Tag Archives | product

Product Life Cycle Stages

See also:
Product Life Cycle
Company Life Cycle
Why You Need a New Pricing Strategy
Increasing Pricing on Products

What is the Product Life Cycle?

A product life cycle includes stages the product experiences throughout its lifetime – from conception of the idea to the decline and abandonment of the product. Some products experience longer life cycles than others; however, all products go through the product life cycle stages.

Product Life Cycle Stages

What are the product life cycle stages? They are introduction, growth, maturity, and decline. Some may add other stages in between the four listed, including research and development, abandonment, and revitalization.

Introduction

The introduction stage is often preceded by a research and development stage. For the purposes of the product life cycle stages, we will start from when the product is first introduced to the marketplace. This stage is by far the most expensive stage in a product’s life cycle. Sales are typically slow, so a company may be bleeding cash until the product hits the next stage.

Pricing and promotion are critical in this stage of a product’s life. If it is not priced profitably or promoted effectively, then the product will arrive at the decline stage much quicker than anticipated.


If you want to see if you have a pricing problem and learn how to fix it, then click the button to access our Pricing for Profit Inspection Guide.

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Growth

The next stage is the growth stage, where the company ramps up its sales and profits. The company will now be able to take advantage of economies of scale, profit margins, and increased profitability. Companies typically reinvest in this stage to grow the potential.

As the product gains more market share, increases distribution, etc., it will be ever important to scale the manufacturing and distribution effectively. A company needs to have an effective supply chain and logistics process to grow supply to the increasing demand. The worst thing that a company can experience in the growth stage is not being able to keep up with demand. Remember, growth impacts a company’s cash flow.

Maturity

In the maturity stage of the product life cycle, a company will start broadening the product’s audience, use, and availability. It is now able to maintain a consistent market share. A company will also continue to increase its production and logistics as demand continues to grow. The product becomes more popular during this stage. As a result, a company needs to be more careful in what marketing.

For example, when the iPhone was first released, many early-adopters acquired that technology. It took a few more years for it to become one of the most popular smart phone brands. As the product matures and continues to gain popularity, Apple continues to release newer, better, and greater models for a higher price.

Decline

Demand will eventually decline for a variety of reasons. Some of those reasons may include that there is a better product on the market or there is no need for that product anymore. This decline stage ends in total abandonment. A company usually has three options during this decline stage. Those include:

  1. Offer the product at a reduced price
  2. Add new feature or revamp the product
  3. Allow it to continue to decline, resulting in the elimination or abandonment of the product

If the company decides to take option 3, then the entire product line is discontinued. Furthermore, they will liquidate any remaining inventory for that product.

What Stage Your Product Is In

So, what stage is your product in? As a financial leader, it is important to know what stage your product is in because it impacts profitability and the company’s value. If you are in one of the first 3 stages, then it’s time to check your pricing for your products. Are you pricing them to result in profit every single time? If you are not sure, then download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Product Life Cycle Stages, Product Life Cycle

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Marketing Fraud

See also:
Intangible Assets: Protecting Your Brand and Reputation
The Red Flags of Fraud
Dealing with Employee Fraud
Marketing Plan
7 Warning Signs of Fraud
Marketing Mix

Marketing Fraud Definition

The marketing fraud definition is the false promotion of a product or service and/or the making of false claims. Some of the most common forms of marketing fraud is selling authentic versions of a product for it to only be an imitation or knock-off brand. This issue of false advertising led to the famous expression, “if it’s too good to be true, it probably is.”

Mass Marketing Fraud Explanation

There’s a significant difference between marketing fraud and mass marketing fraud. The US Department of Justice defines mass marketing fraud as “any fraud scheme that uses one or more mass-communication methods – such as the Internet, telephones, the mail, or in-person meetings – to fraudulently solicit or transact with numerous prospective victims or to transfer fraud proceeds to financial institutions or others connected with the scheme.” Marketing fraud can occur anywhere as it doesn’t need to reach a massive amount of people for people to fall for it. But mass marketing fraud is typically hosted on a web-based platform (email, telemarketing, internet, etc.).

Examples of Marketing Fraud

Some examples of marketing fraud include exaggerating claims, false advertising, and misrepresenting the product. Although it is sometimes difficult to see your own company’s marketing fraud,  it is easy to identify other company’s participating in this fraud. Ever seen a commercial for the next supplement that will magically loose weight? If you pay attention to what they are saying, then you may find that they do not mention medication, prescription, FDA, etc. All you hear is about the results, the method, and how taking it will give you six pack abs.

