In our previous Economic Insights article, we expanded our understanding of the macro economy with the concept GDP — Gross Domestic Product. And we discovered that the key to assessing changes in our economy is by noticing not just the actual dollar value — but rather the percentage change in our indicator, period over period.

To have a better grasp for evaluating GDP, we need to make another adjustment to our macro measurement, and that is: we must take into account price changes that could affect the dollar value of GDP — and in turn distort the changes in real productivity or real output. So we need to move from the concept “GDP” to “Real GDP”.

As you recall, one way to measure GDP is by summing up, over some period of time, all final output multiplied by each item’s associated price. This is sometimes expressed as:

GDP = Volume x Price
Note that Volume represents both final goods and services.

Of course prices can change, but real output (”O”) may not. If that occurs, the economy really has not grown; “stuff” just costs more. So to correct for this, we want to achieve a GDP measurement in base year prices. That is:

GDP = ∑ BaseYearPrice_t OutputCurrentYear_t
Note that “t = the current year”

How do we actually do this ? In reality, statisticians calculate and estimate nominal (or current) GDP, and then adjust for any price changes by something called the GDP deflator. Assuming prices have generally increased, this measurement will reduce GDP by the percentage change in prices since the base year.

An important question that arises is: what should be the base year on which prices are determined ? In truth, the base year changes from time to time, because the further away we are from the base year — time wise — the less relevant (and the bigger) those price changes become. Also an important factor is the changing composition over time of output or “O”. Prices are associated with the actual goods and services that reflect the productive output of our economy. The further back in time we go, the greater the likelihood that GDP will include more and more goods (and services) that are no longer produced — and hence whose prices would distort the GDP deflator measurement.

In the end, we are interested about the percentage change in real GDP.

This measurement is provided annually (year over year), and as well estimated quarterly (current quarter over previous quarter). So when the news and financial media announces the percentage change in GDP each quarter, what we are really receiving is this:

Percentage change in real GDP, quarter over quarter, at an annual rate.

Furthermore, this estimated percentage change will probably be revised several times before the next quarter calculations are addressed.

A couple of last notes:

1. Changes in real GDP, year over year, will be calculated from the total annual data, after the year concludes.
2. Once we know real GDP for the year, another measurement of growth in the economy is real GDP per capita: that is $GDP / total population.

In other words, what has the economy achieved, on average, in terms of real GDP per person? This takes into account not only productivity changes, but growth or changes in the population as well.

Next time: What is the role of Inventory in the nation’s productive output ? and if real GDP is increasing (or growing) — why does it not feel like a recovery ?

In the previous Economic Insight we introduced the concept of GNP, or Gross National Product. For decades this was the major macro-economic indicator of final output produced for the economy over a year’s time.

As the world became more internationalized, and as increasing numbers of companies became more globalized, the measurement of GNP became ever more difficult, especially in the attempt to identify what would be “national” product (which could be produced anywhere in the world).  So the concept was updated to GDP — or Gross Domestic Product.

Image via Wikipedia

This indicator measures final output produced domestically, or within our borders — whatever the nationality of the producer.  And conceptually this more closely reflects that output which is produced by our domestic labor force. Also, theoretically, this should be equivalent to Gross Domestic Income — that which is earned domestically from production.

Today, as measured by GDP, the U.S. economy is about $14 trillion on an annualized basis. Now the question is: how do we grasp the impact of this number?

Actually, more accessible and understandable to us are the changes in GDP, one period over the next. And this is really the focus of our concern: is GDP growing (increasing), or is it not ? Or, is it decreasing?

In fact, we have become so interested in this indicator that we measure the changes in GDP not only annually, but also quarterly. Let us understand what these percentage changes mean.

First, year over year : We take the dollar value of GDP of any particular year (say 2009 = V2), and compute the percentage change in that value from the dollar value of GDP of the previous year (2008 in this example = V1).

What we have is a percentage change on an annual basis. And this is intuitively understandable, much as interest rates are always stated in terms of annual percentage rates.

