Turning Down a Sale

One entrepreneur who came on the show this week was lambasted for doing something few prudent business people would ever consider – they turned down a sale. This was not because they were to inundated with orders to be able to meet demand – on the contrary, they had essentially no other sales. They turned down the purchase order because it wasn’t the right distribution model for their business.

Pierre Beaupre and Jean-Daniel Nieminen from Quebec came on Dragons’ Den with their invention, an easy-to-install dual-flush system. Designed to be easy to install and priced at roughly 10% of what a comparable toilet would cost, the device allows any standard toilet to be easily converted into a high efficiency unit.

However, when they traveled to a trade show, they returned without any sales – because they were looking for distributors, not sales.

On the Den, the dragons frowned on their maneuver, because it undermined their credibility.

It’s one thing for a business which has an existing revenue stream to turn down orders, as it could negatively impact existing business. However, a business which has yet to see its first dollar of income should be eager to take on new customers, even if they are not ideal. Where the business has an outstanding debt to its founders in the amount of $100,000 this need becomes even stronger.

While Pierre and Jean-Daniel claimed that they turned down the order due to an inability to fill the order, the dragons were skeptical of their ability to lead a business at all. As was phrased on the show, had they come onto the set with a purchase order in hand, asking for the funds that would allow them to fill the order, they likely would have walked away with a deal.

A prediction was made on air – one year later, Pierre and Jean-Daniel would either have done exceedingly well, or incredibly poorly. It is unlikely that they would be anywhere but. Looking for their business, I discovered their site at Flush2O.com and was unimpressed with what I saw. Low visit count, nothing out of the ordinary from a design perspective.

It’s looking like the Dragons made the wise choice to avoid business owners who couldn’t close a sale.

Dealing with an Offer

Sometimes, convincing a prospect to buy your product isn’t the hard part – structuring the deal is.

Take Jim, a software developer who wrote a small program that he was selling for a modest fee via his website and through direct sales. A company contacted him after using his application to find out if they could license the distribution rights to his software, or purchase it outright.

Since this is not a normal course of business, at least to date, Jim had to get a crash course in negotiating this kind of deal.

  • Will the deal be exclusive, and therefore limit his own abilities to distribute the application, or find other distributors?
  • What kind of support packages would the client want?
  • How is the deal to be structured – flat fee, annual rates, usage based?

The smartest thing to do in such a case is to put the onus on the buyer to come up with the initial terms. That is, politely respond to the buyer that you are interested, at least in concept, and ask them to provide a more detailed offer. Imply that there may be more available than the publicly available version – part of the up-sell that could create some room for leverage later on. Ask them to include a section for support and maintenance.

If the buyer has gone through this process ever before, then they will know how they would like to structure the deal, and the kind of terms they can expect to end up with. By asking them to provide an opening offer, you create room for an immediate acceptance if the offer is overly fair (unlikely, but possible), some haggling over the details if the general ideas are acceptable, the issue being with the number, or a flat refusal if the offer is so poor as to be offensive.

If the buyer has not gone through this process ever before, they will have no idea how to present a fair offer. However, they will now have to evaluate the costs of leaving you out of the loop, something they likely have already done before contacting you in the first place. This gives them their limit on how much they would spend on such a product or service, and they will work backward from there.

In either case, pushing the buyer to start the negotiations can only benefit you – if they ask you what your terms are, then you will still have to come up with a fee structure and pricing model, but it is more likely that the answer to your query will be exactly what you need – a starting point for the offer.

Understand Bureaucracy

In recent dealings with several large financial institutions, I learned about bureaucracy – and how to work with one.

Forced to enter discussions with them, I was overwhelmed by the volume of paperwork and the miles of red tape that seemed to be targeted at making my inquiries impossible to be answered. With one employee at an institution assuring me that I would get an answer, and others presenting all the complications that stood in my way, I wasn’t sure if a simple solution existed.

A phone call to a colleague suggested an answer. He directed me to a particular branch of one of these institutions, where they were under significant internal pressure to work with clients such as myself. As such, they had streamlined their own processes to make dealing with the inquiries swift and painless for the customers.

While they had no assurance that even with a positive answer I would give them my business, they were aware that negative experiences could drive me away. As such, they solved my real problem for me – they explored the inane rules that they had to follow, and found ways to circumvent them.

This is similar to the experience of Mr. Incredible, who, working for a large insurance company, explains to one of the clients how to circumvent the bureaucracy to get a claim processed. This branch took it one step further, though, and instead of telling me how to get past their systems, they did the work for me.

If you have to work through a bureaucracy, it may be worthwhile to find people inside the system who have ulterior motives for helping you. This can be in order to meet other internal quotas, a relationship with you (e.g. a friend), or merely disdain for the complexity of the faceless entity they work for. These people, working within the system, know how to get things done, and how to do so expediently.

There’s no getting around the paperwork or the red tape, but there are certainly ways to make the experience less frustrating. Knowing which particular forms need to be filled out, and which ones do not, can save you large amounts of time, and can lead to faster answers to the questions you’ve been tasked with answering.

Strategic Partnerships with the Competition

Does having competition make you uncomfortable? Perhaps you should consider making a strategic alliance instead.

Competition can be a scary thing, but it can also be useful, if handled correctly. Few industries or markets are only large enough for a single player, which means that there is little reason for anyone to be afraid of their competitors. Instead, if companies welcome their competition, they will soon discover that they can benefit one another.

For example, two web development companies might initially think that they are in direct competition. However, the reality is that both companies get much of their business via referrals, for which there is no competition. Having a partnership with another company means that each company can quietly outsource their extra work when they’re busy, maintaining a positive outward appearance to their clients.