How to Prevent Fraud in Your Marketing

When a company deals with marketing fraud, there are a myriad of issues that stem from it. Some of those consequences include bad reviews, customer backlash, lawsuits, and even prison time depending on the severity of marketing fraud. Needless to say, your company needs to have processes in place to prevent fraud in your marketing because it can have financial repercussions. As the financial leader in your company, you need to know know what marketing fraud looks like and how to flag it if it’s happening in your company.

Know What Marketing Fraud Looks Like

Before you can prevent fraud in your company, you need to know what marketing fraud looks like. It can come in the form of overnight engagement sensation on social media, significant boosts in traffic or followers, and emails made to look like they are coming from someone else. For example, a company that uses social media heavily got 20,000 more followers in a day. That company also saw a 400% increase in comments (and those comments all raved about the product being sold). Although some companies may naturally experience this, you may want to look at the quality of followers you have and if they are even real. Unfortunately, some marketers manipulate the analytics to please the financial leader. But that is fraud.

Flag That Company

If your company is dealing with marketing fraud, then it is destroying the value of your company. But you do not have to continue in old habits anymore and can remove those “destroyers” of value in your organization. Download your free Top 10 Destroyers of Value guide to avoid letting the destroyers take value away from you.

Marketing Fraud definition

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Increasing Pricing on Products

increasing pricing on productsRecently, Netflix – streaming service giant – increased their pricing on two of their products by more than 10%. At first, media and customers displayed anger and backlash. But after the pricing increase, many customers remained at the increase was approximately a $1 difference. Plus, you have to factor in that many people are “cutting the cord” from traditional cable companies and converting to streaming services, like Netflix, Hulu, and Amazon Prime, for their entertainment. Netflix isn’t the first company, nor the last, to increase their pricing on products or services. But how to you manage to increase pricing without losing customers?

Increasing Pricing on Products

Increasing pricing on products is a result of various things – such as increased costs, additional services, improved quality, etc. When a company decides to hike their prices, we found that it stemmed from either two things: costs increased or they had their economics wrong in the first place. The other big one is taxes.  Taxes actually increase prices.  Companies that have their act together and run a streamlined operations will capture even taxes in their costs, even it is “below the line”.   Be assured when taxes go up, so do prices to the end user.  One of our goals when we work with clients to be more profitable is to look at their prices. Will increasing the price retain more customers or drive them away? Will there be more value added to compensate for the increased prices? When do you increase prices and how?

When to Increase Prices

Timing is everything when you want to increase prices! If you time it wrong, then customers will be annoyed that they didn’t get the special or backlash because their monthly payment just increased a certain percentage. Netflix timed their pricing really well. Because they were releasing a new season of House of Cards, Stranger Things, and The Crown (all of which have been award winning and original content) within the next month or two, Netflix was able to communicate added value. For that extra $1, you will get more seasons of your favorite shows.

But what if you aren’t a streaming service? For example, you may be a Tax CPA firm. If you needed to increase prices for your services, then the wrong time would be in the middle of the tax season. Find those gaps between the rush of customers and communicate the value – even if you aren’t necessarily adding anything new. Be sensitive to price increases and avoid the “shock” factor.

How to Increase Prices Effectively

When you have figured out the timing of when to increase prices, you have to answer the question, “how to do it?”. As a financial leader, this is where you cross lanes from the accounting department into the operations, sales, and marketing departments. You know the economics of your company, but if the salespersons cannot sell the product/service at that price, then it will fail.  I actually had a CFO tell me that they had a “pricing problem”.  Come to find out, they did not have a pricing problem.  They knew exactly what the price needed to be, they had a management problem because the sales guy did not want to put pressure on his buddy who is the buyer.  I guess the sales guy was afraid of losing the invitation to the annual fishing trip.

Pricing is a sensitive subject. We get it. But are you pricing your products to result in profit? Click here to download our free Pricing for Profit Inspection Guide.

Add Extra Offerings

One of the things that we have found with our clients is to add something “extra.” For example, Company ABC wants to increase their price on widget A from $80 to $150. They don’t have any other products, but they need to increase the prices so that they will be profitable. Instead of losing customers that may not be able to afford the $150, Company ABC splintered their products into three separate items – priced at $47, $56, and $89. Once a customer saw value in those smaller products, they opted-in to purchase the $150 product.

