Wednesday, December 15, 2010
Wednesday, December 1, 2010
Coopetition For Coaches: The Synthesis Of Competition And Cooperation - II
Continuing from our previous post...
Let us now focus on a particular example.
One challenge every business faces is retaining existing customers vs. acquiring new customers. Since you don’t need to educate existing customers on your offering, the cost of marketing will be lower. Moreover, studies have shown that the success rate of repeat sales to current customers is significantly higher than the success rate of new sales to prospects. However, there will always be a certain amount of defection with existing customers and just to maintain current revenue, new customers are essential. Consequently, this is not an either/or decision – it is an example of a polarity. A business must find a way of doing both - retaining existing customers AND acquiring new customers to remain viable.
Let’s narrow our discussion to the first side of this polarity. One of the easiest things to do is to adjust the price of your offering. Price is not always the determining factor for retaining existing customers, but it would be foolhardy to dismiss it as not a consideration. In a business-to-business market with big-ticket items where contracts are the norm, a most-favored-customer clause or a meet-the-competition clause are often successful. What can be done in a mass market? There are two issues to consider if you decide to keep existing customers happy by simply charging them a low price. The first is that you’ve just lowered your profit. The second is that you risk starting a price war. The act of lowering prices is both an offensive and defensive move. Your low prices will attract some of your competitor’s customers away. While this may increase sales initially, your competitors may eventually respond by lowering their prices to lure their former customers back. After the first round of sales, you are back to square one but with lower profits all the way around. This is how price wars start and nobody wins including the customers if the entire industry is damaged. So the goal would be to lower your prices only for your current customers without at the same time threatening your competitor’s customer base. Is there a strategy for doing so?
Actually, General Motors faced this challenge back in 1992. Credit is due to Brandenburger and Nalebuff for this outstanding example contained in their Co-opetition book. The big three automakers back then were all engaged in cash-back offers, dealer discounts, end-of-year rebates and other incentive programs. Profits were low, competition was fierce and demand was flat. The solution to this challenge pulled together many of the concepts discussed thus far. GM teamed up with Household Bank, a major distributor of co-branded credit cards to offer the GM MasterCard. Cardholders would earn a rebate equal to 5% of their charge volume, which could be applied to the purchase or lease of any new GM car or truck, subject to a rebate ceiling. Household Bank in effect became a complementor to General Motors.
What does game theory predict regarding the reaction of current and potential GM customers along with competitors like Ford? If both GM and Ford are offering comparable cars at $20,000, the market will divide on the basis of personal preferences. One can assume that only customers planning to purchase a GM vehicle would accept the GM MasterCard and rack up loyalty points that could only be redeemed through a GM purchase. If the typical rebate is $1,000 GM could conceivably raise prices $500 and still keep existing customers happy since they would be getting $500 off the price of a comparable Ford. Ford is not at all threatened since a comparable GM vehicle is now $500 higher. In fact, it only took five months for Ford to team up with Citibank and offer their own credit card loyalty program. This turns out to be a win-win situation for both GM and Ford. GM and Ford are less tempted to cut prices to lure new customers, because people are reluctant to forfeit rebates in their current loyalty program. This means higher profits for both manufacturers, which solved the first of the three problems. GM effectively changed the game from lose-lose to win-win. The fierce competition between automakers to steal each other’s customers dropped dramatically solving another one of the three problems. Finally, by attaching an expiration to the rebates, consumers had an incentive to buy now since prices were going up and they would lose their rebate. This solved the last of the three problems.
This is an outstanding example because it illustrates the use of complementors, the use of game theory, how the rules of the game can be changed for advantage and how the coopetition concept can be used to craft a superb strategy. It also demonstrates how counter-intuitive strategy can be. Most people would think that a good strategy would be to charge your current customers more than you charge potential new customers, since you want to tempt the latter through the use of lower prices. However, you must always take into account how other players in the game will react.
Let’s now consider another example that should be familiar to most businesses including coaches. A request for a bid comes in from a large potential client whose current contract with a competitor is up for renewal. How do you respond? Most likely you realize that the chances of landing the account are small and the bid is likely just to be used as leverage to extract a better deal from the current coach. However, if you don’t bid there is no chance of getting the business and you risk alienating a potential customer. So it only appears to make sense to bid and do so aggressively, correct? Savvy business people have learned that the greatest success comes not from competition, but from controlling the rules of the game as GM did in the example above. How can you change the rules to your advantage? The answer will be provided in the webcast.
