benefit.
For this reason, many companies make a habit of firing clients, or never take them on in the first place.
For example, last year, I received a letter from my accountant. She advised me they were reviewing their business and letting a lot of their clients go, although they were still happy to work with me, and asked that I have a chat with them if I had any concerns.
I did have a chat with them, mainly to confirm my suspicions.
They were deliberately getting rid of 50% of their clients. They had figured out who their top clients were i.e. the clients who took them the least time to service because their books were in order, and they eliminated the rest i.e. those clients whos books were a mess and were generally a pain to deal with. They downsized their business, reduced overhead and now tell me they are making more money than they previously were due to their optimized cost structure. They also appear to be playing a lot more golf!
They optimized their business, became more profitable, and have a lot more time because they made a point of figuring out the core of their business, and saying “no” to everything else.
Saying no can be very powerful. Prospective clients seem to respect this more, not less. There is something very appealing about a service that is exclusive and beyond reach. It signals a level of confidence that can be attractive.
Exclusive positioning is not just done for the sake of it. It’s a way to filter clients in order to find a good fit, which is especially important for small companies, as they have less resources available to carry bad risks. If we can figure out a client need that we know we can service well (specialization), with sufficient margins for us to be enthusiastic, and the client gets the value they were looking for, then everyone wins.
Let’s say running a PPC bid management service earns an internet marketing company the most money with the least effort. Let’s say they also do web design, but this is a lot more work (read: higher cost to service), and the margins are lower.
Would this company be better off saying “no” to new web design business? Quite possibly. They could dedicate more time to PPC, their PPC processes would get more refined through increased specialization, and they would likely be better placed to compete in the PPC space as their brand and attention becomes more focused. They could let go of the web designer, thus reducing overhead.
Granted, there are many factors to consider, but the question is this: are some areas of your business being serviced only because you can? Or does it make sense to focus on the areas where there is best fit? i.e. better margins, lower costs, most productive relationships - even if that means letting some clients, and even some staff, go?
The following is a guest column written by Rory Joyce from CoverHound.
Last week Google Advisor made its long-awaited debut in the car insurance vertical -- in the UK. Given Google’s 2011 acquisition of BeatThatQuote.com, a UK comparison site, for 37.7 million pounds ($61.5 million US), it comes as little surprise that the company chose to enter the UK ahead of other markets. While some might suspect Google’s foray into the UK market is merely a trial balloon, and that an entrance into the US market is inevitable, I certainly wouldn’t hold my breath.
Here are three reasons Google will not be offering an insurance comparison product anytime soon in the US market:
1) High Opportunity Cost
Finance and insurance is the number one revenue - generating advertising vertical for Google, totaling $4 billion in 2011. While some of that $4 billion is made up of products like health insurance, life insurance and credit cards, the largest segment within the vertical is undoubtedly car insurance. The top 3 advertisers in the vertical as a whole are US carriers -- State Farm, Progressive and Geico -- spending a combined sum of $110 million in 2011.
The keyword landscape for the car insurance vertical is relatively dense. A vast majority of searches occur across 10-20 generic terms (ie - “car insurance,” “auto insurance,” “cheap auto insurance,” “auto insurance quotes,” etc). This is an important point because it helps explain the relatively high market CPC of car insurance keywords versus other verticals. All of the major advertisers are in the auction for a large majority of searches, resulting in higher prices. The top spot for head term searches can reach CPCs well over $40. The overall average revenue/click for Google is probably somewhere around $30. Having run run similar experiments with carrier click listing ads using SEM traffic, I can confidently assume that the click velocity (clicks per clicker) is around 1.5. So the average revenue per searcher who clicks is probably somewhere around $45 for Google.
Now, let’s speculate on Google’s potential revenues from advertisers in a comparison environment. Carriers’ marketing allowable is approximately $250 per new policy. When structuring pay-for-performance pricing deep in the funnel (or on a sold-policy basis), carriers are unlikely to stray from those fundamentals. In a fluid marketplace higher in the funnel (i.e. Adwords PPC), they very often are managing to a marginal cost per policy that far exceeds even $500 (see $40 CPCs). While it may seem like irrational behavior, there are two reasons they are able to get away with this:
a) They are managing to an overall average cost per policy, meaning all direct response marketing channels benefit from “free,” or unattributable sales. With mega-brands like Geico, this can be a huge factor.
b) There are pressures to meet sales goals at all costs. Google presents the highest intent of any marketing channel available to insurance marketers. If marketers need to move the needle in a hurry, this is where they spend.
