What you sell and how you sell is the foundation of success: building profitability and equity value
What products you sell, how you sell them, and why customers buy them is often misunderstood. Here is how you can better understand the product foundation of your business and drive equity value in your business.
Asking a business owner or senior manager if they know what they sell, be it a product or service, could come across as naïve, perhaps even insulting. Of course, the builder knows they build houses. Of course, the accountant knows they provide financial services, and so on. But, in our experience, from coaching hundreds of business owners over the years, is that a thorough understanding of the products or services you sell, and how you sell them, is missing. Lacking that knowledge undermines the opportunity to make strategic product and distribution choices that support greater revenue.
The journey of starting and growing a profitable business has multiple, interconnected dimensions, some of which we’ve addressed in previous blogs and are all addressed in our eBook, More Time. More Revenue. More You. Your products are the foundation. You can’t build a house without a foundation, and you can’t build a great business without a rock-solid product foundation. There are three parts to taking a deeper dive into your product offering. The first starts with clearly defining your product mix, then making a strategic choice about distribution, and finally, how you could leverage your product and distribution mix. While the short-term outcome of this exercise is about revenue, it has long-term implications for building equity value in your business.
What are you selling?
Let’s start with the basics: your product model. What do you do or provide that your clients pay for? Is it one or multiple products? This is simple for small businesses and likely revolves around a single product, which we’ll call Product 1 (P1). You distribute this to one type of client or distribution base, which we’ll call Channel 1 (C1).
For example, a builder operates at the high-value end of home construction, building architect-design homes for high net-worth people. Each home is unique, and each customer is different. But fundamentally, the distribution channel is residential architects. The product is the bespoke designer home. So, this business is a P1 / C1 model.
This is an important point because this is where the misunderstanding sets in. For example, an accounting practice may think it has three products, such as tax returns (Product 1), audits (Product 2), and business advice (Product 3). Sounds fair, but as far as its clients are concerned, these are all seen as the same thing, just one product (Product 1).
You see where this is going. Without a clear understanding of the product-channel model, you can’t make strategic choices about where to target resources for growth. What strategic choice does the builder have? Find more architects, or find more channels, on the distribution side? Or could the builder sell more products into the channel?
Sell more things, or sell one thing to more?
Part of the builder’s marketing positioning is bespoke finishes. Their internal capability for reclaiming and re-using certain timbers for showpiece staircases, doors and so on has been extended into custom furniture. Whatever the client wants, let’s say a dining table they intend to be a family heirloom, can be designed, built, and installed by the firm. This isn’t just an upsell; this is a legitimate product extension based on the builder’s resources and capabilities and a move that supports their positioning. Now the builder has a P2 / C1 model.
It could go the other way. For example, suppose the builder opened a showroom displaying custom-made furniture. This is a new product and a new distribution channel, making it a P2 / C2 model. In either case, it’s a strategic choice based on precisely understanding their product-channel mix and having the resources – capital, human, and equipment – and capability to pull off the product-channel expansion.
Bundles and packages
Many business owners find the task of grouping their products and channel challenging at first. If you think that you really do have only one product, what then? Pull it apart and look at each component, step, or deliverable in a particular product or service. By getting clear about what clients are paying for, you may be able to unbundle your product and charge very profitably for the bits you currently give away.
The other option is to take the opposite approach and bundle a set of products together to create a competitive advantage to capture market share and increase sales volume. Look carefully at what your competitors are doing and consider adopting varying approaches to create competitive differentiation. A final option may be product packaging. Developing new products is hard, but it’s relatively easy to repackage your existing offer. For example, the builder may discover an increasing demand for energy-efficient designs and materials. The skills and experience in this domain could be an opportunity to repackage the firm’s offering to leverage customer demand.
Products, channels, and equity
The business model you choose has implications for immediate cash flows and, longer term, the value of your business. If we use a highly diversified business model, up to 4 Products or 4 Channels, this is how they stack up in terms of building equity, from most valuable to least valuable:
Product 4 / Channel 4
Product 1 / Channel 4
Product 4 / Channel 1
Product 2 / Channel 1
Product 1 / Channel 1
Here’s the lesson: the more profitable products and distribution channels you can build, the more profitable and valuable in equity terms your business could be. But as Stellar’s founder, Chris Dionne, reminds business owners: “It is a strategic choice whether to focus on building products to sell into a single distribution channel or develop multiple distribution channels for a single product.”
Strategic choice. Those are the keywords. So, do you know exactly what you sell?