But what do the quarterly changes in GDP mean? And what are the comparisons being measured ? Is it GDP of any particular quarter, compared to the same quarter of the previous year? Or a percentage change in GDP, quarter over quarter?

Actually, it can be done either way. However conventionally, as reported by the Bureau of Economic Analysis and the financial press, we observe the change in GDP,  of the most recent quarter, compared to the previous quarter. So, for example, the advance GDP report determined the percentage change of GDP for the first quarter 2010, compared to the GDP of the fourth quarter 2009.

However this raises a concern with interpretation. Quarter-over-quarter percentage changes will most likely be quite different than the percentage changes we would see year-over-year. So to allow for consistency, the reported percentage changes in our quarterly measures of GDP are annualized.

In sum: the real GDP for first quarter 2010 was 3.2% greater than the real GDP of fourth quarter 2009 at an annual rate.

Next time: what is real GDP, and what are the changes in real GDP? And what other measures do we utilize to gauge the overall Macro Economy?

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For almost a decade now we have been hearing how important search engine optimization is for your company website. Millions of dollars have been spent to try and climb the results ladder. What exactly has it done for your business? In most cases I would venture to say that it has contributed very little to your bottom line. Human behavior studies have shown that if you are not listed in the top five search results you are irrelevant to most people.

Image via Wikipedia

Additionally, Google™ changes their search algorithms more than once a day to prevent people from exploiting their search engine. That being the case how can you expect to be in the top five results of a query that may have a global audience and how much are you willing to spend to maintain that top listing?

Get Back To Basics

It is time to get back to marketing basics. Before jumping into the Internet marketing morass you need to thoughtfully craft a solid marketing strategy for your company. This starts by taking a good look at your company and determining what makes your offering different from others in your industry.  Ideally you will want to identify something that brings real value to your relationship with your customers.

Let Your Price Do The Talking

Your pricing is one of your most powerful marketing tools and should be used to focus your customer’s attention on your value proposition not on the price itself. Check out our recent blog entry on Using Your Price Tag As a Potent Sales And Marketing Tool.

Who Is Your Audience And Where Do They Live?

This is a basic concept that seems to have been forgotten in the electronic age. If your business is in Los Angeles California and you offer personal training would it make sense to send direct mailers to Canada or Mexico? Why then would you spend thousands of dollars trying to rank your website in the top five of a global search for personal trainers? You need to identify your audience, find out where they shop, vacation, work, chat, socialize, etc. and place advertisements in their gathering areas. In the Internet world that means participating in Health and Exercise Blogs, Social Networking groups, and building a list of “followers” to promote your company to with news letters and other useful information. Think of marketing on the Internet like you would marketing in a small town. Driving visitors to your site is much more effective than just trying to attract them.

Build Your Web Site To Add Value

Finally, when you create your web site make sure that it offers value to your visitors. Using the example of a personal trainer you could offer a section with healthy recipes or a free exercise and weight tracking log software. By offering free value you can ask your visitors to sign up for your mailing list which helps you build a solid list of high value marketing targets.  Your website needs to be an active component of your marketing strategy and needs to act as a sales advocate on your company’s behalf.

Getting back to marketing basics will help keep you out of the trap of spending large amounts of time and dollars chasing the illusive top 5 position in a search result. Instead you will focus on what really matters and that is connecting with your customers and turning them into an army of evangelists for your business.

Do you think the day will ever come when the deciding factor for your customer’s purchase will not be based on your price? Are your margins shrinking because you have to continually cut your rate or product price to compete with others in your market space? The time has come to stop the downward spiral of price competition an prevent it from gutting your business profits. 

Most marketing text books say that a price tag has two elements.

1. It defines the terms for the exchange or how much the customer will pay.
2. It is a signal of quality. (The economy car is less expensive than the luxury car.)

