Cash flow is the lifeblood of every business. Under appreciating the importance of cash flow and cash flow forecasts are top reasons why small businesses fail. This is true for larger companies, too. Jawbone's announcement that it was folding was foretold by reports last year that it was not able to pay key vendors due to a lack of cash. High flier GoPro is shifting its focus to costs and profitability versus growth to shore up cash flow.
The truth is growth and cash flow does not have to be an either/or choice if it is done in the right way, for the right consumers and at the right time. This is key because generosity--done well--is a great way to grow. Netflix dropped full seasons of its shows to enable its consumers to binge watch, despite investor concerns of consumers signing up, watching and quitting. Costco has an outstanding return policy which is part of the secret of its success.
But it is a balancing act. Being too generous with your pricing or your payment terms can kill cash flow. However, 'crafty generosity' is an approach that gets you the best of both worlds. Here are three specific ways to execute this in your business.
Be Generous the Right Way: Crack the Value Code
Cracking the value code is perhaps the most foundational decision to ensure your cash flow is sustainable. My simple value code equation is to ensure that the benefits you deliver to customers exceeds the price you charge them and that the price you charge exceeds your cost of goods and cost to deliver. Benefits > Price > Cost. Pretty simple in concept, but most companies don't really recognize how much or how little benefits their products deliver and use outdated pricing strategies like cost plus or competitive benchmarking. A really good way to fix this is to the 'next best alternative' approach by my friend and pricing guru, Rafi Mohammed.
Be Generous With the Right People: Superconsumers
Every business has periods of the year where they are the most generous with heavy discounts that are eagerly anticipated like black Friday. The problem is that most customers who enter during a peak discount period are less involved consumers focused on the lowest price. Your generosity will not be reciprocated.
You want to be generous with your category superconsumers--people who spend a lot and care a lot about the category. This is your chance to audition before the kingmakers of the category, who--if you delight them--will gladly evangelize the category and your brand to many others. These people are not seasonal customers. They leave digital breadcrumbs everywhere because they are so eager to learn. They appear in spikes and valleys in your data. Find them and be generous to them. Any successful investment in superconsumers converts into a marketing investment and potential for earned media.
Be Generous At The Right Time: Share Expiring Inventory and Barter Today for Tomorrow
Every business has inventory that is about to go bad. You don't have to sell perishable products for your inventory to spoil. An airline seat that is empty on a plane is an opportunity cost that never comes back. Service providers who are idle for a week never get that week of capacity back. Your best bet is to actively offer up your excess inventory that is about to 'spoil' and offer it up to your superconsumers. They can be none the wiser and feel deeply touched by your offer.
Finally get comfortable bartering a little today for a lot tomorrow. One of my mentors led an internal study at a top tier consulting firm to determine if discounting was good or bad. The results were startling. He found that they should discount more often, if done the right way. Discounting was very good as long as you were clear about two things. First was to be clear on the size of the economic discount, so that the client knew the extent of your generosity. Second was to be clear on the strategic value you wanted back, be it a referral or testimonial. The key is to know your benefits/price/cost value code to know if you can afford the economic discount and accurately estimate the strategic value you are getting.
If you've ever bought fresh cut fruit from a grocery store, then you're familiar with a terrific example of crafty generosity. Superconsumers of fruit love the convenience of pre-cut fruit and can be convinced to shop there again. Grocers love taking fruit that is about to spoil, into a premium priced product that actually generates versus destroys cash flow. It's a great win-win.