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The objective of the book is to highlight the differences between what highly successful companies do versus what less successful companies do.

Three Signs of a Bad Strategic Plan

Introduction
We’ve spent a lot of time in prior blogs focusing on what good planning is all about. Today we will look at the key characteristics of bad strategic planning. In general, bad strategic plans have one or more of the three following characteristics.

#1) Bad Plans Are Full of Platitudes
One dictionary defines platitude as “a flat, dull, or trite remark, especially one uttered as if it were fresh or profound. Synonyms: Cliché, Truism.” In strategic plans, platitudes can be quite common. At first, the words sound profound, but after you think about it, you realize that it is merely a trite truism—a cliché.

Examples of platitudes would be phrases similar to the following: Our goal is to be a…

a)     …market leader.

b)     …highly profitable company.

c)     …consumer-centric organization.

d)     …good corporate citizen.

e)     …successful leader in our industry.

f)      …company with above average returns on investment.

A good way to tell if you have a platitude is to say the opposite of the statement. If the opposite does not make any sense as a strategy, then the original statement does not make sense as a strategy, either.  For example, does it ever really make sense if you turn to the opposite of the above phrases and say your goal is to be a…

a)     …market loser or also ran.

b)     …highly unprofitable company.

c)     …organization that ignores its customers and treats them poorly.

d)     …bad corporate citizen.

e)     …unsuccessful follower in our industry.

f)      …company with above poor returns on investment.

If the opposite is not a viable option, then your original statement is little more than a fancy way of saying “We want to be good.” And that is no strategy—it is just a wish.

Great strategies are about making tough choices. It is about choosing where to focus and where not to focus. It is about making trade-offs so that you give up in some areas in order to win in others. It is about finding your differential advantage versus competition. You don’t find these in platitudes. Platitudes tell you what is common to all; strategies tell you how you are creating a meaningful difference in the marketplace.

In contrast to the above statements, a great strategy could say something like: Our goal is to win on the basis of superior quality. This works as a strategic statement, because you don’t have to have superior quality to win. You could also win on price, service, speed, originality, etc. So the opposite of “not winning on quality” makes sense. You’ve made a real choice.

This choice provides direction (towards quality). It lets you know the trade-offs (I will invest in extra quality even if it means I cannot have the lowest prices). It lets you know how you will create demand for your offering versus the competition (better quality than them).

Those platitudes cannot do this. Just finding a fancy way to say “I want to be a success” provides no direction on what you will do to achieve that success. Putting the platitude on the wall may warm your heart a little, but it does not help you determine:

a)     Why does my company deserve to win?

b)     What actions are needed to create the win?

c)     Why should customers prefer me over the competition?

d)     What should I focus on?

And if your strategic plan cannot help you answer these questions, then it really doesn’t help you at all.

#2) Bad Plans Focus on the Scoreboard
To solve the problem above, some companies attach a specific number to define their success. The statement may go something like this: In five years, we will have achieved success by attaining:

a)     Sales of “X”

b)     Profits of “Y” percent of sales

c)     An annual growth rate of “Z” percent.

The problem is that putting a specific value on a wish does not change the wish into a strategy. It merely makes the wish more specific. Yes, now there is a quantifiable and measurable goal associated with the statement. But there still is no direction as to how that number is to be achieved. The numeric specifics let us measure how badly we did at the end, but they do not tell us what to do at the beginning.

In the past, I’ve referred to this as focusing on the scoreboard instead of the clipboard. It refers back to a statement Flip Saunders made when he was the coach of the Minnesota Timberwolves basketball team. When a reporter once asked him what it would take to win, his answer was “Unless they’ve changed the rules, we have to score more points than the opposition.” Although that answer is true, it is not a strategy.

The point is that a scoreboard lets you know who is winning the game, but it provides no strategy as to how to win. If Flip Saunders’ only advice to his team was “Go get me more points than the opposition!”, he has not given them a strategy for winning. Yelling at the scoreboard to put up more points doesn’t get you more points, either.