A third aspect of the price tag has been suggested in research done by Marco Bartini and Luc Wathiue, that being the price of an offering can shape the value of the offering by motivating the customer to more closely evaluate and better understand what is being offered. This is counter intuitive to most modern business owners but can be a very powerful tool if used correctly.

Luc and Marco’s study showed that raising the price of an offering by 50% to 80% did not cause buyers to shy away from the offering but had the opposite effect. They became more interested in what made a similar offering more expensive so they evaluated the benefits of the offering over the lower priced offering.

Genius!!!  Raising the price made the customers not focus on the price!

In their study Luc and Marco used four different strategies to test buy responses. All four worked well to focus buyers on quality and features and may be used successfully depending on your specific circumstances. 

Strategy 1: Use Price Structure to Clarify Your Advantage

This is perhaps the most radical approach for most business owners because it requires them to completely restructure their pricing. Instead of looking at the market and setting prices based on competition and perceived customer expectations you will be pricing your offering based on its differentiating value components. Perhaps the most vivid example of this is the one used in the study examining how GoodYear spent many years struggling with getting customers to pay for the innovations designed to extend tread wear. Finally they took a step back and completely restructured they way they charged for tires. In doing so they changed the way the entire industry priced their tires. They simply charged by expected tread wear length. That way the customer could see the value of the tread wear and safety innovations simply by the signal sent by the price tag. The price tag focused the customer on aspects of the offering that made if more valuable to them.   

Strategy 2: Willfully Overprice to Stimulate Curiosity

This strategy is best suited for areas of the market where there are many similarly priced items such as computers. The research showed that a moderate price increase over similar products provoked customers to investigate and seek out what made the offering more valuable. There are many great examples of this technique at work in the wold today. The most popular example is Apple Computers. Their products are generally priced 30% to 40% higher than most PC or comparable products. This has caused consumers to focus on the “value” they receive by paying more for a computer. Another compelling example of this is StarBucks Coffee. They were in a market where the downward spiral of pricing had a cup of coffee as nearly a give-away item. They willfully priced their coffee much higher than any competing coffee shop which caused consumers to focus on the StarBucks ”experience”. Their pricing approach changed the price movement for their entire industry. 

This strategy should be used thoughtfully and with care. It was found that outrageous price increases actually alienated customers and caused them to dismiss the offering without consideration. Prices that were changed by 10% to 30% were invisible to the test subjects. Prices that were increased by 100% to 190% higher had negative effects on consumers. The sweet spot for this approach appears to be 40% to 80%.

Strategy 3: Partition Prices to Highlight Overlooked Benefits

Price Partitioning can be a very powerful tool to highlight differentiating elements of your offering. This approach requires that you itemize and assign prices to individual elements of the offering. Even if the individual elements are not optional the itemization encourages customers to evaluate your offering more closely and to connect with the elements that are personally appealing to them. Cable TV and Telephone companies are great examples of this kind of pricing. Both use this approach to highlight their plan benefits and to show how much of the total amount is attributable to Government taxes and fees. 

Partitioning your prices can be a dangerous game. If you are not completely transparent with your customers, itemizing elements of your offering that are not optional can make your customers feel “trapped” into paying for something they do not want. Additionally, hiding prices for non-optional items can invoke very bad feelings in your customers. Airlines are quickly becoming the poster child for this kind of pricing. Some discount airlines are charging “extra” for the check-in process so they can advertise a very cheap ticket price. In this case they would see better results by having a little higher initial ticket price and itemize the services included with that price. 

Strategy 4: Equalize Price Points to Crystallize Personal Relevance

Price Equalization throws out the cost-plus pricing approach and equalizes the price across all product variations. This type of approach works best in mature markets where customers are asked to choose a set of options which appeal to their specific taste. In such a market customers do not seem to respond to nominal changes in value. As a matter of fact, itemizing tends to make buyers look for ways to pair undesired features to reduce the price. A current example of this is the way Apple priced music tracks on iTunes. Charging the same price for Pop, Rock, Country, and Oldies was completely counter to the way the music industry structured it’s pricing in the past. By pricing all tracks the same and all albums the same, price was removed as a consideration in the buying decision. Customers simply chose options that were personally appealing. Interestingly, the research found that customers were 30% more likely to purchase songs and ended up purchasing more songs per transaction than with the old price structure. Bottom line was that they realized an 89% increase in revenue!

