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EXPERT OPINION: HOW TO CALCULATE YOUR SHARE-OF-WALLET

Written by Alan Creedy on . Posted in Practitioner Forum: Insights and Ideas, The Creedy Commentary. 3 Comments on EXPERT OPINION: HOW TO CALCULATE YOUR SHARE-OF-WALLET

Scott Meierhoffer

A few years ago we came to the realization that there was a real necessity to review our system.  Not all calls are equal in service type, in merchandise and in revenue.  The old system indicated that direct cremation had the same market share value as a traditional burial.  In a sense that is true.  Every individual death accounts for a decision made by a family on the choice of a funeral provider.  In the strictest sense calculating market share would be accurate.

However, we devised a system to track a broader range of information, and in a fairly easy and cost-effective way, to clarify what was occurring in our market.  In so doing, we still track market share but we added the component of revenue and service type share to the study.

To initiate the process we identified the various service types that we were interested in tracking for both the traditional burial and cremation services.  These included the following service types: chapel service, church service, graveside service, cremation with visitation and memorial service, cremation with memorial service, cremation only, ship-in/ship-out and miscellaneous services.

We then itemized the charges for each service type from our own General Price List.  When funeral merchandise was included we used our average casket, outer burial container and memorial package in our computations.

The next step was to obtain our competitors General Price Lists and build the same packages for each competitor.  In these computations, we selected merchandise as close as possible to the merchandise we included in our own packages for comparative purposes.

After sending all of this information to our resident Excel expert to build an appropriate tracking spreadsheet, we began tracking information from the local obituaries daily and then auditing our results at the end of the month with the competitors’ websites.  For the most part, traditional services are simple to track and input into the correct service type.  Traditional burials in the chapel, church or graveside service categories are easy to detect from the obituary.  Determining cremation services has been more of a challenge.  The question is raised particularly often when the memorial service is held at a church following cremation.  It is difficult to discern if the funeral home is involved in these services or not.  Do we book the case as a “cremation with memorial service” or “cremation only”?

When reviewing the information now, we are not only able to see the true market share of which percentage of deaths went to which funeral home in our area, we can now see the percentage of the revenue expended those same funeral services among our competitors.

For example, in a given time period of a month, our firm may have accounted for 41% of the market share.  But based upon the call mix for that period, our revenue share may account for 47% of the dollars expended on funeral service.

Although we understand these are not exact figures, because we are comparing averages in regards to merchandise selected, we feel confident that this study gives us added insight to what is occurring in our community.

From the data we enter we can look at traditional burial separately from cremation, and look at each service type alone to see what families are choosing from all of the funeral providers in the area.  It becomes a clearer way to see trends developing in service types and the funeral homes families are choosing to provide them.

Two additional bits of data we are collecting are age of the deceased and if the memorial gifts published in the obituary call for donations to the funeral home to help pay expenses.  This information gives us more anecdotal results.  With the first we can calculate the average age of the deceased for each of our competitors.  The second gives us an indication as to the ability for families to pay for the services they select.

For example, if a competitor shows 21% market share and 18% revenue share with a high mix of cremation and a large percent of the families asking for donations to help offset funeral costs we can extrapolate that that competitor may have an accounts receivable issue which may be affecting their business model.

Much of this is unscientific and speculative to an extent, but it does clarify our community and what is happening with the dollars expended in our industry.

Scott Meierhoffer is currently Chief Executive Officer of Meierhoffer Funeral Home & Crematory in St. Joseph, Missouri and its affiliates which include: Pettijohn & Crawford Family Funeral Service, Mound City, Missouri; Bailey & Cox Family Funeral Service, Plattsburg, Lathrop and Polo, Missouri; Family Service Group, Horizon Cremation Center, Family PALS pet Crematory, St. Joseph Memorial Park, Mount Auburn Cemetery and Ashland Mausoleum, all of St. Joseph, Missouri.  Operations at these facilities include traditional funeral, cremation and cemetery services as well as pre-arranged funeral planning, pet cremation, reception and catering services and floral and gift shop.  A licensed funeral director in the State of Missouri since 1994, Meierhoffer is a member of Selected Independent Funeral Homes.

