Wednesday, April 3, 2013

What Does it Mean To Be Innovative?

In my last article I wrote that innovation is the key to success in challenging times.
This is particularly so in an industry that is currently experiencing major structural change, such as what is happening now in community pharmacy.
In these difficult times there is ever increasing pressure to discount to maintain or grow market share. And that may be an acceptable strategy where your market is growing.
However, I am a firm believer in the wise advice offered by Reed K. Holden, co-author of Pricing With Confidence.
His opinion is that pursuing a discounting strategy to pursue growth in a stagnant or declining market is fundamentally flawed - innovation is the key to growth (or market share preservation).
In fact, discounting is the easiest competitive strategy to copy.
The only winner in a price war is the one with the lowest input costs and/or the deepest pockets.
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There have been a number of cases where I have advised clients faced with a competitor embarking on a major discounting strategy to put their prices up! Now I know that would appear totally contrary to what would appear logical. However, it is important to understand the research as to why businesses lose business. Now this research is a number of years old, however I believe that it still is relevant. So these were the reasons given for customers leaving the business they previously dealt with:

* Convenience. 3% (eg location)
* Relationship at a higher level 9% (e.g. friend/family went into a similar business)
* Price/Product/Time 15%
* Miscellaneous. 5%
* Perceived Indifference 68%

So what is perceived indifference? Well, the customer thought that the business just didn't care about them - or simply put - just poor service.

It good times, businesses can get away with perceived difference - it tough times, you simply can't!

If we take the above research on board, discounting is really important to only 10-15% of your customers. The reason you lose business is not because of price only - but generally poor service!

So let's look at what needs to happen to maintain your profit by discounting:

Assume sales of $3m
Gross margin of 35%
Expenses $600000
Net Profit $450000

If a discount of 5% over the board was implemented you would need to see an increase in sales volume of 16.7% to make the same profit as previous (assuming that a 16.7% increase in sales did not attract an increase in fixed costs). However, if there was no increase in sales volume, your net profit would reduce by 33.3% or $150000!

On the other hand, if we were able to increase prices by 5%, your sales volume could reduce by 12.5% and you would still make the same profit (assuming overheads remain the same). If there was no change in sales volume, your net profit would increase by 33.3% of $150000.

Now, I'm not saying that you shouldn't discount - this can be quite a legitimate strategy in certain circumstances. What I am saying is to understand the numbers and what impact this strategy can have on the bottom line before you do it. Understand that a 5% variation in price can have as much as a 33% impact on profit, not 5%!

Now, with all that out of the way, let's talk about innovation. What areas can you innovate in? The answer to this is that it is unlimited - the only really limitation being the space between your ears and the ability to make the time to work on this.

May I suggest that a starting point may be to look outside your industry, rather within it. I say that because many within your industry have a lot of experience and baggage of the past and find it difficult to look outside the box for new ideas. I think the classic example here is the Retravision experience where store owners were let down by lazy head office management that were bereaved of any innovation what so ever. The result was a decline in store sales and ultimately a collapse of the buying group that had been around for many years.

I do not profess to be an expert at innovative thinking by any means. However, I'll give you some areas to start:

* Products
* Services
* Presentation - store/team/merchandising
* Delivery of products/services
* Customer Service Standards
* Mobile technology
* Web presence
* Store layout/location
* Education - team/customers
* Social Media

Obviously, this is not an exhaustive list - but hopefully it may assist in getting you started.

One thing that I would strongly recommend to you would be to join LinkedIn ( and join one or more of the many special interest groups that have been established. There are many retail, on line retail and other professional groups on LinkedIn than can provide wonderful insights and information relating to business innovations that you could incorporate into your business. Plus, each of the groups provides you with a forum to ask questions - there are many eager contributors only to pleased to assist you with your queries.

And finally, with any major innovation, I strongly recommend you test/test/test your possible innovations before full implementation. Who can forget Coca Cola's "New Coke" disaster of the late 80's, early 90's!

1 comment:

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