With all of the investment we make to build our brand and market our differentiating features we continually force our customers to focus on price and they become desensitized to the features of our products. To break that trend you need to challenge your customers with creative and thought provoking price tags. Let your pricing revive the conversation with your customers by encouraging them to ask “what am I actually paying for?” and “what about this offering do I really need or want?”

This post is based on a research article published in Harvard Business Review May 2010 edition. (Reprint Code: R1005F)

The aggregate, overall economy is that sphere within which we all live.   Even if you try to ignore it, or profess to have no interest in it, the impact of the Macro economy is pervasive and unavoidable.  So for your own well-being, it is best to have knowledge about the  Macro economy –  and then to understand policies undertaken in its name.

Image via Wikipedia

First:  the overall economy sets the tone and provides the foundation by which we all flourish (or not) in our material pursuits.   This importance became painfully evident by the beginning of 2008, and the debate continues, two years later,  as to whether we are truly “pulling out of it”.

Pulling out of what?  Lower levels of overall income – typically measured by the Gross National Product  (GNP);  higher levels of unemployment (about 10% nationwide;  more in California);  exploding levels of underemployment (probably another 10% or more);  and individuals leaving the labor force.

The immediate and often estimated measure of overall well-being is the Gross National Product or  “GNP”.    What is this, really?   You can view GNP from two perspectives.  One perspective is that GNP is the measure of all final output produced in a specific time period  –  say for the calendar year.   So literally, GNP is the sum of every piece of final product (“O”) times its final price (“P”).   It provides a dollar value to the goods and services that support us materially.  Equally important, and at the same time,  GNP reflects the income received for producing.

Another way to perceive GNP is via the demand for “stuff” and services.   So GNP can also be measured by Final or Aggregate Demand  –  by whom ?  By Consumers (C);  Business (I); Governments (G); and foreigners or net exports (X-M).   Business demand is especially intriguing.  “I” or investment spending is the sum of purchases by businesses for capital (long term) equipment and property; plus changes in inventories.  And what drives this ?  Undoubtedly, Investment spending is influenced by expectations of the future.

Ultimately, the value of the output (Sum of O x P) has to equal the value of demand by the various sectors of the economy  –  C + I + G + (X-M).   This value does matter, and so does the change in GNP, one time period over another.   The value is crucial because it is a reflection of the gross income achieved by the society.   For practical and essential reasons,  hardly any society or country would wish this to be smaller, rather than larger, compared to a previous time period.

Today, the U.S. economy (GNP) is about $14 trillion on an annualized basis.    Can we really grasp the magnitude of this number ?  More accessible and understandable to us are the changes in GNP, one period over the next.    So… next time:  what are changes in GNP ?  How do we interpret them ?  What is “real” GNP versus “nominal” GNP  ?      And…. What do we want ?

If it there is one thing I have learned over the years it is that you can find inspiration almost anywhere if you are open to receiving it. A good case in point is this podcast from the Theatre Of The Mind web site. Lori Culwell proposes that that many people strive to attract success and abundance in their lives but they do things that drain their creative energy batteries. If your batteries are dead when an opportunity comes by you will not be able to take advantage of it. To prevent that you need to manage your energy use just like you do for your home or your car. You need to engage in activities that recharge your creative batteries so you have a strong reserve to expend when your opportunities arrive.

We all have opportunities, those who appear to be successful are the ones who have the creative energy to take their opportunities to the bank.

Take 30 minutes to listen to the pod cast and see if you can find something to enhance your professional life.