So how can we use this particular model of coopetition in the coaching business? What are some complements to coaching and how can these be exploited to craft an outstanding strategy that will drive up profits? The webcast will address these issues. Finally, most coaching businesses today are still comprised of solo practitioners and let’s face it – a large number of non-billable hours are devoted to filling up the marketing pipeline with the hope of converting a percentage of those names to paying clients. There are more powerful models of coopetition that can be used to tackle this challenge that the webcast will address. Please join us. Details are on our website at www.strategyforcoaches.com.
Let us now focus on a particular example.
One challenge every business faces is retaining existing customers vs. acquiring new customers. Since you don’t need to educate existing customers on your offering, the cost of marketing will be lower. Moreover, studies have shown that the success rate of repeat sales to current customers is significantly higher than the success rate of new sales to prospects. However, there will always be a certain amount of defection with existing customers and just to maintain current revenue, new customers are essential. Consequently, this is not an either/or decision – it is an example of a polarity. A business must find a way of doing both - retaining existing customers AND acquiring new customers to remain viable.
Let’s narrow our discussion to the first side of this polarity. One of the easiest things to do is to adjust the price of your offering. Price is not always the determining factor for retaining existing customers, but it would be foolhardy to dismiss it as not a consideration. In a business-to-business market with big-ticket items where contracts are the norm, a most-favored-customer clause or a meet-the-competition clause are often successful. What can be done in a mass market? There are two issues to consider if you decide to keep existing customers happy by simply charging them a low price. The first is that you’ve just lowered your profit. The second is that you risk starting a price war. The act of lowering prices is both an offensive and defensive move. Your low prices will attract some of your competitor’s customers away. While this may increase sales initially, your competitors may eventually respond by lowering their prices to lure their former customers back. After the first round of sales, you are back to square one but with lower profits all the way around. This is how price wars start and nobody wins including the customers if the entire industry is damaged. So the goal would be to lower your prices only for your current customers without at the same time threatening your competitor’s customer base. Is there a strategy for doing so?
Actually, General Motors faced this challenge back in 1992. Credit is due to Brandenburger and Nalebuff for this outstanding example contained in their Co-opetition book. The big three automakers back then were all engaged in cash-back offers, dealer discounts, end-of-year rebates and other incentive programs. Profits were low, competition was fierce and demand was flat. The solution to this challenge pulled together many of the concepts discussed thus far. GM teamed up with Household Bank, a major distributor of co-branded credit cards to offer the GM MasterCard. Cardholders would earn a rebate equal to 5% of their charge volume, which could be applied to the purchase or lease of any new GM car or truck, subject to a rebate ceiling. Household Bank in effect became a complementor to General Motors.
What does game theory predict regarding the reaction of current and potential GM customers along with competitors like Ford? If both GM and Ford are offering comparable cars at $20,000, the market will divide on the basis of personal preferences. One can assume that only customers planning to purchase a GM vehicle would accept the GM MasterCard and rack up loyalty points that could only be redeemed through a GM purchase. If the typical rebate is $1,000 GM could conceivably raise prices $500 and still keep existing customers happy since they would be getting $500 off the price of a comparable Ford. Ford is not at all threatened since a comparable GM vehicle is now $500 higher. In fact, it only took five months for Ford to team up with Citibank and offer their own credit card loyalty program. This turns out to be a win-win situation for both GM and Ford. GM and Ford are less tempted to cut prices to lure new customers, because people are reluctant to forfeit rebates in their current loyalty program. This means higher profits for both manufacturers, which solved the first of the three problems. GM effectively changed the game from lose-lose to win-win. The fierce competition between automakers to steal each other’s customers dropped dramatically solving another one of the three problems. Finally, by attaching an expiration to the rebates, consumers had an incentive to buy now since prices were going up and they would lose their rebate. This solved the last of the three problems.
This is an outstanding example because it illustrates the use of complementors, the use of game theory, how the rules of the game can be changed for advantage and how the coopetition concept can be used to craft a superb strategy. It also demonstrates how counter-intuitive strategy can be. Most people would think that a good strategy would be to charge your current customers more than you charge potential new customers, since you want to tempt the latter through the use of lower prices. However, you must always take into account how other players in the game will react.
