One of the biggest obstacles that prevent a buyer from making a purchase decision is the fear that they will pay too much. From the seller’s perspective, there is the fear of pricing a product or service too high killing potential sales or too low, leaving money on the table.

There is an asymmetry of information in that the seller has a much more intimate understanding of how the purchase can benefit the customer… but all the customer knows is what the seller or their published content says. Enter “Pay What You Want” (PWYW) pricing.

When the buyer can name their price, it solves the big question on a buyer’s mind which is ”Am I paying too much”, also known as buyer’s remorse. It also solves a seller’s problem of coming up with a price and their remorse of pricing it too high or too low..

Pay What You Want is a value pricing strategy where the buyer determines the value, not the seller.

Many sellers fear that if buyers are given the option to name their own price they will simply assign a very low value to the product or service. However, there are a few ways that a seller can avoid these situations. For example, the seller may set a reserve price similar to an eBay auction so that if the buyer’s offer price is too low then the transaction does not occur. Or perhaps the seller can provide a suggested price to help guide the buyer into a price range.

Then there are a few ways to drive up the value that a buyer will perceive fair.

Add a Charitable Cause

A large amusement park tested the effectiveness of PWYW by selling roller coaster photos to park visitors. Their results show that while many more people bought the photos when it was offered under PWYW, the average price paid was very low resulting in no income increase to the amusement park. However, when PWYW was coupled with a charitable cause (buyers were informed they could pay what they wanted AND that half of the amount they pay would be donated to a charity) the average amount paid increased substantially, resulting in a significant income increase to the amusement park in addition to generating a substantial charitable contribution.

On the flip side, PWYW pricing may deter some buyers from purchasing because individuals may feel bad when they pay less than the ‘appropriate’ price, causing them to pass on the opportunity to purchase the product altogether.

Beat the Average

When coupled with a charitable cause, the seller can increase the buyer’s willingness to pay by encouraging buyers to “beat the average” by adding additional value for customers agreeing to pay more than the current average purchase price.

Post-Consumption Pricing

One simple enhancement is to shift the time that the buyer pays from the usual practice of expecting payment at the initiation of a transaction and prior to the consumption experience, to deferring payment to after the consumption experience.

Post consumption pricing separates the decision to buy from the decision of how much to pay. Information asymmetries about the quality of the product or service are reduced during the act of consumption so that buyers are informed about the product or service quality when they decide how much to pay for it. As a consequence, risk-averse buyers who may have refrained from purchasing under a fixed price strategy, or who would price the purchase at a discount to allow for this risk, can be attracted to purchase under a PWYW pricing ex-post consumption. In this case, the pricing strategy itself constitutes a signal to the buyer. Therefore, post-consumption pricing can be a profitable strategy to attract risk-averse buyers.

PWYW pricing works best when the buyer has a previous relationship with the seller. New buyers have no attachment or emotional connection to the seller. New buyers get a deal and are gone. However, if the buyer has had prior dealings with the seller and the ...

Many businesses struggle with understanding the difference between having employees vs independent contractors, also called 1099 subcontractors. Most small business owners would prefer to have everyone classified as an independent contractor to avoid all the friction that the government places on employers. Businesses that use independent contractors are not required to provide them benefits, withhold federal, state, and FICA taxes, match the employees FICA contributions, or pay for workers’ compensation, or unemployment insurance. However, the IRS would rather that businesses have employees so that a single employer is responsible for all the withholdings as opposed to multiple independent contractors.

Moreover, the 2017 Tax Act stipulates that individuals who are independent contractors can qualify for a 20percent tax deduction on their 1099 income as long as they are engaged in a trade or business and make less than $157,500 as an individual or $315,000in a business owned by couple filing jointly. Since the new tax law potentially rewards independent contractors, the IRS expects many businesses to attempt to reclassify employees to an independent contractor.

Keeping in mind that the IRS considers a person to be an employee unless proved otherwise, the IRS has developed a 20-question test to determine if a person should be classified as an employee or an independent contractor. “Yes” answers most likely indicate that if challenged, the person will be classified as an employee and not as an independent contractor by the IRS.