 

Great Advice on Turning Your Business Around

Written by Alan Creedy on . Posted in The Creedy Commentary. 1 Comment on Great Advice on Turning Your Business Around

I started my career in business turnarounds in the 1970’s when I worked for  a company whose business it was to buy and “refurbish” distressed businesses and resell them. DeathCare is in need of a turn around. There are different types of turnaround strategies and turnaround strategists.  Many are simply liquidators who cut costs so drastically that the already wounded patient has no choice but to be sold for parts.  But the truth is most businesses can be saved if you are willing to do the work.

I became aware of Jack Stack and his Game of Business in the late ’80’s.  He is a savior not a liquidator.  Saviors save jobs and businesses and investments.   I found early on by luck and prayer that the fastest way to rebuild your business is to engage your employees.  They know where the waste is, they know what customers really want and, if they really trust you, they will tell you where you might be going wrong.   That is not to say that you should abdicate your role as leader and expect staff to run the place.  It’s not that easy.  Rather, it means engaging them to give you feedback and input and weighing that input with other information to decide what is the best thing for the firm at this moment.

Watch this 6 minute video, it will encourage you.   But one last note of warning: if your financial reports aren’t in order or you don’t understand them or they aren’t timely don’t even start.

The Emperor Has No Clothes

Written by Alan Creedy on . Posted in The Creedy Commentary. 5 Comments on The Emperor Has No Clothes

What employee turnover reveals about your leadership.

Employee turnover can reveal a lot of things.  Surely turnover is normal but both too much and too little are signs of serious management issues.  The pressures of the last ten years have led many in DeathCare to be frustrated with their employees.  An attitude has sprung up that suggests a feeling like: “If somehow I could just fix my employees everything would be alright.”

High turnover rates and no turnover rates are actually two sides of the same coin.  Both indicate an unwillingness to develop people and poor to nonexistent communication skills.  It is the leader’s role to communicate what is expected of people, to follow through and to teach and to develop.  High turnover indicates they have put too much pressure on people to meet expectations without giving them the tools and resources to do the job.  Tools and resources include emotional support and guidance.  Having no turnover is just as bad.  If you are a firm of any size it is impossible that you haven’t got at least one person who doesn’t belong.  Even Jesus made a bad hire although He did it on purpose to fulfill prophesy.  Most often, when someone tells me (usually with some pride) that no one ever leaves I am willing to take a bet that they have several aimless people who couldn’t find work elsewhere who are just showing up for a paycheck.

Drucker’s Orchestra metaphor is the best illustration:

When a new orchestra leader takes over a poorly performing orchestra he does not have the luxury of letting everyone go and replacing them with top performers.  Instead, he must ferret out the worst and work with the remaining average players to help them want to work at peak levels

Great leaders do 4 things extremely well:

  1. Select the right people
  2. Set clear expectations
  3. Motivate people to do their best
  4. Develop people

Interestingly, there are 8 things employees really want from leaders:

  1. Tell me my role, what to do, and give me the rules
    1. Clear direction
    2. Parameters so they can work within broad outlines.
  2. Discipline my coworker who is out of line
    1. Hold people accountable-be fair but hold fast to what is and is not acceptable
  3. Get me excited
    1. About the company
    2. About what we do
    3. About where I fit
  4. Don’t forget to praise me
  5. Don’t scare me
    1. They don’t really need to know about everything you worry about
    2. Don’t lose your temper
    3. Be fair and consistent
  6. Impress me
    1. be bold
    2. or be creative
    3. or be smart
  7. Give me some autonomy
    1. Give me a special project
    2. Trust me with an opportunity
  8. Set me up to win
    1. Indecisive leaders frustrate everyone and make them feel defeated

Do you find it interesting that financial incentives aren’t on this list?  Turns out that money is only a demotivator.  If you aren’t paid fairly it will demotivate you.  Overpaying you will not motivate you or make you more loyal.

