It’s that moment of truth, the split second in which they make the call: “Yes – I am going to take it” or they decide “no – not this time”. It may have taken months of pondering to build up to this decision point or they might be operating on pure impulse. Either way, it ultimately comes down to a telling moment when a potential customer finally says “yes” or “no”.
For any business owner, positively influencing customers in this moment of truth can be the difference between success and failure. It’s no secret that the more times you can sway customers to say “yes” to your product or service, the more likely you are to have a thriving business.
The key question is whether there is anything you can do to help them make that choice?
There is a field of study called behavioural economics, which integrates psychology and economic theory to understand how and why people make the decisions they do. Behavioural economists are particularly fascinated with irrational decisions like why some people pay R8 for a bottle of “branded” water that they know is no different from the free water in the tap or why others will drive 20 minutes to the right store to save R15 on a R30 pen but they won’t do the same to save R15 on an R800 jacket.
Although the field of behavioural economics examines decision-making in an array of different settings many of the principles are very useful for understanding buying decisions. As a business owner, some of these experimentally proven principles may aid you in getting customers to say yes to your product or service.
Many of the big corporations are hiring expensive marketing consultants to help them integrate some of these principles into their selling process. Therefore, if you want to compete with the big players, you need to apply these principles as part of your pricing, promotion and selling practices.
1. The Principle of Relativity:
We always tend to evaluate offers in relation to other options
In order to be in the game you need to make target customers aware of what you do. There are multiple ways of doing this but the key is to build awareness in a way that appeals to your target customer base and to stand out from the crowd in the process.
When Gary Erickson launched Cliff Bar he built awareness of his sports bars by giving them away at endurance events and by sponsoring mediocre but passionate local athletes. By creating a presence at local sporting events and being part of the community, the company soon became top of mind for grassroots athletes and Erickson effectively cracked into a tightly held sports nutrition market.
Because it is difficult to evaluate the real value of most things we consider buying, if we are able to compare one option to another, we are far more likely to actually make a choice. Consider this example: suppose somewhere in this magazine there is an offer to subscribe to the publication. Because you have been buying the publication over the counter for the past few months and have found the content valuable you consider subscribing.
If you are given the following options, which would you choose:
- Entrepreneurmag.co.za web only one-year subscription – R159,95
- Entrepreneur magazine print only one-year subscription – R289,95
- Entrepreneur magazine print and web one-year subscription – R289,9
- Research would suggest that more than 80% of the people who are given this choice would choose the third option – the print and web subscription. But what if option two was removed and only the following was on offer:
- Entrepreneurmag.co.za web only one-year subscription – R159,95
- Entrepreneur magazine print and web one-year subscription – R289,95
In this case nearly 70% of the people asked selected option one – the less expensive web only option. The mere presence of a close comparison option to the more expensive print and web subscription caused the vast majority of the audience to select that but when the close comparison was removed from the choices, people tended to go for the cheaper web only option.
The reality is that we are all fooled by relativity and it influences our perception of value in a big way. Our mind is wired to make comparisons and when we get to choose between a number of different options we automatically focus on the things that are easy to compare and avoid those that are less easy to compare.
Suppose you are shopping for a used luxury German car. When you arrive at the dealer, you describe what you want and the dealer says he has three cars that meet your criteria in your price range. One is a Mercedes Benz and two are BMWs.
All three cost about the same and have very similar engine power and features. But one of the BMWs has a big scratch on the bumper. The salesman promises that it will be repaired and you should not factor that into your decisions.
Which car are you most likely to choose? The chances are good that you will choose the BMW with no scratch. Why? Because you had a direct comparison in making the decision. The BMW with no scratch is way better than the one with the scratch.
We like comparisons when making decisions. This affects a range of decisions from our choices of holiday destinations, the way we choose washing powder from the supermarket shelf and our selection of a movie while standing in a queue at the theatre, to our decisions about house purchases.
We are wired to make comparisons and we are much more likely to make a buying decision when we are able to make a direct comparison. One of the first things a consultant will do to increase the revenue in a restaurant is place a high price item in each section of the menu.