The way you win in basketball is by drawing up good plays on the clipboard and then executing them well. The clipboard is where the strategy is developed, not the scoreboard. If all you do is attach numbers to a platitude, then all you have done is merely told me what you want the scoreboard to look like when the game is over. But that doesn’t mean anything.

True strategies will look more like that clipboard. They will specifically say what everyone’s role is and how they are supposed to work together to increase the odds of scoring more points than the opposition.

And remember, a budget is not a strategy, either. It is just a more elaborate scoreboard.

#3) Bad Plans Focus On Improving the Parts
To avoid the problem of focusing too much on the scoreboard, some companies will work with the individual departments to talk about ways to specifically make improvement. It usually focuses around tactics to either reduce inputs or increase outputs for that area.

Although this is nice, it also falls short of great strategy. The problem is that it focuses on improving each part separately, rather than looking at how all the pieces fit together. It would be like having a separate clipboard for each player on the team telling them their best move in isolation. When all the players go onto the basketball floor together, they will probably fail, because they were not given a plan on how to work together for the good of the whole.

Perfecting the parts individually in isolation assumes that:

a)     You are already doing the right things (you just need to do them better);

b)     You are not missing anything (you have all the parts you need); and

c)     Making each individual part the best is optimal for the whole.

In most cases, these are bad assumptions. Today’s status quo can become obsolete in a short time. This can make what you are doing no longer appropriate, no matter how well you do it. Perfecting the obsolete is a waste of time. Perhaps you need to rethink the entire approach.

Perhaps the best approach is to move into brand new Blue Ocean areas, which require capabilities nowhere found in your organization. Or maybe the great opportunities lie in the white spaces between your departments, and you need to focus on better interaction between departments.

And, depending on what trade-offs you have chosen, it may be wrong to improve every area. For example, if you have chosen to win on quality, perhaps you need to double your efforts on quality initiatives by taking away improvement efforts in areas which will not increase quality.

Great strategies do not just look at improving the individual status-quo parts. Instead, they build integrated business models showing the best way to get all the parts working on behalf of the trade-offs needed to win in the environment of the future.

SUMMARY
Bad business plans tend to have a combination of these attributes:

a)     A Focus on Platitudes;

b)     A Focus on the Scoreboard; and

c)     A Focus on Improving the Parts.

By contrast, great business plans tend to:

a)     Focus on Differentiating Direction;

b)     Focus on the Clipboard; and

c)     Focus on the Integrated Business Model.

FINAL THOUGHTS
A little bit of fluffy platitudes in a plan can make it prettier and easier to sell (like adding dessert to a meal). But if that is all you provide, then you have not given them the most important part of the meal.

Strategic Planning Analogy #510: Overcoming the Spread

THE STORY
Awhile back I was trying to help my mother liquidate some of her assets. One of the things she had was a collection of old coins. I went to a dealer in coins to find out what they were worth.

I was shocked by the spread between the wholesale price (the price the dealer pays to acquire my mother’s coins) and the retail price (the price the dealer charges when he resells the coins). I felt like I was being cheated.

It looked to me like collectable hobbies were a big rip-off. You are stuck buying at retail (high) and reselling at wholesale (low). Even if your collection appreciates in value, you may never see any of that gain because it gets lost in the spread between buying high (retail) and selling low (wholesale).

If you advocated dealing in the stock market in that same way (buy high, sell low), you’d be seen as crazy. But collectable hobbyists do it all the time. I guess that’s why it’s called a hobby instead of a business.

THE ANALOGY
In the business world, there are essentially three ways to make money. One is to be like a collectable hobbyist. You trade in assets (like coins) which you hope will appreciate in value, so that you can resell them at a profit. We’ll call that the “Appreciation” strategy. The appreciation strategy includes a lot of the business approaches used by those who do a lot of M&A activity, private equity funds, and stock traders.

The second way to make money is by being like that coin dealer. You make money by helping people using the Appreciation strategy make their transactions. Your profits come from the spread between retail and wholesale. We’ll call this the “Mediator” strategy. It is the approach used by brokers, agents, investment bankers and retailers, among others.