 

Funeral Home Valuation Part 3: How To Present Your Operating Results

Written by Alan Creedy on . Posted in The Creedy Commentary. 1 Comment on Funeral Home Valuation Part 3: How To Present Your Operating Results

In order to properly determine EBITDA you first have to present your financial statements correctly.

If you are not using an accounting service that specializes in the funeral or cemetery industry then it is highly likely that your financial statements are not presented in a manner that makes ratio analysis meaningful.

For instance:  the way non-industry accountants handle cash advances typically has a significant impact on your ratios.   Let’s say that your Revenue before cash advances is $1,000,000, your cash advance revenue is $150,000 and your cost of sales is $210,000.    The proper way to calculate your cost of sales ratio is to divide $210,000 by your net revenue of $1,000,000.  The result is 21% which is too high (it should be between 15% and 18% in most areas).  But, most non-industry accountants include cash advance revenue in total revenue and post the corresponding expense to either cost of goods sold or an expense account.  This artificially inflates revenue which drives lower cost ratios.  $210,000 divded by $1,150,000 yields a cost of sales ratio of 18.26% thus obscuring the fact that your cost of sales ratio is too high.  (For an example of an industry accepted chart of accounts click here.)  P&l statment

So, step one in “normalizing “your profit and loss statement is to determine your actual ratios.  I would estimate that 8 out of 10 of my clients require analysis and reallocation of accounts to bring their financial statements in to conformity with accepted practice where proper comparisons can be made.  I strongly recommend this be done by a professional.  There are too many nuances for someone who doesn’t have experience.  Typically, it takes me as much as 4 hours to complete this process on 3 years of statements.   Once this reclassification is done then ratios can be calculated and the deviations from standard industry experience will draw attention to areas that deserve deeper analysis.

The most common places that can be adjusted are cost of labor (including owners compensation) and facilities (specifically rent to owners).  But there are others including redirected income like preneed insurance commissions paid directly to owners instead of through the business that you should be alert to.  Ultimately, the goal of normalizing or recasting financial statements is to show what the firm would look like if it were owned and operated by someone who emphasized reporting to investors over sheltering income from the IRS.

It is vitally important to remember that you can’t play games during this step and any professional analyst will refuse to do so.

For example:  Let’s assume that your actual cost of labor is 42% of Net Revenue.  The normal industry experience (including owners, taxes, benefits etc.) is in the range of 35%.     You should only restate labor costs to 35% if you are confident that  a buyer can achieve that level.   Let’s say you are selling to your children, but you plan to stay on in a reduced role at your current salary and benefits it is not legitimate to recast as if you were going to no longer be paid.  (I have seen it done).

For your information, the typical major ratios expressed as a percent of net revenue  for normal firms are as follows:

Cost of sales: 15% – 18% (this is often a function of geographic location which impacts cremation rate)

Cost of labor: 30%-35% (with all labor related costs (taxes, benefits, etc)

Facilities: 10% -12%   (including rent, mtge interest, leasehold improvements, depreciation, etc)

Disclaimer

While I  have experience in business valuation, I am not a Certified Business Appraiser.   The explanation and comments contained herein are my own.

Interrupting This Blog For an Urgent Message

Written by Alan Creedy on . Posted in The Creedy Commentary. 1 Comment on Interrupting This Blog For an Urgent Message

Once in a while something comes along that deserves to be viral.  Something that speaks to the common good and addresses issues deep enough to be shared by everyone.

 

Intelligence indicates knowledge not wisdom. A wise man knows how to use his knowledge to make a good decision. A person may have a lot of knowledge but be unable to use it properly.