People will seldom, if ever, buy the new over-priced items but they will feel much more comfortable selecting the second most expensive item. Thus, by creating an expensive dish, a restaurateur can lure the customer into buying the second most expensive dish on the menu (which used to be the most expensive before she added the more expensive decoy).
This simple insight can aid you in making sales in many different fields of business. When selling your products or services, give potential customers a higher priced or less appealing alternative. This will help them make a choice and commit to the buying decision.
2. The Principle of Anchoring:
We always tend to establish anchors and make buying decisions in relation to those anchors
What do you expect to pay for a cup of coffee? What are you likely to spend on your next house? What will it cost to send your child to university? Your immediate answer to these questions is an indication of your anchor price for all these potential purchases.
Whether we like it or not, we tend to establish anchor prices for almost everything we have once considered buying. Sometimes these anchor prices are realistic and sometimes they are way off the mark. Think about the family that moves from Middleburg to Cape Town.
They sell their four-bedroom, two-bathroom house in Middleburg for R750 000 and expect to get something similar in Cape Town for marginally more. But after a week of house hunting their expectations change drastically when they realise they cannot even get a two bed-roomed apartment in Cape Town in their original price range.
In the USA it has been proved that people moving from expensive housing zones (like San Francisco, New York City or Seattle) to less expensive zones (like St Louis, Omaha or Durham) often end up overpaying for their first property, especially when they buy it soon after they move.
Their housing anchor price is out of sync with the market in which they are buying and as a result they end up overpaying for their property. It is possible for a savvy entrepreneur to adjust an anchor price for a product and in so doing profit handsomely.
Starbucks has adjusted the anchor price for a cup of coffee. Twenty five years ago Americans expected to pay no more than a quarter (25c) for a cup of coffee. When Howard Schultz established Starbucks he worked diligently to separate Starbucks from other coffee shops.
He paid very close attention to every aspect of the coffee experience in an effort to make Starbucks feel like a continental coffee house. He used European names for the coffees, such as Caffé Latte, Macchiato or Mocha Java and the words Short, Tall, Grande or Venti to distinguished cup sizes instead of small, medium or large.
Starbucks did everything in its power to differentiate the experience from any other coffee option in the USA. It was so different that Starbucks did not need to use the established anchor prices for coffee. It created a new anchor price at somewhere around the $2 mark. Because of the proliferation of Starbucks the anchor price for a cup of coffee in the USA is now $3. According to standard inflation measures it should still be less than a dollar.
Something similar is currently happening in endurance sports events in South Africa. For many years marathon runners and cyclists have been spoiled with having to pay very low entry fees to participate in world-class events such as the Comrades Marathon, Two Oceans Marathon or 94.7 Cycle Challenge.
Our anchor price for such events is well out of line with global standards. For example, the entry fee for Comrades is R130 whereas the entry for the New York Marathon is ten times that at $170 (R1 360). A few enterprising individuals, such as the organisers of the Cape Epic mountain bike race and The South African Ironman triathlon have realised this.
They have created endurance sports events that are substantially different from the traditional marathons in South Africa and as a result they are able to charge entry fees aligned with international standards. The Cape Epic mountain bike race costs R12 600 per person and The South African Ironman costs R3 500 per person.
Both events tend to sell out. The differentiating efforts of the teams behind these events have had the effect of adjusting the anchor price for local athletes who are now willing to pay prices that are completely out of line with the price of other endurance sports events in South Africa but consistent with international standards.
The lesson for entrepreneurs is to search for opportunities to establish a new anchor price for their product or service. Most managers and business owners assume that they need to be “price takers” – accepting that the price the market is currently paying for similar products or services is what they can charge.
If Howard Schultz or the organisers of the Cape Epic or The South African Ironman believed this, they would not have a viable business right now. Because they were proactive in establishing a new anchor price by adequately differentiating their product, they have created thriving businesses.