The third way is to make money by adding a new element of value that wasn’t there before. We’ll call this the “Creator” strategy. The value can be created by taking raw materials to make a new product (i.e., manufacturing) or by taking raw ideas and processes to make a new service (which is like a form of intangible manufacturing).

Just as I saw collectable hobbies as a rip-off, I see similar flaws in strategies primarily focused on the Appreciation or Mediator approaches. As we will see in this blog, the Creator strategy approach has inherent advantages over the other two approaches, because it tends to avoid the problems I saw in collectable hobbies.

THE PRINCIPLE
The principle here is that the approach you take for gaining profits makes a difference, and the creator approach tends to have the most solid foundation for success.

1) Problems With the Appreciation Strategy

As we saw with the coin collecting, there is a big spread that needs to be overcome in order to profit from any appreciation. This same problem applies to all who operate under more of an appreciation approach. If you are a private equity fund acquiring assets or a business doing a lot of M&A, you are familiar with this problem, although you may call it something else.

There is something called an “acquisition premium” when you buy companies or businesses. It is the price you pay over the current ongoing value of the business as is. This is most easy to see when a publicly traded company is acquired. The acquirer always pays a lot more than what the company had been previously trading for. Supposedly, the public trading price on the stock market is a fair assessment of the value of that business pre-acquisition. So the premium means that you are paying a lot more than the market thinks it was worth.

The fact that one has to pay a premium over the trading price is like the spread at the coin dealer. You acquired the company high, sometimes as much as 30% or more over the pre-acquisition valuation. And often, the company is resold via an IPO, where the price is intentionally set relatively low, to appeal to the initial buyers of the IPO stock, who want to achieve a quick appreciation on their investment.

As a result, a whole lot of appreciation has to occur in order to cover that spread and make money. That can be hard to come by in this slow-growing economic environment. This is compounded by the fact that those attempting to acquire are finding more savvy sellers who are demanding a larger premium (just ask Michael Dell in his attempt to take Dell private). So the gap may be getting larger while the opportunities and tricks available to get an appreciation over the gap are getting more difficult. This is why many private equity funds are having difficulty finding ways to effectively invest all that money.

A second problem for those using the Appreciation strategy approach is that they tend to have less control over their strategy than those using the other approaches. Commodity prices can fluctuate rapidly. As we saw in the great recession, prices on mortgage devices can plummet quite quickly. And the strategy only works if you can find another set of buyers to pay you more than when you first bought the asset, which is not guaranteed. With less under one’s direct control, the harder it is to make sure the Appreciation strategy succeeds.

2) The Problems With the Mediator Strategy

Mediators, like my coin dealer, also have problems. The largest problem has to do with market disruptions and disintermediation. In the past, agents, brokers and the like held special power because they were about the only way to connect buyers and sellers (the power of mediation). Now, thanks to disruptive digital business models, buyers and sellers can approach each other directly. Instead of going to the coin dealer, I could have sold those coins directly to consumers on Ebay and kept some of the spread for myself.

Travel sites have eliminated most of the need for travel agents. Why use an expensive stock broker when you can trade directly online? And in the retail space, there are so many digital ways for consumers to beat the spread, that retail stores are at risk of being showrooms for digital competitors. The ability to go direct makes many Mediators superfluous.

And even those Mediators who are keeping their positions are finding out that the spread between wholesale and retail is shrinking. The digital explosion is making knowledge available to everyone. This eliminates friction, makes markets flat, and reduces the power of the Mediator (who used to thrive by having special information other did not). As a result, the Mediator adds less value to transactions, thereby cutting the commission they can demand.

3) The Benefits of the Creator Strategy

The Creator approach avoids many of these problems. First, instead of getting caught in the trap of buying high and selling low, Creators are more likely to buy low and sell high. Why? Creators buy raw materials and sell finished products. Raw materials tend to cost a lot less than finished products. And buying the services of an engineer can be a whole lot cheaper than selling the cool stuff dreamed up by that engineer.

