Strategy For Coaches provides periodic fee-free webcasts on topics related to strategy and geared towards professional coaches. Strategy For Coaches has announced the webcast schedule for calendar year 2011. Exact dates and times of each webcast will be provided approximately one week in advance on our website and an email will be sent to all registered members.
The webcast scheduled for 1st Quarter 2011 will focus on Coopetition: The Synthesis Of Competition And Cooperation and discuss how this concept can be applied to the coaching business. 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.
A careful examination of nature shows both competitive and cooperative behavior. It is quite common for organisms to not only compete but also 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. Coopetition, a synthesis of the words competition and cooperation, was designed to convey the dynamic relationship between the two concepts. Business often involves cooperation to create the market (the pie) and competition to divide up the market (one’s slice).
Games-as-business metaphor is common. A game is simply a situation in which players engage in an artificial conflict, defined by rules, that results in a quantifiable outcomes. Game theory is the study of rational behavior in contested environments and offers scientific principles that can be used to predict the actions of others. Real-life situations are often extremely complicated and game theory only provides a model of that complexity. Despite its limitations, game theory has proven extraordinary useful in providing information for developing strategy. The biggest opportunities and the biggest profits have consistently come not to those who play the game best, but to those who play the right game. Changing the game can be accomplished by changing any of the key elements that comprise the game. Game theory coupled with the concept of coopetition has resulted in new possibilities for profit by changing the game being played and is worth a careful look.
Most coaching businesses today are still comprised of solo practitioners, although the trend for group practices is gaining ground. Solo practitioners are at a particular disadvantage due to the significant number of non-billable hours required to run any coaching firm. A smart business strategy that leverages coopetition could be just the prescription for success. This webcast will begin with a thorough introduction to coopetition and game theory, discuss numerous real world examples and finish with ideas for profitably applying the knowledge to the coaching business.
The webcast scheduled for 2nd Quarter 2011 will focus on the Blue Ocean Strategy. An amazing strategy for creating new markets through value innovation has been dubbed the Blue Ocean Strategy after a book by that name from W. Chan Kim and Renee Mauborgne.
Most companies try to outperform their rivals through incremental changes in price or quality - assessing what their competitors do and striving to do the same things better. As the market space becomes more crowded, supply overtakes demand causing products and services to become commoditized, encouraging price wars and rapid feature duplication among rivals. Markets that are well explored and already crowded with competitors are called "red oceans". They are called red because the only way to increase profits is by taking away market share from the competition. This usually results in bloody battles where few companies emerge unscathed.
“Blue oceans” on the other hand represent uncontested market space - pools of demand and customers that have not been reached by any competitor. Blue oceans have always been around. Just look back a few decades, and you will find that many industries we now take for granted – such as mobile communications or biotechnology – that simply didn't exist. Technological advances represent one reason blue oceans are developed, but another one is creative thinking that discards conventional wisdom and current product/service design.
Through intuition, trial and error or just plain luck, people stumble on strategies that have a proven track record of success. Although not likely intentional, the Blue Ocean Strategy was the strategy that started the coaching profession. After a thorough introduction to the Blue Ocean Strategy, the remainder of the webcast will show how a more complete implementation of the strategy could make the coaching profession far more lucrative for coaches while providing clients with an even better value proposition.
The webcast scheduled for 3rd Quarter 2011 will focus on Evidence Based Coaching. The term evidence based coaching was coined by Anthony M. Grant to distinguish between professional coaching that is firmly grounded in a theoretical knowledge base from coaching that was developed from anecdotal and other observations. The concept of evidence based practice grew out of the medical field and is important in psychology, management and other fields besides coaching.
Evidence based practice requires that the practitioner use the best knowledge available, integrate this knowledge with their own expertise and skillfully apply this knowledge in the current context while considering the needs, values and preferences of their client. It is also critical to assess the effectiveness of any intervention. Fundamental questions that must be examined include what constitutes evidence, how to bridge the divide between theory and practice and how to access effectiveness. The webcast addresses these important questions.
The coaching field presents an additional level of complexity since fundamental issues, both theoretical and practical, divide the various approaches to coaching which range from goal-oriented approaches to cognitive development approaches among many others. Not all approaches work equally well with all coaching situations. This challenge is not unique to evidence based coaching. Many prominent academics have leveled stinging criticisms regarding the field of strategy. One target has been the bitter battles that have yet to be resolved between the various schools of strategy. The other target is the perceived gap between research and practice, which is particularly troublesome for a field which should have such enormous practical impact. New comprehensive systems have been developed for practicing strategists that are directly applicable to addressing the many similar challenges within the coaching profession. The remainder of the webcast discusses this vital topic.
The webcast scheduled for 4th Quarter 2011 will focus on cognitive development. The ability of an individual to manage complexity is a function of their cognitive processing. In 1984 Hunter & Hunter published a comprehensive study that showed cognitive ability was the number one predictor of successful job performance whereas experience came in fifth.
Most cognitive growth in adults involves learning new facts, skills and ways of doing things. This is often referred to as horizontal development, in contrast to vertical development, which is less common and refers to how we change our interpretation of experience and transform our views of reality. For years, researchers postulated that vertical development consisted of several stages, with each stage characterized by a more comprehensive, differentiated and effective meaning-making system, set of mental models and worldview. Today, most researchers use the metaphor of a web and not a ladder in order to portray cognitive development as a complex process of dynamic construction within multiple ranges in multiple directions.
Cognitive development has important implications for both strategists and coaches. David Rooke and William Torbert studied organizational development efforts for over 10 years and found that the success of a firm is tightly correlated to the development stage of the CEO. Businesses with CEOs who measured at the strategist developmental stage on a diagnostic test consistently grew in size, profitability, quality and reputation.
Several coaching instructors have postulated that the development level of a coach can limit his or her effectiveness. They have also postulated that a coach-client relationship where the coach is at a lower developmental level than the client would not advisable since the coach would be unable to see the limitations of their present stage before having transcended it. If the developmental levels of coaches are in the same statistical percentages as the general population, this would pose an issue worthy of attention.
This webcast will summarize what is currently known about cognitive development in adults. Several studies have shown that a type of learning, called transformational learning, facilitates cognitive development. The webcast will also look at transformational learning – what it is, how to do it and why it is believed to facilitate cognitive development. The ability to think better will soon become the most significant competitive advantage any individual can claim.
Strategyforcoaches.com is open to professional coaches or coaches in training regardless of coaching specialty. You must be a member of strategyforcoaches.com to attend any of our events. Interested coaches can request access by clicking the Join Us button on the main page of our website. There is NO fee to join or attend these webcasts.
Saturday, January 15, 2011
Saturday, January 1, 2011
Happy New Year
The year-end brings no greater pleasure then the opportunity to express our best wishes for a prosperous New Year!
-Strategy For Coaches Staff
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.
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