Sustainability is quickly becoming the new buzz word for business, society and the environment. Unfortunately, when something becomes in vogue, much of the original or core meaning is lost to spin and marketing for profit. I would suggest that if we each, as individuals, managers, and business leaders work at making our sphere of influence sustainable many of the social, economic and environmental issues that face the world today would disappear.

What, exactly, does sustainable mean? Webster’s dictionary defines sustainable as “relating to, or being a method of harvesting or using a resource so that the resource is not depleted or permanently damaged.” Wikipedia has a somewhat broader definition of the term. They indicate that it is “…the ability to maintain balance of a certain process or state in any system.” Both of these definitions have significant meaning when applied to a business environment. What business owner is not interested in preserving their resources so they will always have enough to draw from in times of need?

What are some of the game changing tactics that you can implement to make your business sustainable? I will leave for the philosophers the discussion of what products and services are moral and support or degrade our social sustainability. Here we will only focus on sustainable practices that will help your business weather both good and bad times. Let us look at six business roles and how each can effect the sustainability of your business.

BUSINESS LEADERS:
Most companies, large and small, have habits that waste their precious resources. Those habits slowly drain your organization of much needed reserves. Your resources are not only cash but are your human resources, customer confidence, credibility, etc. Take a long hard look at your company culture to see if it encourages habits that cause imbalance in your employees lives. Do your company habits take your customers’ loyalty for granted? Are your company habits causing you to neglect your buildings or fixed assets? All of these habits consume vital, finite, resources that are the life blood of your company’s existence. You might think that all of these items are renewable resources, and you would be correct. However, as with the environment, renewal of resources takes time and a huge amount of energy.  At what cost and time frame can you renew your spent resources, and will they renew in time to keep your business viable?

EMPLOYEES:
“Our people are our most valuable assets.” This is the mantra of many a company. Unfortunately, the employees themselves rarely believe it or act accordingly. Ervin Laszlo suggests that we should change our mantra of “Live and Let Live” to “Live so That Others May Live.” Applying this to your business environment you can encourage employees to band together and connect with each other so that they are working to help preserve all their jobs instead of spending vast amounts of time and effort making sure that they look good at the expense of their co-workers. Collaboration throughout the organization can create an organism that is balanced and wholly focused on growth and innovation.

CUSTOMERS:
As a provider of goods or services to your customers are you acting as a partner or a predator? Do you try to save your customers’ money by providing a quality product at a fair price and offering less costly alternatives if your product does not fit their needs, or do you try to milk every dollar out of each account by selling unnecessary products and services? Building strong partnerships with your customers brings trust and balance to the relationship and strengthens your business ecosystem. In other words it makes that part of your system sustainable.

VENDORS:
When we think of customers we think of “our” customers but are “we” good customers. Do you look at your vendors as adversaries, trying to keep them in the dark as much as possible so as to milk every dime out of a deal, or do you practice transparency, and work in partnership with your suppliers to build strong, long lasting relationships? If you “win” a deal by beating your vendor or supplier down you may find that you have gained nothing. If your vendor cannot make a fair profit they will either not be there to deliver for you or they will cut corners to save money and give you a substandard product. Neither outcome lends itself to creating a strong, balanced, sustainable system.

COMMUNITY:
Most businesses reside in a community. In many small businesses the owner, managers and employees live in the same community. Is your business a balanced, sustainable influence on the community in which it resides, or is it an island floating in the community but never really connecting with it? There may come a day when you need the strength of the community to come to the aid of your business. It is important to create an environment in your businesses that builds good citizens within the community. Thomas Jefferson admonished us that “If you believe that the people are not sufficiently informed to exercise the power of demos in society, the democratic solution is not to take power from their hands but to inform them. “We can help keep our people informed by encouraging an open exchange of ideas and opinions in and around our work place. There is a hidden advantage to being an active, informed citizen of our community. It helps you identify social trends that can effect your current business line or present new opportunities. These can often be detected in their early stages before market pundits even acknowledge them.

