Startup company - Optimalprint's diary

Executive Summary

A Clear Price Position can turn your company into a profitable growth machine. Are you running a company with a more or less homogenous product or service, then here is a short summary from 7 years of operational experience from a market with highly similar product characteristics.

Introduction - Striving with an unclear brand or product position
August 2003 I was appointed CEO of Tele2 Norway, a telecom company renting all production capacity, with roughly 600.000 customers and at that time with around 250 Million USD in yearly turnover. We offered very homogenous telecom products, fixed/mobile minutes and ADSL that we rented from our biggest competitor. Lacking a strong, easy to understand, selling point was expensive in terms of marketing and terrible for our growth. The situation required a market position and marketing message that was easy to understand and communicate. We decided to regain the price position and make our “guaranteed lowest price” part of all our communication. Before decreasing your prices there is some very important work to do.

3 Vital Actions before Establishing a Price Position:

1. Cut your cost in all parts of the organization, do it unconditionally & do it fast. We cut staffing with close to 40% within 12 months, renegotiated all supplier contracts that had invoiced us more than 150 dollars last year, cut severely down on all company representation, moved to new premises and so on, even renegotiated the contract with the coffee supplier – a strong symbolic value!
2. Clean up in your product portfolio – a clear price position with to many products make the administrative task and marketing message hard to support. We decided to terminate around 80% of all our products including divesting all accounts with large businesses to one of the competitors. This generated transparency and facilitated rapid and effective benchmarking of prices with competitors.
3. Respond instantly to competitors threatening your price position. First and foremost you need to identify your top two, maximum three, competitors. We decided to respond to any price reductions from the two major competitors within 60 minutes. Doing this continually will make your competitors realize that lowering their prizes will only destroy their margins while gaining zero growth. In addition the associated press releases from your major competitors will quickly become free advertisement for your company.

Remember - Nothing is more expensive than to regain a lost price position
Once a price position is established make sure you never ever loose it. There is nothing more expensive in business than loosing a price position. To regain a clear price position, not only does your company have to significantly lower the prices on your product or service, but you also need marketing to communicate it and build trust again. This dreadful combination of lowering prices while increasing marketing spending can undercut your profitability and long-term survival.

4 Advantages with a Obvious & Transparent Price Position

1. Significant savings in marketing. To establish your company's products or services as top of mind is easier with messages such as “most value for money”, “cheapest in the market”, “best price is guaranteed” and so on, is cost efficient - short and to-the-point spots. The alternative is many times the more complicated and time consuming marketing message focusing on product differentiators such as technical aspects, design and so on. So once a price position is established and successfully defended your marketing activities can be summarized in two to three words.
2. Substantial savings at Customer Service. A leaner product portfolio makes answers from customer service agents more correct, which in return cuts down response time while increasing accuracy. In addition, your customers that have searched for the absolute cheapest price in the market for a product or service do not expect the best customer service in the market. They have chosen you since they know you are the cheapest, leverage on that and support the customers with the very basic services only. Furthermore, customers searching for low prices are more willing to engage more actively in producing their own services, look at RyanAir and IKEA.
3. Focus an a metric that is easy to measure and follow up on. The clear and non-disputable metric is very easy to communicate to all employees. As prices for most products or services decreases over time, independent of industry, your strong focus on defending a price position makes it is easy to explain and defend necessary cost adjustments such as layoffs and cost cutting activities.
   
4. Defending your price position is easier towards customers that focus on design, product features, technological development and so on. Meeting these competitors on their arena will cost a lot of money. A price leader’s counter attack could be – let’s not complicate things – You know we are the cheapest. Call us now.

5 Big Risks of Offering the Markets Lowest Prices

1. The Grasshopper-effect – You risk attracting customers that will switch to competitors as soon as they undercut your prices.
2. Overall lowest cost – Successfully supporting a price leadership requires that your organization always win the “low cost competition”. Your organization needs to be more lean & mean or effective than all of your competitors.
3. Economies of Scale can kill your price position instantly – Multinational corporations can by the power of size and economies of scale support your market with products at a price that mean negative margins for you and they might enter your market in no time. Keeping a close eye on the industry leaders and how they expand geographical is strongly recommended and often a very wise investment in terms of time and resources.
4. Obsolete infrastructure, which significantly weakens the advantages with a price position on products with declining popularity.
5. Lowering your price for existing customers - Defending a price position often means radical and fast price cuts as soon as any competitor tries to enter the price leadership throne. The question then comes on how to deal with existing customers. Being perceived as a price leader requires according to me that you include existing customers in the new price plans, i.e. accepting short-term decrease in profitability.