Regardless of how Google actually structures the pricing, the conversion point will be much more efficient for the consumer since they will be armed with rates and thus there will be less conversion velocity for Google. The net-net here is a much more efficient marketplace, and one where Google can expect average revenue to be about $250 per sold policy.
How does this match up against the $45 unit revenue they would significantly cannibalize? The most optimized and competitive carriers can convert as high as 10% of clicks into sales. Since Google would be presenting multiple policies we can expect that in a fully optimized state, they may see 50% higher conversion and thus 15% of clicks into sales. Here is a summary of the math:
With the Advisor product, in an optimized state, Google will make about $37.50 ($250 x .15) per clicker. Each cannibalized lead will thus cost Google $7.50 of unit revenue ($45 - $37.50). Given the dearth of compelling comparison options in insurance (that can afford AdWords), consumers would definitely be intrigued and so one can assume the penetration/cannibalization would be significant.
Of course there are other impacts to consider: How would this affect competition and average revenue for non-cannibalized clicks? Will responders to Advisor be incremental and therefore have zero opportunity cost?
2) Advisor Has Poor Traction in Other Verticals
Over the past couple of years, Google has rolled out its Advisor product in several verticals including: personal banking, mortgage, and flight search.
I personally don’t have a good grasp on the Mortgage vertical so I had a chat with a high-ranking executive at a leading mortgage site, an active AdWords advertiser. In talking to him it became clear that there were actually quite a bit of similarities between mortgage and insurance as it relates to Google including:
Both industries are highly regulated in the US, at the state level.
Both verticals are competitive and lucrative. CPCs in mortgage can exceed $40.
Like insurance, Google tested Advisor in the UK market first.
Hoping he could serve as my crystal ball for insurance, I asked, “So why did Advisor for Mortgage fail?” His response was, “The chief issue was that the opportunity cost was unsustainably high. Google needed to be as or more efficient than direct marketers who had been doing this for years. They underestimated this learning curve and ultimately couldn’t sustain the lost revenue as a result of click cannibalization.”
Google better be sure it has a good understanding of the US insurance market before entering, or else history will repeat itself, which brings me to my next point...
3) They Don’t Yet Have Expertise
Let’s quickly review some key differences between the UK and US insurance markets:
Approximately 80% of car insurance is purchased through comparison sites in the UK vs under 5% in the US.
There is one very business-friendly pricing regulatory body in the UK versus state-level, sometimes aggressive, regulation in the US.
The UK is an efficient market for consumers, the US is not. This means margins are tighter for UK advertisers, as evidenced by the fact that CPCs in the UK are about a third of what they are in the US.
As you can see, these markets are completely different animals. Despite the seemingly low barriers for entry in the UK, Google still felt compelled to acquire BeatThatQuote to better understand the market. Yet, it still took them a year and a half post acquisition before they launched Advisor.
I spoke with an executive at a top-tier UK insurance comparison site earlier this week about Google’s entry. He mentioned that Google wanted to acquire a UK entity primarily for its general knowledge of the market, technology, and infrastructure (API integrations). He said, “Given [Google’s] objectives, it didn’t make sense for them to acquire a top tier site (ie - gocompare, comparethemarket, moneysupermarket, confused) so they acquired BeatThatQuote, which was unknown to most consumers but had the infrastructure in place for Google to test the market effectively.”
It’s very unlikely BeatThatQuote will be of much use for the US market. Google will need to build its product from the ground up. Beyond accruing the knowledge of a very complex, and nuanced market, they will need to acquire or build out the infrastructure. In the US there are no public rate APIs for insurance carriers; very few insurance comparison sites actually publish instant, accurate, real-time rates. Google will need to understand and navigate its way to the rates (though it’s not impossible). It will take some time to get carriers comfortable and then of course build out the technology. Insurance carriers, like most financial service companies, can be painfully slow.
I do believe Google will do something with insurance at some point in the US. Of the various challenges the company currently faces, I believe the high opportunity cost is the toughest to overcome. However, the market will shift. As true insurance comparison options continue to mature, consumers will be searching exclusively for comparison sites (see travel), and carriers will no longer be able to effectively compete at the scale they are now -- driving down the market for CPCs and thus lowering the opportunity cost.
This opportunity cost is much lower however for other search engines where average car insurance CPC’s are lower. If I am Microsoft or Yahoo, I am seriously considering using my valuable real estate to promote something worthwhile in insurance. There is currently a big void for consumers as it relates to shopping for insurance. A rival search engine can instantly differentiate themselves from Google overnight in one of the biggest verticals. This may be one of their best opportunities to regain some market share.
I run my own business, but I've just completed a short stint working on-site at another company.
And after a few months working for another company, I realized that, at my own company, I had fallen into routines and work habits not all of which could be considered productive.