1. Is the worker required to comply with the employer’s instructions about when, where, and how to work?

2. Is training required? Does the worker receive training from or at the direction of the employer, includes attending meetings and working with experienced employees?

3. Are the worker’s services integrated with the activities of the company? Does the success of the employer’s business significantly depend upon the performance of services that the worker provides?

4. Is the worker required to perform the work personally?

5. Does the worker have the ability to hire, supervise and pay assistants for the employer?

6. Does the worker have a continuing relationship with the employer?

7. Is the worker required to follow set hours of work?

8. Does the worker work full-time for the employer?

9. Does the worker perform work on the employer’s premises and use the company’s office equipment?

10. Does the worker perform work in a sequence set by the employer? Does the worker follow a set schedule?

11. Does the worker submit regular written or oral reports to the employer?

12. How does the worker receive payments? Are there payments of regular amounts at set intervals?

13. Does the worker receive payment for business and travel expenses?

14. Does the worker rely on the employer for tools and materials?

15. Has the worker made an investment in the facilities or equipment used to perform services?

16. Is the payment made to the worker on a fixed basis regardless of profitability or loss?

17. Does the worker only work for one employer at a time?

18. Are the services offered to the employer unavailable to the general public?

19. Can the worker be fired by the employer?

20. Can the worker quit work at any time without liability?

Misclassifying an employee as an independent contractor can prove to be a very expensive mistake for an employer. The employer may not only have to pay additional wages but fines and fees. Then there is the matter of back workers’ compensation and unemployment taxes.

Worker’s Compensation: An employee who is hurt on the job can receive benefits under workers’ compensation as an employee. However,

Many clients I speak to are looking for a home run or flagship clients. Their logic is since it takes the effort to sign up a new customer, why not sign up a few large customers vs. many small customers? However, this is a misguided goal of building a healthy business. Ideally, you would like many customers rather than a few large customers for the two main reasons: reduced risk and margin squeeze.

First and foremost is that if your one big account leaves, it can cripple or destroy your business. 3 years into my documentation and training company’s history, we had 2.5 million dollars in revenue when we won a 1.2 million dollar per year account. After leasing new office space, buying equipment, and training ten new employees, my client was targeted for acquisition and canceled the project halfway through the contract. We had taken on a lot of fixed expenses with the new lease and capital equipment.

We could not get out of these expenses without a huge penalty cost. Without the revenue from the project, we were bleeding cash. The cash flow hemorrhage brought our business to the brink of extinction and we only survived because we won a settlement from the client after a protracted legal battle. In addition to the effects of losing a big customer, a savvy big customer understands their power and can hold you hostage during price negotiations. Volume discounts translate into margin squeeze. Margin squeeze, in turn, lowers your profit margins, making your business less profitable and therefore less valuable. Ideally, no one client should account for more than 10% of your revenue.

What is the revenue distribution of your customers?

 

Many clients I speak to are looking for a home run or flagship clients. Their logic is since it takes the effort to sign up a new customer, why not sign up a few large customers vs. many small customers? However, this is a misguided goal of building a healthy business. Ideally, you would like many customers rather than a few large customers for the two main reasons: reduced risk and margin squeeze.

First and foremost is that if your one big account leaves, it can cripple or destroy your business. 3 years into my documentation and training company’s history, we had 2.5 million dollars in revenue when we won a 1.2 million dollar per year account. After leasing new office space, buying equipment, and training ten new employees, my client was targeted for acquisition and canceled the project halfway through the contract. We had taken on a lot of fixed expenses with the new lease and capital equipment.

We could not get out of these expenses without a huge penalty cost. Without the revenue from the project, we were bleeding cash. The cash flow hemorrhage brought our business to the brink of extinction and we only survived because we won a settlement from the client after a protracted legal battle. In addition to the effects of losing a big customer, a savvy big customer understands their power and can hold you hostage during price negotiations. Volume discounts translate into margin squeeze. Margin squeeze, in turn, lowers your profit margins, making your business less profitable and therefore less valuable. Ideally, no one client should account for more than 10% of your revenue.