This is also a numbers game. When you provide extra offerings, you are able to capture more market. Hopefully, you will be able to promote those purchasing the cheaper products into a higher price range.

Adjust the Product

While this option isn’t necessarily increasing pricing on products, it is changing the cost structure and improving profitability. This tactic is used frequently in restaurants. Have you ever frequently visited a restaurant and your favorite meal started getting smaller… Yet, you were still paying the same price? Many companies chip away parts of the product to reduce costs, and therefore, increasing the price per plate, ounce, etc.

increasing pricing on products

Occasionally Run Specials

Think of that customer that is very price conscious and sensitive. Every once in a while, offer your products with a discount – essentially bringing it back down to its original price. This is a great way to retain previous customers that were conditioned with their prior expectations. Retailers do this all the time.

Change Your Customer

Increasing pricing on product often brings to light the fact that you have the wrong target audience. For example, one audience is highly sensitive to price due to the currency exchange. While another is less sensitive. Explore what it would look like to focus on that preferred audience. Maybe your specialized expensive item belongs in a specific industry that values your product, and not in a more general industry that maybe does not need or appreciate it.

Do Your Homework

Increasing pricing requires a lot of work on behalf of your marketing, sales, and operations team. If you are increasing pricing on products, are you absolutely sure that you will not have to do it again in the next few months? Because this process is an undertaking, do your homework and research the costs of your product. Will there be anything that could influence your costs?

When is the last time you had a price increase?  You would be surprised how many times we speak to a business and they had gone years without a price increase.  These companies are not evening covering the cost increase attributed to inflation.

Increase Pricing on Intervals

Service companies frequently use this pricing tactic. They increase their pricing after a 6-month or 12-month membership. It’s expected. Sure, you may have customers that work around the system – finding new services, signing under a different name, etc.

Examples of Recent Price Hikes

While we have discussed extensively about Netflix, there are other industries, companies, and areas of the market that are having to adjust to a) the loss of customers, b) the increase of costs, and c) growth.

Movie Theaters or Cinemas

Before the era of streaming networks and DVRs, movie theaters or cinemas were all the rage. That was the only place you were able to watch new releases before you could purchase their respective DVDs. But as we have seen, more potential customers choose to stay home and watch on their home television instead of going out. Maybe this is caused by generational preferences. Regardless, movie theaters are having to increaseproduct to compensate for decreased customers AND add value. Theaters are now offering fully stocked bars and restaurants, reclining chairs (or pods), and creating a high scale environment. iPic Theaters is a great example of how the environment of movie watching is changing.

Price for Profit

Whether you are increasing the prices of your products in the next couple of months or years, it’s important to price them right the first time. Oftentimes, when we work with our clients, we find that their pricing was not resulting in profits. After seeing this so often, we developed a Pricing for Profit Inspection Guide that you can access here for free. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

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Vertical Integration

See Also:
Horizontal Integration
Business Cycle
Business Segment Reporting
Mergers and Acquisitions (M&A)
Business Intelligence and Finance

Vertical Integration

What does vertical integration mean? Vertical integration is the process or a company’s domination of every aspect of the production line or process for a particular product. This includes the extraction of raw materials to manufacturing, and the sale of the finished product.

Vertical Integration Explained

Vertical Integration was first used in business practice when Andrew Carnegie used this practice to dominate the steel market with his company Carnegie Steel. It allowed him to cut prices and exhuberate his dominance in the market. Currently, this is considered a vertical monopoly and is illegal as an entity.

There are currently three types of vertical integration in the marketplace. The first known as backward integration means that a company possesses control over the first parts of the production process. These can range from raw material possession or production to the manufacturing process. The second form of vertical integration is forward integration where a company maintains control over the forward parts of the production process like distribution and selling of the finished goods. The last of the types of vertical integration is balanced integration. This type of integration contains all parts of the production process, and is also referred to as a vertical monopoly.

Vertical Integration Example

Chris owns a wooden furniture company which is responsible for the manufacture of wooden furniture products to several retailers around the United States. Recently Chris’s company has undergone some strains on its profit margins from the timber companies that supply the company to the retailers who are trying to cut their own costs. Chris has thus decided to vertically integrate to try and enhance his profit margins because if he doesn’t he sees his company going out of business. Thus Chris buys one of the larger retailers so that he can immediately use the large distribution and selling centers around the nation. By doing this Chris can charge a higher price because he is now selling directly to the customer. He can also see a reduced cost for his distribution points.