Procrastination, which some argue can be beneficial, can also be a problem when we really need to get things done. So, it was refreshing to see how other people organize their work, and an opportunity to reflect upon, and improve, my own work approach.
In short, I really needed a way of getting more valuable stuff done each day.
How Often Do We Produce Business Value?
Do you sometimes find that you’ve been working all day, but end with a sneaking suspicion you didn’t create a lot of actual value? Are you sometimes busy for the sake of being busy?
That was true in my case.
But now I organize my work to ensure I deliver something of real value - every day.
I discovered a method of working that has been around for a while, called Agile. Agile is a software development process incorporating a number of elegant concepts that can help skyrocket personal productivity. It is used by companies such as Amazon, Microsoft, Yahoo and Salesforce.
Agile is a huge topic, and there are many flavors of Agile, but I’ve picked out the one key feature that can be very effective for individuals and small companies working in areas beyond software development.
But first, let’s talk about how a bunch of amateurs built a supercar in under three months.
Wikispeed are a group of part-time volunteers. They built a 0-60mph-in-under-five-seconds supercar, that can do 100mpg, and they did so in under three months. What is more astonishing is that the people building the car often weren’t in the same room, city or even country.
But with very little money, no factories, and little formal car-building experience they built something astonishing in a very short space of time. Currently, they’re building a full production car suitable for the mass market, and if you want to help build it, well, you can!
That's quite some feat in terms of both organisation and personal productivity.
Some people would be forgiven for assuming that the process must have been meticulously planned in advance, laying out precise complex technical and procedural detail, but that wasn’t the case. The project was broken down into very simple concepts even a child could understand
The work was broken down into stories
What Is A Story?
In Agile, a “story” is short, simple description of a feature told from the perspective of the person who will use the capability being created. It also defines the business value.
Here's a template for a story:
As a (type of user), I want (some goal) so that (some reason).
An example might be:
As a marketer, I want a report that shows the number of links coming to my site from Twitter so that I can measure if my Twitter experiment resulted in over 1000 links
We then create a list of tasks needed to accomplish the story.
Investigate software solutions for Twitter link measurement
Implement software solution
We then create success criteria to measure if the story has been completed i.e. what output of business value is created?
I can see a report that shows how many links are coming into my site from Twitter
Ensure You’re Focused On Delivering Value
On a Monday, I write a set of stories about what I’m going to do that week. I estimate how long each story will take, and then I arrange them in a hierarchy. The order of the hierarchy is determined by which stories produce the most business value.
Next, I count up the hours involved, and if the hours involved exceed the number of hours I have available, the story gets put on the backburner for consideration next week.
I define tasks for each story, and then systematically work through them. It’s like a to-do list, but richer and more valuable because each story forces me to think in terms of delivering something of measurable, business value relative to each other unit of work I need to do. Needless to say, engaging with Facebook doesn't appear often in my stories.
Big projects, such as entire search marketing campaigns, can be broken down into multiple stories, spread over multiple weeks, chunked into tasks, and then timeboxed as a means of project management. In plain, simple language, everyone can see what needs to be done.
If you have trouble determining the business value of a chunk of work you’re doing, chances are it isn’t producing much value, so you should ditch it and find something that does. In this way, you fill your day with the things that matter most.
Satisfaction In a Job Well Done
There are, of course, many ways to manage projects, and many different ways to use Agile. Most companies adopt different flavours of Agile, or use only bits and pieces as it suits.
Personally, I have little use in my own business for the numerous meetings and the often tedious ritualistic activity Agile can involve. I’m also wary of over-hyped--latest-greatest-thing-since-sliced-bread work systems, but I do find stories a great way of deciding what work is most valuable to do at any given time.
I use this chart tool, called LeanKit, to align the story tasks into pre-set columns of “defined” (meaning I've written the story and estimated how long it will take), “in-progress” (meaning "I'm working on it") and “done” (yay!). You can also use sticky notes on a board if you prefer a more tactile approach
I work on one story at a time (the most important first), see it through to "done" status before I start the next one. If I underestimated how long the stories would take, then at least I can be assured I've done the most important work first. If time runs out, the low priority stories simply drop off the end for reconsideration next week.
Click the image for slideshow:
The chart, called a Kanban, is a nice visual representation of how work is progressing, and if other people need to see what I'm working on, and where I'm up to, they can do so at a glance.
As a bonus, it feels very satisfying to move each task across into the done “column”.
Do you use any systems to help ensure you get valuable work done? Please tell us about them in the comments!
PS: I’ve barely touched on Agile, and its many, many variants - a lot of it is more applicable to production processes rather than marketing - but if you want to read more, see the links below.