GLOBAL:
There was a time when considering the global market was only the domain of large, multinational companies. Now, with technology, rapid travel, and the internet, small business can compete on a truly planetary scale. Building sustainable relationships with foreign workers and suppliers can give your business an added edge that some of your competitors may not have considered. Remember to listen to your foreign partners for they have not learned the habits of your society. They are in a unique position to give you fresh insight and ask the “stupid” questions that we are either too busy or too programmed to ask.

Implementing a sustainable ecosystem for your business means reshaping your view of the world from an adversarial to a collaborative view. This means working together with your partners at every level, with every employee, customer, vendor, etc., to build a strong enduring network.

Many of the business owners that I talk to are struggling with the problem of how to sell their product in an economic environment that seems to be taking so many customers out of the market. Most are struggling just to keep their company alive. We, as a business community and as a country; have become distracted by constant and often conflicting rhetoric coming out of the media and our political leaders. In short we have lost our focus on things that matter most to our business.

It is important to be aware of the economic and political climate and market trends; however, it is very dangerous to become distracted by focusing and worrying about the outcome of these events. You might be saying to yourself; “In this time of turmoil the only thing I can do to preserve my business is to focus on cost cutting and hunker down and wait for customers to return to the market.” While cost cutting and doing more on less are important aspects of weathering downturns, you must not forget to focus on activities that preserve and increase your revenue streams.

This is your best and most cost effective source of new revenue. Talk to your customers and find out what your company can do to help them weather these tough economic times. Find out what new services or features you can add to your current products to make your customers’ experience the best it can be.

During economic downturns, many companies desperately try to take on risky ventures into new markets, instead of focusing on what they do best. To really do more on less, make sure you explore and derive the maximum potential from the things you do best.

A strong vendor network can be a bulwark of financial strength that can help you weather economic downturns. This means being the kind of customer for your vendor that you strive to cultivate for your company.

Make it easy for your prospects and customers to say no. Giving them this option will make them feel more comfortable with you and your solutions, and will prevent you from wasting time on long and often unfruitful sales efforts. This will turn the sales process into a relationship built on a foundation of trust and lets you form a partnership where you both work together to build a solution that is mutually beneficial.

Great fortunes are won and lost in times of financial turmoil. These times are a molting process for the economy where old ways are shed and new companies and markets are born. So turn off the interference of all the bad news and get back to focusing on the fundamental values that make your company great.

Answering this question is not always easy for most businesses. When looking for places to trim the budget, marketing is an easy target with immediately perceived results. While this may be the case, you should take a long hard look at the ramifications of reducing your exposure in the marketplace.

CREATE BUZZ

In the good times there are plenty of customers to go around. However, when times get tough and customers become frugal or get out of the market all together, the first reaction is to pull back and stop going after the few consumers left. In today’s technology world, marketing does not always mean throwing out thousands of direct mail pieces or buying radio and television spots. With technology you can mine your customer database, create a potential customer profile, and focus your marketing efforts in areas where that customer may be lurking. Existing customer databases are company gold mines waiting to give riches to whoever mines them. Consumers who have purchased your product in the past are more likely to purchase from you in the future. Keep in touch with them. Inform them of new products and services. Provide compelling reasons for them to visit your site. Provide a way for customers to connect with each other to share their experience with your company. Use your happy customers to help create the buzz that will help make your company stand out.

When economic times are tough it is more important than ever to create buzz around your company. With buzz you can enlist thousands of people to spread the exciting news about your company. Buzz does not just happen. You need to work at engaging your customers and making them feel the excitement that you and your employees have about your company. What are some of the ways you can engage your customers?

• Create a personalized or VIP customer service center
• Start .a blog about your industry or company
• Implement a weekly or monthly email news letter
• Setup a support or general forum for customers and visitors to discuss issues in your industry
• Add functionality to your website that provides added value to your customers

These are just some the things you can do to economically focus your marketing efforts and dollars on improving market share and ultimately your bottom line. Marketing is an investment if you treat it as such and like investing, you should determine what will give you the best return on your investment