What is the revenue distribution of your customers?

 

When a business advances from stage 3 to stage 4, the business transformation is nearly complete. During stage 4, company decay can often begin to set in as the administration of the business is placed in the hands of a “guardian.”

The primary motives of the business guardian are comfort and security. Unity towards a purpose is absent and replaced with self-interest. The layered class structures fail to understand each other; leaders and followers grow more distant. Workers doubt their leaders have any clear vision and are no longer willing to dedicate themselves to the company’s mission.

Workers are in it for the money and generally are just going through the motions. Internal harmony breaks down and the guardian increasingly seeks unfamiliar solutions to problems he does not fully understand. The board of directors are indebted to the leadership and conform rather than challenge leadership.

Guardians spend most of their time in meetings trying to understand what has or will go wrong. They believe tighter control will solve their problems, making matters even worse. They are more concerned with how Wall Street or the investors see the company than the customer.

Stage 4 companies become so inept in the industry they are challenged by start-ups and are frequent targets of acquisition by competitors. Finally, the culture of a business in stage 4 is one of inaction and has achieved the same level of bureaucracy as our government.

The entire evolution of a business can be seen in the life cycle of Xerox.

Stage 1– Chester Carlson invented copier technology and was the oracle. He spent nine years trying to sell the technology with no real progress.

Stage 2 – The company moved to stage 2 when Wilson Haloid, the general, took charge and funded research to turn the idea into the product we know as xerography.

Stage 3 – Enter Horace Becker, the athlete that managed engineering and manufacturing which turned xerography into a reliable product. Horace was succeeded by Joe Wilson, the performer that changed the model from selling to leasing, growing the company to be so large Xerox became a virtual monopoly.

Stage 4 – Anti-trust suits were filed. Afraid to act, Xerox was taken over by lawyers and Xerox evolved into a bureaucratic culture under Peter McColough, the guardian.

Do you work for a stage 4 business? Is now the time to leave and become an entrepreneur?

When a business advances from stage 3 to stage 4, the business transformation is nearly complete. During stage 4, company decay can often begin to set in as the administration of the business is placed in the hands of a “guardian.”

The primary motives of the business guardian are comfort and security. Unity towards a purpose is absent and replaced with self-interest. The layered class structures fail to understand each other; leaders and followers grow more distant. Workers doubt their leaders have any clear vision and are no longer willing to dedicate themselves to the company’s mission.

Workers are in it for the money and generally are just going through the motions. Internal harmony breaks down and the guardian increasingly seeks unfamiliar solutions to problems he does not fully understand. The board of directors are indebted to the leadership and conform rather than challenge leadership.

Guardians spend most of their time in meetings trying to understand what has or will go wrong. They believe tighter control will solve their problems, making matters even worse. They are more concerned with how Wall Street or the investors see the company than the customer.

Stage 4 companies become so inept in the industry they are challenged by start-ups and are frequent targets of acquisition by competitors. Finally, the culture of a business in stage 4 is one of inaction and has achieved the same level of bureaucracy as our government.

The entire evolution of a business can be seen in the life cycle of Xerox.

Stage 1– Chester Carlson invented copier technology and was the oracle. He spent nine years trying to sell the technology with no real progress.

Stage 2 – The company moved to stage 2 when Wilson Haloid, the general, took charge and funded research to turn the idea into the product we know as xerography.

Stage 3 – Enter Horace Becker, the athlete that managed engineering and manufacturing which turned xerography into a reliable product. Horace was succeeded by Joe Wilson, the performer that changed the model from selling to leasing, growing the company to be so large Xerox became a virtual monopoly.

Stage 4 – Anti-trust suits were filed. Afraid to act, Xerox was taken over by lawyers and Xerox evolved into a bureaucratic culture under Peter McColough, the guardian.

Do you work for a stage 4 business? Is now the time to leave and become an entrepreneur?

For a business to advance from stage 2 to stage 3, the business undergoes a substantial shift from being on the offensive and growth-oriented to becoming more defensive and focused on process improvement through business segmentation. The business segmentation associated with stage 3 sets up the business for shared leadership and management by creating multiple divisions.

