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May 2011 News and Notes

Being the Cheapest...or the Best

At the time my wife and I decided to buy a lot to build a home, the local area was in the midst of an economic downturn, led by problems in real estate. After picking out a lot that we really liked, we contacted the broker whose sign was posted on the lot. He looked up the price, which was a little higher than we wanted to pay. The broker suggested that we make an offer. We submitted an offer several thousand less than the asking price, and asked the seller to carry a note. A few days later, the broker indicated that the seller had declined the offer. I asked if there was a counter offer, and he said no. After much back and forth, we eventually purchased the lot for a cash price only slightly below the original asking price. When the escrow closed, I discovered that the seller was a company owned by one of the richest families in the country.

The seller stuck to his terms because, in spite of the economic conditions, he wasn’t desperate. One transaction did not mean much to him, and he knew that prices would come back in time. There was no reason for him to cheapen his inventory of lots just to get one sale. What can we learn from this?

Pricing decisions for products and services are always a hot topic in a soft economy. The temptation is to think that people will buy from you if you just make your wares more affordable, or that you will lose business if you don’t. Often, the opposite is true. In a world where people can’t always be sure what something is worth, price can become synonymous with quality. I recently read a story about a man who lost a consulting job to another firm whose price was much higher than his. The client told him that they liked his proposal, but wanted to go with the best they could get.

Anybody can lower prices. Not everyone can provide the highest quality. Before launching a strategy of lowering prices to improve business, consider a marketing approach that emphasizes things like quality, reliability, and value to attract and retain customers. Buyers who have been burned by buying cheap may be ready to get the best value for the money they spend. It’s worth a try. Remember, once you lower your price, you may be committed to further reductions, because there will always be someone who is willing to go even lower.
 

Withholding on Government Contract Payments

As documented here over the last several months, the rules expanding the requirements for issuing 1099's have been repealed, and the old rules remain mostly intact.  Another potential problem lurks on the horizon for contractors and others who provide services to government.  Although recently delayed, a regulation is now slated to take effect in 2013 that would require government entities to withhold 3% (for income taxes) from all individual payments of $10,000 or more made primarily to contractors.  In an industry where profit margins are often pretty thin, a 3% reduction in cash flow could be a big blow.  That is especially true for companies that will not owe taxes, either because they are not profitable, or expect current earnings to be offset by previous loss carryforwards.

Efforts to repeal the provision are underway, but have not yet been successful.

Details are provided in this article from The Journal of Accountancy.

http://www.journalofaccountancy.com/Web/20114146.htm

How to Get Mentoring for Your Small Business

One thing that small business owners lack, especially in the early years, is a good source of feedback regarding business issues.  This article suggests several ways to deal with this problem, to insure that you don't have to go it alone.

From the American Express Open Forum.

http://www.openforum.com/idea-hub/topics/managing/article/6-ways-to-build-an-advisory-team-for-your-small-business?cid=em-smartbrief