How did it go at Tele2 in Norway?

Tele2 Norway AS	2003	2004	2005
Revenue (MNOK)	1.481 MNOK (250 MUSD)	2.080 MNOK (350 MUSD)	2.455 MNOK (410 MUSD)
EBITDA (MNOK)	132 MNOK	213 MNOK	240 MNOK
Employees	90 people	65 people	55 people
Revenue / Employee	16,4 MNOK	32 MNOK	44,6 MNOK

Regaining a clear price position combined with significant cost savings and tremendously good personnel were the main reasons behind a growth that was significantly stronger than the overall market.

A company’s salary/bonus system will inevitably push sales in an easy to understand direction. Sales people in general run in the direction in which you place the carrot. Analyzing and really understanding your company’s bonus system is therefore critical. It will explain why your sales force focus on a certain type of customers, e.g. pursuing new customers while neglecting existing. In general, sales towards new customers receive way too much attention compared to sales towards existing customers – contacting and selling towards new customers is often considered a little bit more “sexy”.

GENERATE A RAPID SHIFT IN THE SALES FORCE FOCUS by tweaking on 4 VALUE INDICATORS:

• “New customer indicator” specifies how fast do you want to grow revenue. In the base case this indicator is 1. Here is an example. If a sales person have a budget of € 10.000 and brings in a contract with the value of € 3.000 then in the base case this contract is valued at 3.000 1 = € 3.000. If you need to boost focus on top line for a month then increase the value of every new customer by increasing this “New customer indicator”.
• “Existing contract indicator” specifies the focus you want your sales them to have on extension of existing customer contract. In the base case this indicator is 0.5. Here is an example. If a sales person have a budget of € 10.000 and brings in a contract with the value of € 3.000 then in the base case this contract is valued at 3.000 0.5 = € 1.500. The reason for valuing an extension to 0.5 is primarily because it is generally a lot less work.
• “Off-the-shelf indicator” specifies the value you put on only selling what is standard. In the base case this indicator is 1 but if you are struggling with a sales force that is to create increase this factor to 2 until you have learned the sales people to sell only what is on the shelves. . If a sales person have a budget of € 10.000 and brings in a contract with the value of € 3.000 then for a company struggling with to creative sales people you can value this contract to € 3.000 2 = € 6.000
• “Tailor made indicator” specifies the value you put on selling non-standard solutions. For many companies this is very bad for short-term profitability and long-term work load. In the base case the value of this factor is 0.5. If a sales person have a budget of € 10.000 and brings in a contract based on a non-standardized product / service the value of those € 3.000 is reduced to € 3.000 0.5 = € 6.000

This is a very non-academic and generic approach to fix your salary & bonus model on a short-term basis. For fundamental changes you need to go beyond this simple model. However, I used this approach with good success when responsible for the profitability and revenue for a business segment with more than € 200 million in yearly turnover.

Strongest benefits with this “Indicator-approach”

1. Uncomplicated to communicate
2. Easy to remember and use for your sales force
3. Time efficient to follow-up on for your accounting staff.
4. Strongest benefit however is that you can implement this model on almost any existing bonus-program that exist today and achieve the desired shift in focus in your sales force.

The value of each indicator should depend on
Your company’s profitability on new vs. existing customers
Focus on standard deals, based on sales of “of-the-shelves” products and it’s influence on your technical departments and customer service.
Revenue distribution between existing and new customers. If too much of your revenues come from existing customers then this might indicate a week revenue growth and a tired sales force.
Simplicity to follow-up and understand for auditor, sales people and yourself.

We have worked with address-lists provided by a company called Fastinfo, an online sales tool that present to your company all startups that have been registered in the Domestic Database in Norway. The great thing is that this sales tool with highly relevant contact details to potential customers is for free.

There are most likely equivalent directories over all established companies or startups in your country as well. If you do not find such tools search for partners that you know will be contacted by a newly established company, e.g. telecommunication companies or office relocation firms. Perhaps you could team up and split direct mail marketing costs between eachother. Another effective marketing channel is sites or companies for used office furnitures. These companies are in daily contact with companies that change office location or startups that are focused on keeping their costs to a minimum - these are the perfect customers for Optimalprint at least.

The power of Fastinfo's list is that it provides your company with addresses, telephone numbers, name of CEO/Founder, Industry Segment and Shareholder capital. Address and name of CEO is obviously a pre-condition for contacting the potential customers. Industry segment for the startup company is also very valuable information since industry segment helps you to screen companies depending on your product or service relevance to each individual industry. Proper evaluation will increase your hit rate and return on investment (time & energy).