In stage 3, true leadership begins to migrate more towards management. At stage 3, humanistic motives are being replaced by profit and wealth motives. Rank is introduced; there are workers, supervisor, managers, and vice presidents. The culture is changed from one of unity for a single purpose to becoming more about individualism.

On one side of the organization is the operations department, which is focused inwardly. I call the people who work in the operations department the “athletes.” As in sports, business athletes are focused on doing one thing better than anyone else. Within the operations department, there are engineering athletes, manufacturing athletes, human resource athletes, and so on.

On the other side of the organization are the sales and marketing department. I call the people who work in the sales and marketing department “performers.” As with theater or screen performers, business performers are outwardly focused and focused on their audience.

Athletes share many traits of Generals and often take over a division using General type skills by improving production and increasing specialization. However, Athletes are more introverted than Generals. Athletes enjoy the actual work, are obsessed with measuring progress, and do not like spending time talking in meetings. They like to make decisions and act quickly. However, they recognize they are not visionaries and focus on execution.  The chief Athlete is the President.

Performers are naturally more extroverted and often come from sales. Performers are convincing and enthusiastic communicators, feel more affinity towards the customer, and see their coworkers as obstacles to serving the customer. They love to keep score and are very competitive. Performers are often frustrated by the company’s lack of expansion and feel there is way too much paperwork. The chief Performer is the CEO.

In stage 3, Athletes and Performers take over for the general.

Henry Ford was a good example of a general that hung on too long and was surpassed by General Motors, a business that successfully transitioned to stage 3.

Is your business a stage 3 business?

Next post in the Series: Stage 4: The Guardians of Business

For a business to advance from stage 2 to stage 3, the business undergoes a substantial shift from being on the offensive and growth-oriented to becoming more defensive and focused on process improvement through business segmentation. The business segmentation associated with stage 3 sets up the business for shared leadership and management by creating multiple divisions.

In stage 3, true leadership begins to migrate more towards management. At stage 3, humanistic motives are being replaced by profit and wealth motives. Rank is introduced; there are workers, supervisor, managers, and vice presidents. The culture is changed from one of unity for a single purpose to becoming more about individualism.

On one side of the organization is the operations department, which is focused inwardly. I call the people who work in the operations department the “athletes.” As in sports, business athletes are focused on doing one thing better than anyone else. Within the operations department, there are engineering athletes, manufacturing athletes, human resource athletes, and so on.

On the other side of the organization are the sales and marketing department. I call the people who work in the sales and marketing department “performers.” As with theater or screen performers, business performers are outwardly focused and focused on their audience.

Athletes share many traits of Generals and often take over a division using General type skills by improving production and increasing specialization. However, Athletes are more introverted than Generals. Athletes enjoy the actual work, are obsessed with measuring progress, and do not like spending time talking in meetings. They like to make decisions and act quickly. However, they recognize they are not visionaries and focus on execution.  The chief Athlete is the President.

Performers are naturally more extroverted and often come from sales. Performers are convincing and enthusiastic communicators, feel more affinity towards the customer, and see their coworkers as obstacles to serving the customer. They love to keep score and are very competitive. Performers are often frustrated by the company’s lack of expansion and feel there is way too much paperwork. The chief Performer is the CEO.

In stage 3, Athletes and Performers take over for the general.

Henry Ford was a good example of a general that hung on too long and was surpassed by General Motors, a business that successfully transitioned to stage 3.

Is your business a stage 3 business?

Next post in the Series: Stage 4: The Guardians of Business

For a business to advance from stage 1 to stage 2, the business requires that the role of the Oracle be supported or replaced by a business development person. I refer to this new leader as the “General.” In our McDonald’s example from a previous post, it was a guy by the name of Ray Kroc.

Ray Kroc bought the business from the McDonald brothers and took McDonald’s from stage 1 to stage 2. This cycle continues to repeat itself over and over for any business that continues to grow and evolve past basic survival mode.