The Creator strategy, by its very nature, is converting lower cost inputs into higher value outputs. This conversion creates real economic value. You are not trying to take a relatively similar object and artificially create a spread between two transactions for that same object as is done in the other strategies. No, you have two different sets of objects—raw inputs and finished outputs—and the difference between the two causes a natural bump in value.

This Creator bump is easier to protect and is more in your control than the type of spread attempted when working as an Appreciator or Mediator. This gives the Creator strategy approach many advantages.

The Warren Buffett Way

These are not necessarily new ideas. This is essentially the philosophy behind Warren Buffett and his approach at Berkshire Hathaway. Warren Buffett has tried to steer clear of the problems in typical Appreciator of Mediator approaches. For example, instead of doing a lot of rapid buy and sell, Buffett holds for the long term. That way, he has fewer spreads to cover (less buy high, sell low). Instead, he tries to get the value out of the long-term output of what the company creates.

Second, Warren Buffett prefers to invest primarily in businesses where clear and simple creation is going on. Businesses based on fancy financial trade maneuvering or businesses where the path to value creation are more vague (like social media) tend to be shunned.

This approach has worked quite well for him. So maybe a more creator-based strategy is better for you.

Implications

The implication is that the more real value you can create through asset conversion, the better off you tend to be. Even if you are doing acquisitions or acting as an intermediary, there is room to become more of a creator and less reliant on merely trying to beat a spread. As an intermediary, you can be the disrupter of your industry and create the leading substitute for the status quo. As an acquirer, you can become more like Berkshire Hathaway.

And, as a manufacturer or service provider, you can best break out of the commodity mode by creatively adding more and more value into your conversion from input to output. That differential advantage through superior conversion (in speed, cost, quality or innovation) provides more room to find a profit.

SUMMARY
Businesses attempt to make their profit in one of three ways: by Asset Appreciation, Transaction Mediating, or Value Creation through Asset Conversion. The first two approaches tend to be more problematic, because they tend to rely on more of a buy high, sell low methodology. The third approach is more solid, because it creates more value in a more controlled manner.

FINAL THOUGHTS
We covered a lot of economic territory in a very small blog. There are lots of nuances here that we did not address. But the basic idea of trying to create natural value bumps by converting cheaper inputs into more valuable outputs is a key place to focus one’s strategic energy.

Strategic Planning Analogy #509: High Occupancy Vehicles

THE STORY

To help alleviate pollution, congestion and speed up traffic, some urban areas have put HOV lanes on their highways. HOV stands for High Occupancy Vehicles and is typically defined as a car having at least two people in it.  The HOV lanes usually only allow high occupancy cars and other efficient vehicles, like buses.

Because about 75 to 85% of workers commute by driving alone in their car, most commuters cannot legally take advantage of the HOV lanes. As a result, the HOV lanes are less congested and move along faster. Seeing the HOV cars moving faster makes some of those driving alone try to find ways to cheat in order to get into the HOV lanes.

One way used to cheat is to put a mannequin or a life-size blow-up doll in the passenger seat. For example, in 2010, a 61 year old woman put a mannequin in the passenger seat so she could ride in the HOV lane in New York. Unfortunately for the woman it was a cloudy day, and the hat and sunglasses on the mannequin looked out of place to a highway officer. The woman ended up having to pay a $135 fine and had two points taken off her license.

THE ANALOGY

We live in a business environment which has been described as faster than any time in history and getting even faster. Businesses feel the pressure to move ever faster or die. To a large extent, speed has become the default universal strategy.

One way businesses try to increase speed is by unburdening themselves of as much as possible. Management is eliminated, rules are eliminated, and strategic planning is eliminated—all in the cause for speed.

The elimination of strategic planning is justified with reasons like “We don’t have time to waste on that” or “Things move too fast to plan anything long-term” or “All we have to do is release the next version of our product before the competition—you don’t need strategic planning for that.”

The problem is that the business world is more like those HOV lanes than these people realize. All this unburdening is making businesses look more like those single person cars—going it alone. And since nearly everyone is taking this same approach, they are all crammed into the slower lanes.