This can benefit both sides, since idle workers are expensive, so accepting the work, even at a reduced rate, benefits both businesses. Likewise, the ability to get additional workers when needed on an ad hoc basic minimizes the expense of keeping a large staff.

There are other ways as well in which companies can not compete, for example, targeting slightly different markets, or offering variations on the same service. In either case, there can even be the ability to share clients, allowing each company to focus on what makes them different from their competitors, instead of getting hung up on what makes them all the same.

Question: Who Does Your Business Taxes

I know a few business owners who do their own taxes, and many more who pay someone to fill out their corporate returns each year. Given that the cost of corporate accounting can be significant, some owners have shied away from that route for as long as they can, while others quickly push their books over the accountants without a second thought.

Which group do you fall into, and why?

Calculating Salary

As noted in last week’s questions, assessing salary can be a challenging endeavor, especially if there are limited statistics available for the industry and region. However, there are some basic rules of thumb that can assist in running the calculation.

The first is to determine how much the position is worth to you, the employer. If by hiring someone to perform a particular role, you can generate $100,000 in revenue, then that position is worth some fraction of that. Once you factor in your own overhead, be it rent, taxes, collections, legal, and other aspects of your business which do not directly bring in revenue, this number usually works out to about a factor of 3.

Second, you need to look at the options your candidates have, and what types of positions they might otherwise be interested in. If you’re hiring a computer programmer, for example, but want him to work as a business analyst in addition to programming, you need to consider the salary he might be able to get as just a computer programmer. That number would then be used to determine the minimum salary level – since you require additional skills over comparable jobs.

Last, you need to look at what you can afford. If you cannot afford to pay a fair salary, then either you need to reduce the list of qualifications, or reduce the seniority such that the position becomes affordable. It will not help your business to offer a position at $75,000 per year when in reality you can only afford to pay $60,000. While you may scrimp to make the position work, you will end up doing your business more harm than good when you discover that you hired over your needs.

Market on the Future, Sell on the Present

Too often entrepreneurs looking for an investment will fail on this basic concept, thereby undermining their own credibility and in the process, often losing an investment which could have been won.

A sale, of any sort, is often promoted based on its future value – that is, the satisfaction or value it will bring to the buyer over the course of its lifetime. At a restaurant, you discuss the presentation of the food, the ambiance, the taste. In a car, you look to comfort of the drive, efficiency, maintainence costs. In an investment, you look at risk and potential for returns.

An investor must be sold on the concept of returns – they will put their money into a business, and get paid returns as the company uses that money to turn a profit. The investor needs to know what kind of risk they might be exposed to, the odds that they will lose their money.

At the end of the day, though, the price paid will be based on the real value today. A business turning a certain amount in profit annually has a value. While each appraiser will come to their own conclusion as to the value, it is some form of all the assets available, plus a multiple of the profits. This number is the basis for any pricing.

Failing to recognize this, and to sell a product based on its future value, with the price being that of the future value, is foolish. For one thing – it’s not an investment. Even should the predictions prove to be correct, the investor must wait until the future is realized only to get back the exact amount they put into the deal. As soon as they invested, their ownership depreciated to the current value of the company.

For comparison, that like selling someone a stock which you say will be worth $100 per share, is currently worth $50 per share, and you’ll sell it for $75 per share. That’s a lousy investment, with 50% of the investment being lost immediately.

If you want to be taken seriously, market your deal on the promise of tomorrow. But when it comes to pricing, deal with the realities of today.

Response Time and PR

I’m fortunate in that I get little enough email that I can generally respond within a day to most queries. However, being in contact with many people who receive far more messages than I do, I’m familiar with the concept of dealing with vast quantities of mail.

This week, I had to contact a company which deals in large quantities of email to process a refund. The experience showed me what a good email policy is.

One evening, I realized that a purchase I had made had never been delivered, and so I emailed the vendor requesting a refund. Minutes later, I got an automated response telling me that my email had been recieved, and would be taken care of within 2 business days.

The following afternoon, I got a personal email asking for more details so that they could process the refund, to which I sent the requested information. I was notified that the refund would be processed within 5 days, and would get an email once the processing was done.

An hour later, that email came as well.

What this company did right is that they followed up at every step of the way:

  1. They acknowledged that my email arrived, and let me know when I could expect a personalized response;
  2. They met the timelines they set with a generous margin;
  3. They constantly assured me that they would deal with this issue promptly and that they were concerned with my ultimate satisfaction.

If you receive more email than you can deal with immediately, following the example above may help reassure those emailing you that you will respond, and will do so in a friendly and professional manner.

Keep the Learning Growing

Continuing with the theme of basic pieces of advice, today’s suggestion is in regard to your learning.

I left university having had enough of sitting in the classroom. My degree took 5 years to complete, having added and removed subjects several times. I was ready to move out into the real world, despite the messages constantly being sent during the school years that the workload was preparing me for life.

I have never worked as hard as I did in school.

Being in a real job, whether for someone else, or for myself, made me realize that I have a fair bit of spare time, times when I don’t have other responsibilities. I then did something I would not have considered prior to starting the job – I started learning again.

Some learning was formal, presented in a classroom, with assignments, tests, and marks. Most, however, was the informal learning that I know to be one of the keys to success. Every discussion I had, every event I participated in, every situation that arose, all were opportunities to learn.

Constantly absorbing what happens around you in a work environment can be tougher than my fourth year algorithms course (ranked one of the most difficult courses offered by the university). Reflecting on the situations and making their lessons part of your being increase your value, just as getting a few more letters after your name can do the same.

To succeed, you need to keep learning. Any opportunity you have to sharpen your mind, increase your knowledge and understanding of your business and its environment, can only help you succeed.