Thomas Edison was an Oracle. By himself, Edison invented many things. However, he was not capable of growing his inventions into a really profitable business. Edison didn’t have the desire or skills to take his ideas beyond a stage 1 business and was always looking for funds to continue his research. It took the likes of JP Morgan, a General, to take Edison’s ideas and turn them into the company we know today as GE.

Sometimes the Oracle acquires the skills of the General, such as with the case of Henry Ford and JD Rockefeller. However, this is less common in more modern times.

Frequently, the Oracle and General get paired up early in a company’s lifecycle based on the perceived strength and weaknesses of the founders. For example, Stephen Wozniak was the Oracle and Steve Jobs was the General for Apple. Bill Hewlett was the Oracle and David Packard was the General for the Hewlett-Packard Company. Paul Allen was the Oracle and Bill Gates was the General for Microsoft. You get the picture.

For many stage 1 businesses, the Oracle sells either all or most of their business after they reach the limit of their skills. The business is then acquired by the General.

For the General, expansion is the name of the game. For the General, their mission is clear and urgent. They like being in charge and making decisions. The General is often accused of being authoritarian and not consulting others before making a decision. They have little patience for planning and administrative tasks. The business General, like their military counterpart, have undying loyalty from their followers based on their “take no prisoners” attitude.

However, while Generals are charismatic leaders, they are so focused on moving forward there is no time for any kind of succession planning. When business Generals die or move on, their businesses often collapse without their leadership. No one is there to pick up the flag after they are gone.

Generals are motivated by a single goal and hard-wired to excel during periods of crisis. However, when the objective is achieved, they fail to recognize or rise to subsequent challenges. At this point, stage 2 has often gone as far as it can go and the General needs to be replaced to move to stage 3.

Are you a General of a stage 2 company?

Next post in the Series: Stage 3: The Athletes and Performers of Business

For a business to advance from stage 1 to stage 2, the business requires that the role of the Oracle be supported or replaced by a business development person. I refer to this new leader as the “General.” In our McDonald’s example from a previous post, it was a guy by the name of Ray Kroc.

Ray Kroc bought the business from the McDonald brothers and took McDonald’s from stage 1 to stage 2. This cycle continues to repeat itself over and over for any business that continues to grow and evolve past basic survival mode.

Thomas Edison was an Oracle. By himself, Edison invented many things. However, he was not capable of growing his inventions into a really profitable business. Edison didn’t have the desire or skills to take his ideas beyond a stage 1 business and was always looking for funds to continue his research. It took the likes of JP Morgan, a General, to take Edison’s ideas and turn them into the company we know today as GE.

Sometimes the Oracle acquires the skills of the General, such as with the case of Henry Ford and JD Rockefeller. However, this is less common in more modern times.

Frequently, the Oracle and General get paired up early in a company’s lifecycle based on the perceived strength and weaknesses of the founders. For example, Stephen Wozniak was the Oracle and Steve Jobs was the General for Apple. Bill Hewlett was the Oracle and David Packard was the General for the Hewlett-Packard Company. Paul Allen was the Oracle and Bill Gates was the General for Microsoft. You get the picture.

For many stage 1 businesses, the Oracle sells either all or most of their business after they reach the limit of their skills. The business is then acquired by the General.

For the General, expansion is the name of the game. For the General, their mission is clear and urgent. They like being in charge and making decisions. The General is often accused of being authoritarian and not consulting others before making a decision. They have little patience for planning and administrative tasks. The business General, like their military counterpart, have undying loyalty from their followers based on their “take no prisoners” attitude.

However, while Generals are charismatic leaders, they are so focused on moving forward there is no time for any kind of succession planning. When business Generals die or move on, their businesses often collapse without their leadership. No one is there to pick up the flag after they are gone.

Generals are motivated by a single goal and hard-wired to excel during periods of crisis. However, when the objective is achieved, they fail to recognize or rise to subsequent challenges. At this point, stage 2 has often gone as far as it can go and the General needs to be replaced to move to stage 3.

Are you a General of a stage 2 company?

Next post in the Series: Stage 3: The Athletes and Performers of Business