Ironically, the faster HOV lane is the one where cars are “burdened” with extra passengers. And, as we will see in this blog, if companies load up their “car” with extra passengers like strategic planning, they will have access to the faster lane and get to their destination more quickly.

THE PRINCIPLE

The principle here is that the proper use of strategic planning does not slow a company down, but actually puts a company on a faster path. So instead of dropping strategic planning in the name of speed, we should be adding it to our “car”. Described below are three reasons why adding strategic planning gets you into the HOV lane of business.

1) Strategic Planning Improves Speed Via Focus

A focused company can move faster than an unfocused company, and strategy improves focus. Lack of focus leads to anarchy and confusion. You can yell at an unfocused company to “Move Faster!” all you want, and all you get is faster anarchy and faster confusion. Everyone is moving in random directions rather than making forward progress. Faster randomness is not improved progress.

Strategic Planning, when used properly, is a way to provide a business with focus. Not only can it tell a business what are the right things to work on; more importantly, it can tell a company what are the wrong things to work on. Strategic planning simplifies the agenda by taking a lot of options off the table (the things that are off-strategy). All the time-wasting rabbit trails are eliminated before they begin.

With a strong, focused strategy, you don’t have to waste time in endless meetings continually asking yourselves “should we be doing this or something else?” Instead, you can speed things up by focusing on how to improve on the things everyone already knows are important to the strategy.

Look at Apple. Under Jobs, Apple did not go in all directions trying to do everything as quickly as possible. Jobs had a specific strategy in mind as to what Apple would focus on. It had to do with designs that emphasized quality, elegance, coolness, and user-friendliness, made possible by focusing on building closed end-to-end systems. It became obvious what was appropriate for Apple to be doing and what was not.

The “not” list for Apple under Jobs was large. They did not work on low price products, or products not tied to the larger closed system. They did not even work on manufacturing. This allowed Apple to become very focused and quickly build a whole new digital future.

2) Strategic Planning Improves Speed By Overcoming the Leapfrog Trap

When speed alone becomes the substitute for strategy, a company is no longer building unique competitive advantages or competencies (except maybe the competency of speed). All they are doing is racing everyone else to be the first to release the next new improvement to the status quo. This is very common in areas like consumer electronics & digital media, and becoming more common elsewhere.

This process leads to what I call the leapfrog trap. Any small success gained by getting to the next improvement first is lost when a competitor leapfrogs you and gets to the improvement which follows before you. Gains are short and fleeting, since others are racing to leapfrog your most recent advancement as soon as they can.

Here is the crux of the problem. Because everyone is focusing on the same thing (speed), nobody is creating a competitive advantage. All the companies look about the same, with the same types of engineers in the same types of culture working on the same types of issues. You cannot create a lasting advantage in this scenario because you bring no real competitive advantage to the marketplace. Others can copy you almost immediately because they have a similar business approach with similar tools at their disposal.

By contrast, a true strategy builds differential advantages which allow a business to do certain things better than others. Rather than playing the same game of leapfrog with everyone else, you go your own way and build a different game where you have an edge and are not so easily copied. This leads to the third point below.

3) Strategic Planning Improves Speed Through Business Model Superiority

Great strategies understand the importance of making trade-offs. They don’t try to do everything well. They understand that:

a)     There are not enough resources to do everything well; and

b)     Even if there were enough resources, it is still not possible to win on all fronts because of conflicting agendas. For example, it is nearly impossible to win at lowest price AND highest quality AND most innovation at the same time, because what it takes to win in one of these areas makes it harder to win in the others.

Therefore, great strategies choose what to specialize in and make all the proper tradeoffs to win there, even if it means giving up abilities in places outside their specialty. Take, for example, Southwest Airlines in the US. For decades, they have had both consistently lower prices than their competitors as well as consistently higher profits. Why? Southwest Airlines built a business model to specialize in lowering costs. This caused many trade-offs, where Southwest didn’t do things everyone else did if it got in the way of the low cost strategy.

