There are only two markets you need to know:
- The top 20% (controls 70% of Alberta’s wealth)
- Average women
Where is the average men? They simply don’t count in Alberta– their women control their money -so unless you are targetting the high-end market direct your efforts directly to women!
How do you pick your market?
A) If each transaction does not require a material amount of an individual’s time then you can enjoy the largest market- the average people. They come in, they order your soup, which is prepared in a large amount, they pay, they leave. Businesses that can enjoy the mass market: online sales and restaurants.
Big money is made in this market, but few clients can tap into it because many of the times this involves producing junk- think Walmart, Starbucks, big Pharma. THUT 2.0 was the robo-accounting service we tried to deliver to everyone, but it failed. Unless it is online sales or mass production, the masses will slow you down.
B) If each transaction requires a material amount of an individual’s time then you are better off focusing on the top 20% of the population. This was our strategy to enter at the high end of the market: Edmonton’s oil and gas industry, where earners who were in the top 1-5% of the population were prepared to pay a premium, and we used that money to develop cost efficient robo-accounting solutions for other sectors. But we didn’t have enough of these lucrative clients to survive off of doing accounting for a few big CNC oilfield shops.
Sometimes you do what you have to do to get yours: 10 years ago on the time-money continuum we had no money but we had the youth and energy to each work 80 hours in a week.
We did personal tax returns for $20 each no matter the complexity. People came for 10-15 minutes, paid us, and left.
We exercised the same procedure for small businesses charging $2,000 for a nail salon.
As clients grew in complexity, the amount of time required also grew. Those average people simply dragged us down as we could not recover the time spent on each file. So as we progressed on the money-time continuum we dropped clients to reach equilibrium. Simultaneously, we were still banking money from the 1%ers and using the money saved to drive down the market to higher unit volumes and lower prices with each successive category until we can economically service the span of the higher 1%-20% of the market.
High-end services (tech, constructions, salons) would be better off having the end goal of catering to the top 20% of income earners that control 70% of the wealth in Alberta. That will lead to more satisfaction and less headache in the long run.
Successful price increases help you acquire better customers who are more serious about enjoying your offering and less likely to churn. When we had lower prices, we had customers that changed accountants, looking for a better deal, never mind that it will cost them more in the long run in taxes and/or penalties. Our current fees dramatically improve the lifetime value of our customer which in turn boosts lifetime value to customer acquisition cost ratio. It has allowed us to have a more sustainable business model without having to spend years working 80 hours a week each. The success of our price increases lies in the transparency. Everything is listed on our website and customers know exactly how much it costs and what is included. We know most accountants charge more than us, but our goal unlike theirs is not revenue maximization. Our goal is sustainability, and that involves selling something that our customers need.
- $2M revenue and $200K profit is worse than
- $1M revenue and $400k profit
When we include more features, like including bookkeeping, this drives the demand for our offering over other accountants and creates an opportunity to extract the added value in the form of higher prices.
Signs you are ready to transition to cater to the higher end market
Customers and prospects tell you how cheap you are. For example, customers have told us they are surprised we make money and that they appreciate the value.
You create a very high ROI. You should aim to capture 10-20% of your economic value. If your construction build will save $100K over PCL’s you deserve that extra $10-$20K (your customer still saves $80-$90K). At the cost of 1%, we reduce customer costs by 15-25% (taxes + accounting).
Many companies use a 5% annual price escalator so 2 years without raising prices would mean you fell 10% behind your competition.
You included new value without monetizing them. Customers are more open to price increases when you can show a track record of using that extra money to invest in improving your offering. For example, we started doing everyone’s personal taxes at no additional cost, and unlimited CRA correspondence/audit support for free to create goodwill with customers. We continually go to businesses who get audited.
Offer customers a discount for them to refer a family or friend. We give our customers one month free off their service plus one month free for anyone they refer. While many customers were quick to refer someone, many simply paid the higher price. So we raised the average price without driving away customers who might otherwise seek out a “cheaper” alternative. The effort involved with making a referral makes deal-prone customers feel like smart customers- and smart customers are happy customers.
Give them alternatives. We used to only offer 2 categories. Now we offer 5 categories. We convince salon owners to downsize staff and do more work themselves so that they retain more of their income, while their lower revenue keeps them in a lower price category for accounting. Likewise, customers who are already financially independent and look to their business as more of a passive income want to pay us for a more expensive category as a consequence of maximizing their volume.
Make your offerings look more valuable. A nail salon could put a bunch of nail-care and beauty products in a pretty box and sell it at a premium. The idea is to get customers to compare the price to a day at your salon- so in comparison, the package is a good deal. Because most people are illogical and lazy, they will return to your salon just as often, and they got no additional value from the package but you have increased your income. Likewise, restaurants may package a number of foods together, encouraging customers to compare the price to dinner at their restaurant thus raising the perceived value of the packaged treat. Nail techs/restaurant staff and tradesmen should all wear uniforms: scrubs or coveralls. Contractors should have vinyl decals on their van/truck.
Make peace that you won’t convince 100%. We can help you with the math on a price increase so we can determine how many customers you will lose and still break-even. Keep in mind that some of those lost customers eventually come back once they try an alternative and realize the grass wasn’t greener on the other side.
Hiring out work
Unless you are financially independent, you should be working rather than hiring out the work. No one will ever do a better job than you, and no one will ever care about your big picture as well as you.
Only farm out things that can be completed more efficiently through unique skills and economies of scale (Accounting, bookkeeping vs. doing it yourself). Due to minimum efficient scale, the cost/technology would not make sense for an individual to specialize in something that is not directly related to their ability to generate revenue.
Restaurant Specific Advice
Choose fast-casual rather than higher end dining or fast food. Eating out was one of the first things to get cut back in many Albertan households when the oil price crashed. Among clients, sales on average rose 4%. But there is a sector where sales rose 9% last year. It is the sector above fast food, but a step down from fine dining: that middle, ground fast-casual restaurants. While the minimum wage increase hurts fast food places, the fast-casual sector will remain unaffected. As the population gets older, and as the economy remains uncertain this trend will continue to favor fast-casual rather than more costly dining.
The average food cost in restaurants is 30%. Fast food places operate at 25% and the finer the dining the higher the % up to a maximum of 35%.
If one item in your meal is priced at 40% food cost, then the second item needs to be at 20% to maintain your 30% average. Mix low priced rice/noodles with high priced meat.
The staff should ask if customers are interested in any appetizers, side dishes, and deserts. The simpler the preparation the higher the profit.
Consider paying your servers on commission. Any increased wages you pay out to them should mean more profit to you.
Descriptive words on the menu are better than pictures.
Customers find restaurants on their phone. Make sure you have a solid digital footprint: Facebook, Google, Instagram, Yelp. Your consumer base will return on average 1.7 times per month for 2.7 years, for repeat sales. Accordingly, you should value your customers based on their lifetime value 1.7 times per month for 2.7 years.