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Threat of Substitutes (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Supplier Power
Buyer Bargaining Power
Intensity of Rivalry
Complementors (Sixth Force)

Threat of Substitutes Definition

Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. According to Porter’s 5 forces, threat of substitutes shapes the competitive structure of an industry.

Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market.

The threat of substitution in an industry affects the competitive environment for the firms in that industry and influences those firms’ ability to achieve profitability. The availability of a substitution threat effects the profitability of an industry because consumers can choose to purchase the substitute instead of the industry’s product. The availability of close substitute products can make an industry more competitive and decrease profit potential for the firms in the industry. On the other hand, the lack of close substitute products makes an industry less competitive and increases profit potential for the firms in the industry. A threat of substitutes example is the beverage industry due to a market with many competitors.

Threat of Substitutes – Determining Factors

Several factors determine whether or not there is a threat of substitute products in an industry. First, if the consumer’s switching costs are low, meaning there is little if anything stopping the consumer from purchasing the substitute instead of the industry’s product, then the threat of substitute products is high. Second, if the substitute product is cheaper than the industry’s product – thereby placing a ceiling on the price of the industry’s product – then a threat of substitutes high risk is the case. Third, if the substitute product is of equal or superior quality compared to the industry’s product, the threat of substitutes is high. And fourth, if the functions, attributes, or performance of the substitute product are equal or superior to the industry’s product. Any of these situations is a high threat of substitutes: porter’s 5 forces sees less profit potential.

On the other hand, if the substitute is more expensive, of lower quality, its functionality does not compare with the industry’s product, and the consumer’s switching costs are high, then a low threat of substitutes occurs. And of course, if there is no close substitute for the industry’s product, then the threat of substitutes is low.

Threat of Substitutes – Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat of substitutes may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high threat of substitutes and some may indicate low threat of substitute products. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

The Threat of Substitutes Porter places High risk on:

• Substitute product is cheaper than industry product
• Consumer switching costs are low
• Substitute product quality is equal or superior to industry product quality
• Substitute performance is equal or superior to industry product performance

The Porter Threat of Substitutes Low Risk Situation:

• Consumer switching costs are high
• Substitute product is more expensive than industry product
• Consumer switching costs are high
• Substitute product quality is inferior to industry product quality
• Substitute performance is inferior to industry product performance
• No substitute product is available

Threat of Substitutes Interpretation

A low threat of substitute products makes an industry more attractive. In addition, it increases profit potential for the firms in the industry. Conversely, a high threat of substitute products makes an industry less attractive. It also decreases profit potential for firms in the industry. The threat of substitute products is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Start creating a list of potential substitutes that you evaluate as a threat in an external analysis. With this analysis, you’ll be better able to identify and react to any threat of substitutes. Download the free External Analysis whitepaper by clicking here or the image below.

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Factoring: What, When, and Where

See Also:
Another Way To Look At Factoring
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
Factoring is Not for My Company
History of Factoring
How Factoring Can Make or Save Money
What is Factoring Receivables

What, Where, and When To Use Factoring

In order to make a well informed decision on using factoring services, a CFO must understand the factoring product, truly if you do not; your company should not be using it. But to understand the factoring product, examine it from several perspectives. When you know the what, where, and when to use factoring, you can answer some of those basic questions.

What is Factoring

Factoring is the purchase of qualified Accounts Receivable or invoices by a factoring company from an operating business in order to provide immediate Cash Flow to that business. Most factoring Purchase Lines allow for you to sell your invoices at 80 to 85% of face value up to a 45 day period from the invoice date. Typically, you can age the invoices up to 90 days from the purchase date before you must buy them back from the factoring company.

Some factoring companies collect your invoices for you and some do not. Some banks allow for you, the client, to collect your own invoices, and use their treasury management services as a mail box for the collection of the invoices. Pricing is typically based on the risk of the deal, size of the deal, and the volume of invoices sold each month. Finding the proper factoring company with the best pricing and the ability to create a strong banking relationship is as important as the characteristics of the deal. That is why the banks have been so successful with their product. They offer the best of both worlds: very competitive pricing and the ability to develop a long term banking relationship.