Let’s now consider another example that should be familiar to most businesses including coaches. A request for a bid comes in from a large potential client whose current contract with a competitor is up for renewal. How do you respond? Most likely you realize that the chances of landing the account are small and the bid is likely just to be used as leverage to extract a better deal from the current coach. However, if you don’t bid there is no chance of getting the business and you risk alienating a potential customer. So it only appears to make sense to bid and do so aggressively, correct? Savvy business people have learned that the greatest success comes not from competition, but from controlling the rules of the game as GM did in the example above. How can you change the rules to your advantage? The answer will be provided in the webcast.
So how can we use this particular model of coopetition in the coaching business? What are some complements to coaching and how can these be exploited to craft an outstanding strategy that will drive up profits? The webcast will address these issues. Finally, most coaching businesses today are still comprised of solo practitioners and let’s face it – a large number of non-billable hours are devoted to filling up the marketing pipeline with the hope of converting a percentage of those names to paying clients. There are more powerful models of coopetition that can be used to tackle this challenge that the webcast will address. Please join us. Details are on our website at www.strategyforcoaches.com.
Monday, November 15, 2010
Coopetition For Coaches: The Synthesis Of Competition And Cooperation - I
This post will focus on Coopetition: The Synthesis Of Competition And Cooperation and represents a short synopsis of a much more extensive webcast on coopetition available to Strategy For Coaches members.
Traditional business strategy is organized around competition - win/lose models fueled by market share frameworks. Western culture encourages and sometimes requires competition in order to succeed, so we rarely question whether there are alternatives to competing with others.
In fact, there are three ways to achieve one’s goals. One can work competitively by working against others, work cooperatively by working with others, or work independently, by working without regard to others. We are all born with a strong instinct to survive, but research has shown that competition is a learned phenomenon.
Recent research also refutes many cherished beliefs, such as: competition is inevitable and a result of human nature, competition encourages excellence and results in increased productivity and competition builds character and gives us needed confidence.
Cooperation appears to be the opposite of competition. Cooperation may be voluntary or involuntary, formal or informal. Originally, kinship relations alone were used to explain cooperative behavior when found in nature. Further research, however, showed that cooperation is not the exception, but arises spontaneously under the right conditions. In fact, scientists now believe that the emergence of higher levels of organization happens via cooperation at lower levels, and that without such cooperation, increased complexity may not develop.
A careful examination of nature shows both competitive and cooperative behavior. It is quite common for organisms to compete and cooperate with one another, often times simultaneously. Members of a species may hunt in packs (cooperation) while also fighting for alpha status within the pack (competition). Particular behaviors exist on a continuum of pure competition on one end and pure cooperation on the other.
Ray Noorda, founder of the networking software company Novell, noticed a similar phenomenon in the business world. He coined the term coopetition to represent this concept. Coopetition, a synthesis of the words competition and cooperation, was designed to convey the dynamic relationship between the two. Business often involves cooperation to create the market (the pie) and competition to divide up the market (one’s slice). Ruthless competition is often a lose/lose proposition and has on occasion resulted in destroying the market all together as almost happened with the 1990’s price wars in the airline industry where more money was lost in a few years than profits earned since Orville and Wilbur Wright. On the other hand, no one wants to help create a market if they can’t capture a portion.
A good example of coopetition can be found in just about any section of town that has several restaurants concentrated in a relatively small area. From a traditional business perspective, it looks like a bad idea to open a restaurant in an area already full of restaurants. However, it is the abundance of places to eat that attracts customers who may visit the area without any specific restaurant in mind. The restaurants cooperate to create the concentration of culinary options and compete to snare customers after they arrive.
There are several theories about coopetition and methodologies for implementing it. One of the most popular and one of the simplest was outlined by Adam M. Brandenburger and Barry J. Nalebuff in their very successful book entitled "Co-opetition". A key concept to understand is that of complements.
A complement to one product or service is any other product or service that makes the first one more attractive, such as hot dogs and mustard, cars and auto loans or digital cameras and color printers.