Shareholder capital is interesting. We have found a strong postive correlation between the size of equity and hit rate for our sales pitches, the more equite the higher hit rate. It is actually not that strange - if you invest a significant part of your financial assets in a new company, you will do what it takes in order to succedd because there is simply no alternative. So if you have a product or service that, in comparisment with your competitors, is of equal or better quality at significantly lower price - then this type of direct communication with founders/startups can become highly effective. Furthermore, large equity means larger order, at least that is our experience.

So when we have a list of startups - call them directly! Our experience tells us that this is the most effective way to close the deal. You will come in direct contact with the founder. In addition, sending e-mails directly to another person, will in many countries be regarded as spam, unless you have an agreement before hand with the recipient. The fact that you actually call the companies is the primary reason for a good professional scanning of the address-list, you want relevant calls with high percentage of closings.

Put all of the contacts in an mail-merge software. I will come back and recommend a tool that we use for this. A mail-merge software program is an excellent tool for FOLLOWING-UP on the calls you made a couple of weeks ago. You will be amazed by the amount of revenues you can generate by a short and relevant follow-up mail. In addition, mails with relevant links to your products and services will safe time and energy for your potential customers. Finally, a potential customer that you have called and then sent a follow-up mail to will seldom delete your mail (as long as you have been professional in your contact) but instead either order or save for later.

Good luck!

Why this blog came about. First an intro to Optimalprint and our team

. Optimalprint was founded in June 2006, providing printing services with online design templates and highly cost-efficient printing solutions. I had worked 7 years within TELE2 (www.tele2.com), a telecommunication company. For three years as the CEO of TELE2 Norway, a Telco roughly 500 million US Dollars in turnover for 2006. Tele2 was great fun but you worked without feelings related to shareholder ownership.

A collegue of mine Pål, aat that time responsible for all BILLING operations at Tele2 in Sweden, Denmark and Norway, had been working with billing related issues for ten years and was on his way out. Pål decided to leave TELE2 and join Optimalprint.

During 2002 I had worked with an top-notch programmer at TELE2, Mike from Estonia with Russain family. I presented our idea to Mike (still working at SKYPE) and also he decided to join the Optimalprint team.

We are now in August 2006 and the workload is starting to build up. We are primarily trying to figure out which part of the value chain within online printing service should be our primary target and how would that affect our Internet platform and product offerings. So August to October is dedicated to identify softwares, suppliers within both digitial printing services and offset printing services, design agents, font suppliers, and lawyers to assist in writing contracts, distribution partners and logistical partners.

In November I meet an old friend from Canada, Jean-Pierre (JP). JP was an exchange student at Stockholm School of Economics from McGill in Montreal, Canada. JP impress me with his strong focus on delivery and broad international experience and knowledge. JP lives in Canada but speaks Arabic, English and French fluently. November 2006 JP and I meet in Stockholm. JP was then working many hard hours at Deloitte Consulting in New York. JP wanted to go into a startup company by owning a part of the company. I presented to JP the Optimalprint idea with an online digital printing solution that we could easily spread geographically, meaning that Canada could quickly become an interesting market for us. JP decided to leave Deloitte Consulting in New York. JP came to Optimalprint in end of January 2007.

WHY OPTIMALPRINT'S BLOG CAME ABOUT

During the first 12 months we have learned a lot related to many challenges and opportunities for a startup company like Optimalprint. I would like to share learnings and experiences from Optimalprint - Startup Company with primary customer target being the global user community, be it a private consumer or a business customer. I hope that this blog will generate true value to other startup companies, entrepreneurs as well as more established companies. I made many mistakes both at Tele2 and Optimalprint but I also made many things right - I will share most of our experience and learnings with you as we go along. Please contact me at henrik@optimalprint.com if you want to comment, ask question or guide me in any way.


I will touch upon issues such as

• How Optimalprint implement marketing activities. What mistakes have we done in terms of marketing both online and direct mail marketing? What successful decisions were taken within marketing and what is driving traffic growth?
• How we work or why we do not work with suppliers within for example Search Engine Optimization (SEO), online marketing media service, traditional print advertisement, direct mail marketing etc.
• How have we dealt with investor related issues such as - board members, when we have been approached by investors etc
• Expansion plans and all issues related to that - why did we decide to launch in a certain country, learnings from a geographical expansion etc. Some of the more strategic issues will be post-presented but hopefully then even more filled with valuable learnings.
• I will also extend this blog by presenting interviews with interesting people in the business community with knowledge and experiences of importance to Optimalprint and hopefully your company as well.

These blogs should add true value - if not tell me.

//Henrik