When other airlines tried to copy Southwest’s pricing, they did not achieve Southwest’s higher profits, but made their profits even worse. Why? Because their business models were not laser-focused on making enough tradeoffs to pay for the lower prices.

When all you look at is speed, you take your eyes off building the right trade-offs in your business model to allow real differential advantage. If the business model does not provide an edge, then you cannot quickly build a place where you can win. You are stuck in the leapfrog trap.

SUMMARY

Ironically, the singular drive for speed does not usually end up putting a business on the fastest track to lasting success. Instead, the faster track also needs to include a drive for great strategy. The addition of strategy improves speed by:

a)     Adding Focus (on what to do and what NOT to do);

b)     Adding Differentiation (to avoid leapfrog trap); and

c)     Adding a Trade-off Based Business Model Design (which makes it harder for others to copy you).

These additions allow you to take a superior path that speed-only businesses cannot get on.

FINAL THOUGHTS

There’s a reason why mannequins are referred to as “dummies.” And if you think you can sneak onto the fast lane without real strategy in the passenger seat, then that mannequin may not be the only dummy in your car.

Strategic Planning Analogy #508: Profiting from Free

THE STORY
When I was in college, I was desperate to find a job to help pay my college expenses. I ended up taking a job at a call center. The job consisted of calling people to tell them they had won three “free” magazine subscriptions. All they had to do to get their free magazines was pay a small “processing fee.”

As it turns out, that small “processing fee” just so happened to equal the cost of subscribing to those magazines. So the magazines were not free at all. It was a deception. I could not stand deceiving people that way, so I quit after three days.

THE ANALOGY
“Free” is an effective marketing tool. People love to get things for free. And if you cannot do “free” then selling below cost is the next best tool. The problem is that it is hard to make a profit if you give everything away for free or sell well below cost.

Therefore, if you price something as free, you need to get income in another way. That can be a difficult problem to solve. In the story, they solved the problem through deception. That is not usually the best long-term strategy, since the deceptions eventually tend to come out in the open—and people don’t like finding out they were deceived.

In this blog we will look at a list of other ways to bridge the gap so that you can hit a price the market loves and still make money.     

THE PRINCIPLE
The principle here is that the choice of one’s pricing strategy can be one of the most important strategic decisions one can make. And that decision should not be seen as an add-on at the end. In other words, don’t build your strategy first and then decide where to set the price. Pricing needs to be integral to the entire strategy formation—from beginning to end…Why?

1) Free Only Works If the Business Model is Designed to Make it Work

First, in order to support free or below cost pricing, you need a business model which pinpoints other sources of income. If you don’t predetermine those other sources when designing the business model, they will not magically appear later. You need a justification in the business model for why additional money should flow into company (and where it comes from), so that enough money will show up to cover the losses on the core product.

The entire revenue stream needs to be looked at simultaneously, to ensure that total inflows cover your outflows and produce a profit. In this holistic approach, you may find that the model needs adjustments in order to make it all work. For example, you may need:

1.     An additional type of sales force (like people to sell advertising in addition to people to give away the product); or

2.     An additional appeal to an additional customer base (like finding a way to appeal to both premium paying customers and free customers); or

3.      A different production or product design (like a stripped down free model so that you can sell upgrades or perhaps a version more appealing to advertisers).

4.     A broader portfolio of products in the mix (like adding highly profitable french fries to the menu in order to compensate for the loss on selling the hamburger)

Unless you look at all the pieces together, there is a good chance you won’t get enough pieces right to make the whole business work.

2) Subsidies Are Becoming the Norm

The second reason why pricing concerns need to be up-front and integral to the business model development is because the idea of selling free or below cost is becoming the norm. This is no longer just a problem for people selling low cost hamburgers. It is impacting nearly every industry. For example, almost the entire social-based economy has a free element to it. The younger generation who grew up with social media have an expectation that a whole host of items should be free (or highly subsidized), like information and entertainment.