Complements are generally reciprocal. Just as auto loans complement new cars, new cars complement auto loans. Some businesses can actually fail because of lack of complements. Organizations that provide complements are called complementors. Brandenburger and Nalebuff introduced the Value Net as a schematic map that represents all the players in a game along with their interdependencies. The same player can have multiple roles. We’ll employ the business-as-game metaphor throughout this discussion.
On the vertical dimension, customers and suppliers play symmetric roles in creating value. On the horizontal dimension, competitors and complementors play opposing roles in creating value. A player is your competitor if customers value your product less when they have the other player’s product than when they have your product alone. A customer is likely to value a color sublimation printer less if they already have a color laser printer. A player is your complementor if customers value your product more when they have the other player’s product in addition to your product. A customer is likely to value a digital camera more if they also have a color printer than if they had no easy way to print their pictures.
The coopetition theory and methodology of Brandenburger and Nalebuff provides a framework for crafting a strategy that will exploit complementors. We will focus on this model for the remainder of this short post, but the webcast will discuss other even more powerful models.
To gauge the effectiveness of any strategy, it is necessary to have an idea how the various stakeholders, including complementors, will react when the strategy is executed. Imagine playing a game of chess, which is often considered to be a game of strategy. Prior to making any move, a good chess player will try to anticipate their opponent’s possible counter-move and their own counter counter-move in response. How does one anticipate the reaction of your opponent or competitor? There are several tools available – game theory, behavioral psychology and history among others.
So what is game theory? Game theory is the study of rational behavior in contested environments. Game theory offers scientific principles that can be used to predict the actions of others. Real-life situations are extremely complicated and game theory only offers a model of that complexity. We lack the time to discuss game theory further in this short post, but the webcast provides additional information.
Topic will be continued to a future post...
Traditional business strategy is organized around competition - win/lose models fueled by market share frameworks. Western culture encourages and sometimes requires competition in order to succeed, so we rarely question whether there are alternatives to competing with others.
In fact, there are three ways to achieve one’s goals. One can work competitively by working against others, work cooperatively by working with others, or work independently, by working without regard to others. We are all born with a strong instinct to survive, but research has shown that competition is a learned phenomenon.
Recent research also refutes many cherished beliefs, such as: competition is inevitable and a result of human nature, competition encourages excellence and results in increased productivity and competition builds character and gives us needed confidence.
Cooperation appears to be the opposite of competition. Cooperation may be voluntary or involuntary, formal or informal. Originally, kinship relations alone were used to explain cooperative behavior when found in nature. Further research, however, showed that cooperation is not the exception, but arises spontaneously under the right conditions. In fact, scientists now believe that the emergence of higher levels of organization happens via cooperation at lower levels, and that without such cooperation, increased complexity may not develop.
A careful examination of nature shows both competitive and cooperative behavior. It is quite common for organisms to compete and cooperate with one another, often times simultaneously. Members of a species may hunt in packs (cooperation) while also fighting for alpha status within the pack (competition). Particular behaviors exist on a continuum of pure competition on one end and pure cooperation on the other.
Ray Noorda, founder of the networking software company Novell, noticed a similar phenomenon in the business world. He coined the term coopetition to represent this concept. Coopetition, a synthesis of the words competition and cooperation, was designed to convey the dynamic relationship between the two. Business often involves cooperation to create the market (the pie) and competition to divide up the market (one’s slice). Ruthless competition is often a lose/lose proposition and has on occasion resulted in destroying the market all together as almost happened with the 1990’s price wars in the airline industry where more money was lost in a few years than profits earned since Orville and Wilbur Wright. On the other hand, no one wants to help create a market if they can’t capture a portion.
A good example of coopetition can be found in just about any section of town that has several restaurants concentrated in a relatively small area. From a traditional business perspective, it looks like a bad idea to open a restaurant in an area already full of restaurants. However, it is the abundance of places to eat that attracts customers who may visit the area without any specific restaurant in mind. The restaurants cooperate to create the concentration of culinary options and compete to snare customers after they arrive.
There are several theories about coopetition and methodologies for implementing it. One of the most popular and one of the simplest was outlined by Adam M. Brandenburger and Barry J. Nalebuff in their very successful book entitled "Co-opetition". A key concept to understand is that of complements.