3. The Principle of Possession
We always tend to become attached to things in our possession
We have all heard about people camping out for days on end to get tickets to a U2 concert or the World Cup final. Experiments that have been conducted with such people, suggest that those who actually acquire a ticket place a much higher value on it than those who go through all the pain of trying to get a ticket and not succeeding.
This is because we tend to value things in our possession much more highly than things we never manage to possess. Statistics in the car sales industry suggest that if the salesperson manages to get you in the car for a test drive your chance of buying the vehicle increases three-fold. Once you have driven a car you feel what it is like to possess it. You get a clear picture of what it will be like to own it and you are more likely to buy it.
Dan Ariely, the behavioural economist from MIT and Duke, points to three reasons why possession of something has such a big effect on us. Firstly we fall in love with what we already have because we start to incorporate it into our identity.
Secondly, we focus on what we may lose rather than what we will gain if we have to give it up. Thirdly, we assume others will feel the same way as we do about the object and we don’t want others to have what we could have to forgo.
The principle of possession creates interesting implications for businesses wanting to increase sales. If you allow people to “take possession” of what you are selling, they are more likely to buy that item. Taking possession can come in many forms, it could mean allowing customers to “test” the product or service, it could mean encouraging them to vividly imagine themselves owning the product or receiving the service or it could mean giving away an introductory package of the product or service.
Many companies have seen the benefit of a liberal returns policy as this enables people to take the product home and bring it back if they decide they don’t like it (they very seldom do). In Seattle, one innovative property developer furnished four apartments in a new downtown block and allowed interested buyers to spend a weekend in the beautifully furnished apartments.
He provided them with vouchers for local coffee shops, theatres and restaurants, giving them a wonderful taste of inner city life. The apartment block is now completely sold out, despite the housing recession and complete oversupply of new homes in the area.
Another variation of the possession principle is allowing people to take ownership of something small related to the product prior to their next purchase decision. One bicycle company in the USA did an experiment in which they provided a bunch of randomly selected weekend cyclists with high quality cycling jerseys branded with the company’s name and logo.
The randomly selected individuals who were given the jerseys were four times more likely than the average cyclist to buy that company’s bike on their next purchase. The $30 cycling jersey induced a $3 000 purchase – sounds like good business to me. The key is to make people feel like they have some connection with your brand prior to their next purchase.
Some Things to Think About
These are three very simple principles with powerful implications for making sales in your business. The way that you interpret and use these principles will depend on the kind of business you are running.
The application of the principles will vary depending on whether you are selling a product or service, selling high value or low value items, selling to consumers or businesses, or selling frequently or infrequently. No one knows your business as well as you do so you need to spend some time thinking about:
- How you provide the right type of comparison to help your customers make a buying decision
- How you differentiate your product or service to establish a higher anchor price for your offering
- How you enable customers to take possession of your product or service before they have even made a buying decision
If you can come up with innovative and effective answers to some of these questions, research suggests that you are likely to see a significant jump in sales in your business.
For more information on behavioural economics and decision making within business read these three books:
- Predictable Irrationality: The Hidden Forces That Shape Our Decisions, by Dan Ariely. HarperCollins. 2008.
- Sway: The Irresistible Pull of Irrational Behavior, by Ori and Rom Brafman. Broadway Business. 2008.
- Blink: The Power of Thinking Without Thinking, by Malcolm Gladwell. Little, Brown and Company. 2005.
When Do You Know It’s Time To Sell Your Business
Five telling signs.
Even though running your own business gives you many freedoms, everyone still has those days or even weeks of wondering, “Shall I stay or shall I go?” Sometimes this thought becomes persistent instead of a passing phase – and for your own financial future and that of your business, you need to be able to recognise signals that mean the right moment has come to consider selling your business.
This is never an easy decision, especially as the amount of stress and constant pressure that a business owner contends with will play havoc with the decision-making process.
Having engaged with hundreds of business owners over the years, we see the five most solid signals that prompt them to sell are:
This is the single most common factor influencing the decision to sell a business. Whatever age you have chosen as your retirement goal, if you are approaching this then give yourself an opportunity to assess both the benefits and challenges of having your own business.