You even see it now in portions of the large durable goods and business-to-business spaces. And if it isn’t there now, it will get there eventually.

The competitive pressure is too great. To create a strategic position which stands out in a hyper-competitive, hyper-saturated environment where consumers are bombarded with too many messages and too little time, you have to exaggerate. To own quality, you need to offer ultra-high quality to get noticed and get credit for it. Similarly, to own service, you need to offer ultra-high service. To own price, you need to offer ultra-low prices. These exaggerations make it difficult to price the core products at a level to cover what it takes to achieve “ultra” status.

Therefore, one cannot count on always being to sell everything one offers at a price which covers all of its costs. It is safer to say that one should count on at least a portion of one’s business to always need some kind of subsidy in order to price at market levels.

Strategies to Win With Free or Below Cost Pricing

So how do we create strategic business models so that below cost pricing is covered? Here are some suggestions:

1)     Bundling. This is epitomized by the fast food combo meal. To sell the below cost burger, they bundle it with a high margin drink and fries, so that the whole bundle becomes profitable, even if the burger is still priced below cost. This is why salespeople try to sell below-cost computers in a bundle with cables, extended warranties, software, etc.

2)     Fees: To make money on low airfares, airlines add all sorts of fees for baggage, preferred seating, meals and anything else they can think of. Offers for products on TV add “postage and handling” fees to the low price. My telemarketing story added fees.

3)     Freemium Model: Common with social media sites are free basic sites, with others paying a premium price for premium features found in the premium version. The idea is that the more users there are on a site, more valuable it is to premium members (network effect). Therefore, it is worth it to sites like Linkedin to build a large free base in order to increase its value to recruiters (who are more willing to pay to access a large base).

4)     Subsidy (Advertising): If you can get a lot of people interested in something due to being free, then there are often advertisers (or others) who will pay to access those people you’ve gathered. This is common in entertainment (like magazines or web sites). Also, check out a doctor’s office to see how many items have ads from pharmaceutical firms. There are ads everywhere! If you can advertise there, why not anywhere else?

5)     Addiction: In the illegal drug trade there is a saying that “the first dose is always free.” The idea is that it is worth it to give away the first dose of the drug, because it will create addictive behavior that will get them coming back to pay for additional doses for many years. This can work for free chips at a casino. Also, I know of a company that gave away free bags of premium dog food. They knew that if they got the dogs hooked on the premium brands, they would refuse to eat the cheap brands anymore.

6)     3rd Party Payers:  If you cannot get customers to pay, get someone else to pay on their behalf. Lots of firms advertise “free” products or services which are subsidized by the government (through programs like Medicare). Convince children to beg their grandparents to buy something for them. Sell “free” benefits to employees by getting their employers to buy it for them (like health club memberships or pet insurance).

7)     Add-ons: Put a low price on a stripped-down basic automobile and then charge a fortune for all the deluxe add-on features.

8)     Refills: Charge a low price for the razor and charge a fortune for the razor blades. Or charge a low price for the printer and a fortune for the ink refills. Or sell the Barbie doll cheaply and charge a bundle for all of the outfits. The idea is to establish your base cheaply and then get a high margin on replacing the items that go with the base.

9)     Delayed Timing: Make it free now, but get paid later. This is the idea of extending credit so that customers pay nothing at time of purchase. This works for automobiles (just sign and drive). There has been a leap in demand for solar panels since going from an upfront purchase model to more of a pay-as-you-go model.

And the list can go on.

SUMMARY
In the hyper-competitive world of today, about the only way to create a position which stands out is by exaggerating features to the extreme. And often, it is difficult to charge a high enough price to cover the cost of that exaggeration. Therefore, one needs a business model which finds other ways to get adequately compensated. And the only way to ensure that occurs is to design it into the core business model from the very beginning. So address your pricing and income strategy at the beginning and all the way through the business model development. It is too important to try to just tack pricing on at the very end.

FINAL THOUGHTS

The whole world is becoming more like those telemarketers or the fast food combo meals. Therefore you need to think more like them and look for ways to subsidize below cost pricing.