A complement to one product or service is any other product or service that makes the first one more attractive, such as hot dogs and mustard, cars and auto loans or digital cameras and color printers.
Complements are generally reciprocal. Just as auto loans complement new cars, new cars complement auto loans. Some businesses can actually fail because of lack of complements. Organizations that provide complements are called complementors. Brandenburger and Nalebuff introduced the Value Net as a schematic map that represents all the players in a game along with their interdependencies. The same player can have multiple roles. We’ll employ the business-as-game metaphor throughout this discussion.
On the vertical dimension, customers and suppliers play symmetric roles in creating value. On the horizontal dimension, competitors and complementors play opposing roles in creating value. A player is your competitor if customers value your product less when they have the other player’s product than when they have your product alone. A customer is likely to value a color sublimation printer less if they already have a color laser printer. A player is your complementor if customers value your product more when they have the other player’s product in addition to your product. A customer is likely to value a digital camera more if they also have a color printer than if they had no easy way to print their pictures.
The coopetition theory and methodology of Brandenburger and Nalebuff provides a framework for crafting a strategy that will exploit complementors. We will focus on this model for the remainder of this short post, but the webcast will discuss other even more powerful models.
To gauge the effectiveness of any strategy, it is necessary to have an idea how the various stakeholders, including complementors, will react when the strategy is executed. Imagine playing a game of chess, which is often considered to be a game of strategy. Prior to making any move, a good chess player will try to anticipate their opponent’s possible counter-move and their own counter counter-move in response. How does one anticipate the reaction of your opponent or competitor? There are several tools available – game theory, behavioral psychology and history among others.
So what is game theory? Game theory is the study of rational behavior in contested environments. Game theory offers scientific principles that can be used to predict the actions of others. Real-life situations are extremely complicated and game theory only offers a model of that complexity. We lack the time to discuss game theory further in this short post, but the webcast provides additional information.
Topic will be continued to a future post...
Sunday, August 1, 2010
Webcast Suggestions Requested
Strategy For Coaches provides periodic fee-free webcasts on topics related to strategy and geared towards professional coaches. We are actively planning the webcast schedule for 2011 and would appreciate suggestions for topics and speakers. The topic of the webcast should somehow provide a link between strategy and coaching. Staff can assist with the technical aspects.
Thursday, July 1, 2010
Pricing For Services - I
A coaching firm is basically a professional service firm (PSF), all of which have some unique challenges not faced by other types of businesses. Most professional service firms handle prices based on billable hours, but more creative strategies are emerging that are better for both the client and the professional. We will discuss some of these more creative strategies in a subsequent post and will confine our current discussion to billable hours.
The main question, of course, is how does one arrive at a dollar amount? There are three popular methods. The first is applying a cost model where the coach sets a profit objective, figures in their fixed costs and divides the remaining amount by number of hours to reach a price point.
For example, if a coach wanted to earn $150,000 above expenses per annum, with fixed costs of $25,000 and with 1,000 billable hours per annum, the calculation would be:
$150,000 (net revenue) + $25,000 (expenses) = $175,000 (gross revenue)
$175,000/1000 (hours) = $175 per hour
Another method for arriving at a dollar amount is market value. Market value is the price paid for coaches with similar experience in the same market for comparable services. Most professionals research the current "going rate" and then adjust their fees based on how they believe they fit into the market. A typical situation is the coach who fears losing business by quoting a high rate and consequently assumes they must set a low price for their services to start out. The reasoning is they can raise their prices when they are established. The difficulty is that they have put themselves into a niche and clients immediately start thinking of them as less qualified than their higher priced counterparts. Competing on price is not always a good idea, so one should very carefully evaluate whether setting prices artificially low is a prudent step.
Finally, one can base the fee on what a coach would earn as an employee of a major corporation that has staff coaches. To make a fair comparison, the coach needs to consider salary, benefits, expenses and profit. Unlike staff jobs, coaches are not paid when they are not working. Experienced coaches can rarely expect to sell more than 1200 hours of their time a year and a base of 1000 hours a year is probably more realistic. The rest of the time is spent marketing, improving skills, keeping records and other non-billable tasks required for running a business. If an entry-level staff coach makes $90,000 per year, this would work to an equivalent hourly fee of $90 per hour considering salary alone.