Have you considered an exit strategy, such as hiring someone else to run the business instead of you? Or, as in many cases, does your business represents your most valuable asset? In this case, it would need to be cashed out at some stage as this would represent your pension. Selling your business successfully and fetching maximum value could well be critical to ensure that your retirement is well supported by financial surplus.
2. Lifestyle Change
Growing a business can be an infinite journey. Have you reached your goals with this business and do you have the appetite for the ‘next chapter’? Or do you want to move off into a completely new business direction? Perhaps you would prefer to follow a passion of yours or spend extra time with your family, investing more time in yourself and them to counter the massive investment of time and energy that you have made over the years.
3. You are ‘gatvol’
We often underestimate what it takes to live life as an entrepreneur and the amount of compounded pressure we ‘on-board’ over the years. Whether it is customers, suppliers, staff or the banks, you know this stress has reached a decisive, even destructive level if you can’t shrug it off and instead you find yourself repeatedly saying, ‘Enough is enough!’
4. Building a business versus running a business
Go back to the beginning of when you started your business. Do you remember the passion, fire and motivation that drove you to achieving your first sale? How about that sense of achievement as you hit the subsequent milestones? All that represented the very DNA that you have as an entrepreneur – but as your business grew, so did everyone and everything you need manage on a daily basis. Do you find yourself being more of a human resources manager than that entrepreneur with that fire in your belly? Is running a business enough to motivate you and drive your core DNA?
Perhaps this is the signal for you to sell the larger business that you have developed to someone with the skills and interest in the administration it requires. Selling your business would free you up to apply your entrepreneurial skills in a new context.
5. You can’t do it on your own
In many cases you may still have time and energy to keep growing your business – but you may recognise that you are not willing and able to do this yourself. Sometimes you would appreciate a ‘big brother’ who can share the load. This could equate to a partner injecting money into your business, taking on some of your risk or opening up new opportunities for you and your business. This has become more and more prevalent in South Africa with the BEE codes and pressure on certain industries. Bringing on the right strategic partner to help you navigate uncharted waters is a critical step to take in your eventual exit strategy.
Decoding the signals that suggest it might be time to sell all or part of your business means that you will make the right decisions to stay or go based on sound reasoning. Remember that this is one of the few times in your life that you truly get ‘one shot’ to get it right.
Selling Your Business? How To Exit In Style
Gary Palmer, CEO of Paragon Lending Solutions runs through some practical requirements to realise the best value possible when selling all, or part of your business.
Preparing to sell a business you have put years of work into, or even built from scratch, can a be a daunting prospect. Aligning the disconnect between what you think it’s worth versus what a buyer is prepared to pay is just one of the challenges.
Act like you’re on the market – all the time
Like the Scout’s motto says: Be Prepared. A business owner needs to make sure their business is sale-ready at all times. Not only will this save a heap of administration when you do want to sell, but also means that, should an excellent offer land on your desk, your business financials and compliance issues are well in hand.
A business must be able to show a clean set of audited financials as well as up-to-date management accounts. Your accountant will be able to help get these in order if they aren’t already.
Make sure you aren’t running personal expenses through your business. This can be a challenge for some small businesses. Despite the allure of minimising taxes by running private expenses through the company books, it poses significant risk when preparing clean financials.
Prepare a due diligence pack. This can be provided by your auditor or financier and will include a list of your current contracts, VAT and SARS clearance certificates and defendable cashflow projections. Having all the documents required for a due diligence in one place that is easily accessible will go a long way to cutting down on the time it will take your prospective buyer to assess the company’s value and future potential.
It’s also important to remember that assembling all the necessary documentation takes time. It’s better to begin the process well ahead of when it will be needed. It’s also quite possible that a potential buyer may put a premium on the buying price if they know they are walking into a business which is clean, up to date and has no unexpected auditing or compliance skeletons in the closet.
Consider all the angles
Business owners opt to sell their business, or part of their business, for any number of reasons. This could be in order to retire and live off the proceeds, or because they want to raise money for another business opportunity. It’s important for owners to remember that there are associated expenses and even delays that they should plan for.
