Tuesday, January 6, 2015

Limitation of Imitation

Business Tip:
With 2014 coming to a close, I would like to share a very important business dilemma that I encountered this year with several new clients that came to me for accounting and financial help.

This year alone, I had ten new clients who all attempted to imitate a competitor in price matching and customer service. While some imitation cannot be avoided due to industry, products, and services; it is important to remember that to be in business is to be unique and original.

Often time, business owners fail to distinguish between imitating and templating their competition. The key difference being that templating is the process of taking a competitor's model and adapting it to your business plan to create a unique, competitive, and proactive environment in which to grow a company.
Below, is a story of a client who imitated a competitor and the steps taken to make him profitable.

Breaking Free of the Limitations

Recently, I came across a business owner who attempted to imitate a competitor in price matching. The individual owned a manufacturing business that made saw blades and was competing with KASCO. 

The business owner had done his research and found that KASCO sold saw blades for example at $25 per blade. The owner then decided to outbid the competition by being lower in pricing and sold his saw blades at $20 per blade. The decision had an immediate effect on his company -- almost overnight, the business owner saw huge amount of orders coming in. He had new customers, a surplus of orders, and he even purchased a second assembly line to meet the demand.

However, after nine months, my client began to see a shortage in cash flow. His sales were way up but his revenue was nearly depleted. It was at this time, that he approached several banks seeking working capital and was denied due to the unexplained cash shortage. 

It was suggested by the bank that he worked with an accountant to see if the issues could be rectified. At this time, I entered the company as an accountant-consultant with aim at making the company eligible for bank loans. I performed several analysis (cash flow, break-even, margin analysis, etc) and found that KASCO bulk ordering meant their costs were $15 per blade, they sold at $25 and were netting $10 for every blade. 

My client had attempted to imitate this process with bulk ordering and had the same cost as KASCO. However, because my client was a smaller manufacturer and was also selling the blades at a cheaper price, he soon found out that he had been compounding his financial woes.

While KASCO netted $10 per blade, my client only netted $5 per blade and had to spend the much needed cash to keep his bulk ordering high to maintain the lower material costs. In short, cash was tied up in inventory and bulk ordering.

To fix the situation, the client and I implemented several new procedures -- the three most critical changes were:

  • Follow-up phone calls to see if the customers were happy with the products
  • Accepting returns of unused saw blades
  • Customization of saw blades to worker's specification for unique jobs
These changes were followed by a price increase to $55 per blade. To my client's surprise, he only lost three clients who wanted the lower prices, but he gained over twenty new clients and $450,000 in new business from the changes that were made.

It's now been four years and my client has become self-sustaining and appreciates the value of being unique. I am happy to say, he is still in business and continues to be one of my best client.

For more information on what I have done for other companies, visit my website at www.TAAccounting.com

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