Perks and Pricing
Q My friend does a lot for his workers, including taking them to lunch once a week. At first they were grateful, but now they don't even say thank you. What should you do when employees stop appreciating perks?
Salt Lake City
There are several reasons gift horses get their mouths looked in. Sometimes employees view a perk as a paltry substitute for competitive compensation. Sometimes they resent that underperforming colleagues receive the same rewards. Sometimes they don't value the perk or have received it so often they take it for granted. (That fifth gift certificate to TGI Friday's is worth the same as the first, but the recipient would prefer a day off, thank you very much.) Sometimes they're a bunch of ingrates.
In any case, employees' motivations matter less than your friend's in offering the free meals. Chances are he didn't start Taco Tuesdays just to be thanked. If he's never explained his objective, employees may view those lunches as regular weekly meetings--especially if table talk concerns work. Your friend should make his objective clear. If the goal is to boost morale, he could use the lunches as a forum to acknowledge employees' individual contributions. If it's to motivate, he could invite industry experts to speak during the meals. If it's to reward, he should tell employees that--and ask them if they'd rather spend the money on something else, advises Peter Cappelli, professor of management at the University of Pennsylvania.
If your friend does stick with the lunches, less is probably more. "He may be trying to do the right thing, but over time will his employees really find 50 of those lunches a reward?" asks Richard Wellins, senior vice president at Development Dimensions International, a human resources consultancy. Paring back the number of lunches could make face time with the CEO seem more like a perk and less like part of the job, reasons Wellins. Even employment relationships, it seems, require playing a little hard to get. On the other hand, he adds, perhaps taking staffers out individually would rekindle their interest. Having the boss's ear to themselves every few months might be more valuable than a group outing every week.
One other possibility to consider: Maybe your friend takes his staff to lunch because he enjoys their company. In that case, employees' rejection may be especially painful. "For CEOs, there's a very blurry boundary between our business and ourselves," says Denise M. Rousseau, professor of organizational behavior at Carnegie Mellon University. Spending time with his nonwork buddies may make your friend feel better. For a start, you could take him to lunch.
Q My company sets wholesale prices based on a 200 percent markup from the manufacturing cost. How can I improve my pricing strategy?
Pricing is a classic chicken-and-egg problem. You want healthy margins but can't make money if no one buys your product. That means you'll have to think about more than profits and losses. "You can do a P&L," says Jerry Charlup, founder of CFO Associates, a Stamford, Connecticut-based company that provides interim CFO services, "but if the market rejects your price, it's meaningless." In other words, instead of asking, "How much should I charge?" you should ask, "How much are my customers willing to pay?"
Your company is using what's called a "rule of thumb" markup. That's a pretty standard approach, but you could be leaving money on the table, says Barry Nalebuff, a professor at the Yale School of Management and the co-founder of Honest Tea, a $13 million beverage company based in Bethesda, Maryland. Nalebuff sees some of his customers, delicatessens that carry Honest Tea, shortchanging themselves. Nalebuff's product costs about $1 wholesale, while Snapple costs around 67 cents. Most delis take a 50 percent markup on each product, says Nalebuff, charging their customers less (and pocketing less) for the Snapple than for the Honest Tea. But why settle for a much smaller profit on Snapple? The store's overhead is the same for both products, and most customers would accept a slight price increase on the Snapple. "Instead, delis sell more of the items they make the least on," Nalebuff says.
The first step to better pricing, Nalebuff says, is experimentation. Try raising your prices 10 percent on a few items and watch whether demand drops drastically. Mark things down and observe how customers respond. Once you have a sense where their pain begins and your gain ends, it's time to don your CFO hat. Create a spreadsheet that includes estimated monthly unit sales for each product and all of your expenses. That will help you project how price changes will affect your cash flow and margin.
And remember: It's okay to look beyond short-term profitability, especially if your company is growing rapidly. Nalebuff says that Honest Tea used "Field of Dreams pricing," setting its prices lower based on future cost efficiencies. "We had sales of $250,000, but we calculated our cost per bottle based on sales closer to $25 million," he says. "Pick prices that you can grow into."