Before any negotiation begins, a business owner will need to find the right buyer. There are a number of brokers and financial service companies who can help source qualified potential buyers and, unless you have an offer on the table, it is a good idea to work with a third party to get line up a few credible potential buyers.
Once the deal has been negotiated and you have settled on the price, you must factor in Capital Gains tax. It is sensible to have a good idea of this before negotiations begin and to work out your asking price accordingly. Other expenses may also impact what you walk away with, including professional fees for your lawyer, auditor and other consultants with whom you have worked during the sale. You should also plan for delays due to valuation debates and requests for supporting documentation which may take time.
Finally, it is always a good idea to consider whether you want to walk away immediately after the sale. Many business owners choose to stay on in operations, and by doing so can negotiate a more favourable price with earn-outs attached to the sale price. After all, you are the person who knows the business best and has a relationship with your clients – and this insight comes with a value attached.
Most importantly, if you are planning to sell your business, it’s a good idea to have advisors and partners who have been through the process many times and are able to help you navigate what may be unchartered waters for the first-time seller.
When Is The Right Time To Sell Your Business?
Of the 6 most common questions I get asked on a regular basis, when is the right time to sell is by far the most common. The mergers and acquisitions game is part art, part science and a whole lot of elbow grease.
Your personal context
- How old are you?
- How much energy do you have left in your tank?
- Have you extracted value out of the business already?
- Have you managed to de-risk yourself by investing in equivalent assets outside of your business?
Only you can answer these questions, but they will go a long way in providing clarity for you and your ability to take the first step to selling your business?
Is your business ready to sell?
If I had R100 for every time someone had said to me that they want to wait another twelve months before they sell, I would have accumulated a substantial amount of money. Despite what the majority of advisors say, there is very often no real need to ‘dress up’ your business for sale.
Don’t get me wrong. You need a going concern that delivers solid returns to catch the eye of the right acquirer. However, who are you dressing your business up for?
If you do this properly, you will have more than one buyer at the table. Chances are, what is attractive to one buyer won’t necessarily be attractive to someone else. It is impossible to be all things to all acquirers.
You say you are just 12 months away….
12 Months is a magical number. Business owners always seem to be 12 months away from being ready to sell their business. Maybe it’s that big contract you are hoping to land. Perhaps you want to put in a new IT system. There will always be something.
Speaking from experience, I had a client that was going to wait, but instead committed to the process. Had they waited 12 months they would have been hit with ‘Nene-gate’, Brexit and Trump all in a 12-month period! There is no way that anyone could have anticipated a trifecta like that. I had another client that put in a new SAP system in those 12 months and the acquirer used Oracle!
You will reach the 12 month point anyway…
With the time that it takes to complete a successful transaction there is a good chance that you will cross that threshold of that big contract that you were hoping to land, putting that succession plan in or whatever the reason was that you wanted to delay the process for.
Something else that generally ruffles a few feathers, is that selling the (proven) potential generally fetches a far greater value than the past. This in itself is a whole other topic, but in the context of when is the right time to go to market, always keep this factor front of mind.
What is happening in the economy and your industry?
We are fortunate to have seen an increased sentiment in, and around, the South African economy in 2018. There is an uptick in international interest, but you know what the reality is, it never really took a major dive. The reason being that irrespective of the economy or your industry, good businesses sell. Some of my best deals happened in 2016 when the economy was under severe pressure.
Remember that when times are tough, acquirers need to buy good businesses to grow, as their own profit and be under pressure. When the economy and your industry is doing well, acquires will buy as they have excess cash to invest and will have a more bullish outlook on taking risk in their investments.
Truth is….there is no perfect time
The one thing that I have learnt over the past few years is that one can theorise for months trying to think of endless ways to increase the value of your business. Without climbing into the market and actually determining what your reality is, you will keep delaying your decision to take your business to market.
There is only one real hurdle that needs to be overcome, and that is you. If it is any consolation you will never be 100% ready. What have you got to lose? If you go to market and, worst case scenario, you don’t sell, you still have a great business to run and grow.
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