Typical benefits include FICA, health insurance and retirement as a minimum. For most corporations, the value of fringe benefits is estimated at 30% of base salary. When these benefits are added to the coaches’ base of $95,000, the annual earnings become $123,500, which ups the hourly rate to $123.50.
Typical expenses include rent, computer equipment and supplies, utilities, postage and transportation, to name only a few. A conservative estimate for expenses is $25,000 a year. When these expenses are added to the previous figure of $123,500, the annual earnings now become $148,500, which ups the hourly rate to $148.50.
Since coaches are taking risks as any entrepreneur, they have right to a profit, which typically ranges from 5-15%. This arrives at the final hourly rate rounded to $170.00. Recent coaching surveys show that most executive coaches work in the $150 - 300 per hour range. After a careful analysis, our rate calculation appears entirely reasonable and justified. However, the perception of the client matters and many clients will quickly multiply the hourly rate by 40 and again by 50 to get a rough estimate of the annual fee. Under these assumptions the rate may appear high. One solution is to use the hourly rate to arrive at an estimate for the total engagement. Future posts on pricing will focus on just this along with other more creative strategies.
The main question, of course, is how does one arrive at a dollar amount? There are three popular methods. The first is applying a cost model where the coach sets a profit objective, figures in their fixed costs and divides the remaining amount by number of hours to reach a price point.
For example, if a coach wanted to earn $150,000 above expenses per annum, with fixed costs of $25,000 and with 1,000 billable hours per annum, the calculation would be:
$150,000 (net revenue) + $25,000 (expenses) = $175,000 (gross revenue)
$175,000/1000 (hours) = $175 per hour
Another method for arriving at a dollar amount is market value. Market value is the price paid for coaches with similar experience in the same market for comparable services. Most professionals research the current "going rate" and then adjust their fees based on how they believe they fit into the market. A typical situation is the coach who fears losing business by quoting a high rate and consequently assumes they must set a low price for their services to start out. The reasoning is they can raise their prices when they are established. The difficulty is that they have put themselves into a niche and clients immediately start thinking of them as less qualified than their higher priced counterparts. Competing on price is not always a good idea, so one should very carefully evaluate whether setting prices artificially low is a prudent step.
Finally, one can base the fee on what a coach would earn as an employee of a major corporation that has staff coaches. To make a fair comparison, the coach needs to consider salary, benefits, expenses and profit. Unlike staff jobs, coaches are not paid when they are not working. Experienced coaches can rarely expect to sell more than 1200 hours of their time a year and a base of 1000 hours a year is probably more realistic. The rest of the time is spent marketing, improving skills, keeping records and other non-billable tasks required for running a business. If an entry-level staff coach makes $90,000 per year, this would work to an equivalent hourly fee of $90 per hour considering salary alone.
Typical benefits include FICA, health insurance and retirement as a minimum. For most corporations, the value of fringe benefits is estimated at 30% of base salary. When these benefits are added to the coaches’ base of $95,000, the annual earnings become $123,500, which ups the hourly rate to $123.50.
Typical expenses include rent, computer equipment and supplies, utilities, postage and transportation, to name only a few. A conservative estimate for expenses is $25,000 a year. When these expenses are added to the previous figure of $123,500, the annual earnings now become $148,500, which ups the hourly rate to $148.50.
Since coaches are taking risks as any entrepreneur, they have right to a profit, which typically ranges from 5-15%. This arrives at the final hourly rate rounded to $170.00. Recent coaching surveys show that most executive coaches work in the $150 - 300 per hour range. After a careful analysis, our rate calculation appears entirely reasonable and justified. However, the perception of the client matters and many clients will quickly multiply the hourly rate by 40 and again by 50 to get a rough estimate of the annual fee. Under these assumptions the rate may appear high. One solution is to use the hourly rate to arrive at an estimate for the total engagement. Future posts on pricing will focus on just this along with other more creative strategies.
Tuesday, June 1, 2010
Strategy For Coaches Is On A New Server
Special Notice: Our site has now been moved to a new web server. We will be testing all customized modules over the next month and will notify members via email when the site is fully functional. Thanks for your patience.
Saturday, May 1, 2010
May Webcast Rescheduled
Special Notice: Due to our web hosting company going out of business, the Blue Ocean webcast for May will be rescheduled.
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