When To Use Factoring

Deciding when to factor may be the easiest decision to make in the factoring equation. Any transitional need in a company can create a factoring situation. High growth is usually the most common in the Texas market, however, lack of capital, high debt leverage, payroll tax problems, or just not being able to meet your payables within their terms are all reasons for using the factoring product. Always, the primary goal is to increase your cash flow and allow you to smooth out the up and down swings which are created by clients that do not care to pay their bills in a timely manner.

The time value of money becomes critical in these situations, and it seems to be the norm that the larger the client, the slower they pay. This is especially true in the staffing industry where payrolls must be met on a weekly or bi-weekly basis. But clients pay in a 45 to 60 day period subsequent to receiving their bill. Whatever the reason, cash flow is the key element in building and growing a strong business, and if this is your hope for the company you represent as a CFO, then factoring your receivables could be the answer.

Where You Should Factor

Deciding where to factor is probably the hardest decision to make once you conclude that factoring is what your company’s needs. There is a variety of independent and bank owned factoring companies to choose from, and they all have their own cash flow programs. Coined phrases for cash flow solutions are the norm, but keep in mind that there are many differences to their services. Commitment fees, exit fees, delinquency fees, and then standard “factoring fees” all contribute to your cost for the service. Many companies prefer bank owned and operated factoring programs because of the banking relationship it creates and generally lower rates due to the bank’s low cost of money. However, some prefer the service you get from the smaller, independent factoring companies. But keep in mind that you generally pay for that service.

Review Legal Document

Regardless of what type of factoring company you pick to purchase your invoices, always review with a keen eye the legal documents, they will tell the story on the cost of the service. Make sure you have a thorough understanding of the rights of the factoring company and the control they have over the cash flow of your company. Many times you can negotiate away the extra fees, but you must ask. These fees can include the exit fee and the delinquency fee.

Involve Legal Counsel

Also, you may want your legal counsel or your CPA to take a look at the agreement to better define the ramifications for issues that naturally occur in your business, but may not be in accordance with how the program works, like having 60 day payment terms to some of your customers. This small, insignificant issue could put you in default of the Purchase and Sale Agreement and result in higher factoring charges to your company. Clearly, having your council review these documents prior to their execution could save you thousands down the road.

Ask for References

Lastly, a real acid test for a factoring company is to ask for references, and find some clients that are no longer with the factoring company, as this could tell you volumes on how they treat their clients, and how well their services work on a day to day basis. Good factoring companies should have no problem allowing you to check them out. Since factoring is largely unregulated, you owe it to your company to do at least this much due diligence. Good luck and may your cash flow freely.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

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SKU Definition

See Also:
Vendor Finance
Inventory Cost
Perpetual Inventory System
Just in Time Inventory System
Open Account

SKU Definition

A SKU, defined as a stock-keeping unit, is a unique number which distinguishes one product from another. It is used, most often, for the purpose of accounting for inventory. Each product has a unique number, allowing smooth tracking as products move in and out of a warehouse or store. An SKU number is not unique to each item, as the bar code on common consumer products, but more is the number used to for each product type. This is the difference between SKU vs UPC.

SKU Explanation

SKU, explained also as the only thing that makes sense of products in inventory, is an extremely useful tool. An SKU code is the base number for each type of product. From there, the SKU is entered into records. Inventory is counted, often by bar code or automatic radio frequency identification tag, as it moves in and out of the distribution center. This information is then placed with the SKU of the product in a database. An SKU, meaning the unique marker for a product, can then be combined with inventory levels for smooth processing and tracking.

SKU Example

Ira is the distribution warehouse manager for a toy company. His attention to detail and consistent methods have aided him in his work. These traits are essential to someone with his position. Aside from this, the other important trait is leadership. Ira has showed this ability time and time again.

Ira’s leadership skills are to the test again. In this situation, product names have somehow become disassociated with their place in the inventory database. This could prove to be a huge catastrophe. Ira is worried but keeps his cool as he formulates a plan.

Soon, Ira is able to find an old record of inventory rates with their SKU configuration. Due to the fact that this is a direct printout from the database, Ira can task someone with simply reentering the Product names. Though the product name is not listed on the record Ira is hoping the SKU is. SKU, functioning similarly to product name, allows this situation to be simply fixed.

Ira resolves to keep a daily copy of the inventory database. He has learned his lesson and does not want this problem to happen again. Rather than blame workers, Ira is a leader who can find the simple solution to a tough problem.

Keeping track of your inventory is an important factor in knowing your economics. If you want to find out more about how you could utilize your unit economics to add value, then click here to download the Know Your Economics Worksheet.

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