There is no sensible businessman today that isn’t concerned about how they are going to cope with the future.  Never in the history of DeathCare has the pace and complexity of change been increasing as fast as it is today.  What is needed is perspective.   And in a recent article by Todd Van Beck in the Canadian Funeral Director Magazine I was almost startled to find an old perspective…a piece of genuine wisdom… that all of us desperately need today.

I know that several of my readers are trade journalists.  Todd has given me permission to reproduce this.  I appeal to you to help me bring a new / old perspective back from the dead.  Let’s help our readership find new ways to think about the competitive challenges of this day.

Click here for Todd’s article entitled Walmart

Funeral Home Valuation Part 2: Why EBITDA?

Written by Alan Creedy on . Posted in The Creedy Commentary. 1 Comment on Funeral Home Valuation Part 2: Why EBITDA?

Funeral home valuation, Funeral home appraisal, Cemetery Valuation, Cemetery Appraisal

EBITDA became popular in the 70s and 80s when buyers were trying to locate companies that had strong cash flow outside of financing and capital Expenditure concerns. Since buyers were going to change the capital structure anyway, it was convenient to have a quick apples to apples comparison.

EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization is a more reliable and cleaner comparison than Net Income.
1) In general, it is a much stronger indicator of ongoing, operational strength for the firm.
2) Taxes are considered “non-operational” in a sense because they can be affected by a variety of accounting and tax conventions. These have no bearing on the ongoing, operational strength of the firm.
3) Interest expense is a function of leverage, not operations. Companies in any given industry will have varying degrees of interest expense based on the debt load they incur.
4) Depreciation expense is an accounting convention recognizing investment in physical assets over the life of that asset.  It has no bearing on the ongoing operational strength of the firm. Firms with  investments in large capital expenditures like recently built facilities will have high deprection expense while similar firms with older facilities or fully depreciated physical assets will have lower depreciation expense.
5) Amortization expense is another accounting convention dealing with the amortization of intangibles. Because it is an accounting convention, we want to take it “out” also.    Firms with goodwill acquired through other acquisitions will have amortization expense while similar firms who have built their business without acquisition will have none.

So, EBITDA is considered by the financial community the way to compare apples with apples.  It is computed by adding back to net profits or earnings any income taxes paid by the corporation all interest expense, depreciation and amortization.   This is, of course, where many amateurs foul up.   A good tax planner will encourage a business owner to take advantage of all legitimate business deductions.  This includes inflating personal salaries above market as well as other expenses that might otherwise be personal.  As a result, earnings on many independently owned businesses are reported as less than they might be if they were the subsidiary of a public corporation, for example.  So, before EBITDA can be truly calculated adjustments should be considered by a professionally trained analyst to represent the true picture of operations.  Of course, these adjustments are only legitimate if it is reasonable to expect that an independent buyer will operate in a more efficient fashion or can find economies that the seller has not had access to.  This process is called “normalization or recasting”.

After normalization a funeral home typically yields a an EBITDA ratio of between 20% and 30% of NET Revenue with the average falling in the middle.  Interestingly, a branch (accounted for correctly) will often yield between 40% and 50% because it does not bear the burden of duplicated administrative or ownership overhead.

Next week proper categorization, operating ratios and normalization.

Disclaimer

While I have experience in business valuation, I am not a Certified Business Appraiser.   The explanation and comments contained herein are my own.

The Tyranny of the Ten Call Man

Written by Alan Creedy on . Posted in The Creedy Commentary. 4 Comments on The Tyranny of the Ten Call Man

A Management lesson from the bible

One of the most common and pervasive staffing problems in funeral service is the man or woman who undermines almost every current and future issue management tries to address.  They are the “Mayor of the Prep Room”.  No matter what initiative you attempt, they quietly work behind the scenes to undo it.  Sometimes they employ a subtle mechanism I call being “cooperatively uncooperative”.  This means giving the appearance of being on board but quietly “forgetting” to do what they have promised.  Worse they are absolute geniuses in providing what seem reasonable excuses why exceptions must be made.   As “Mayor of the Prep Room” every attempt to communicate to staff is answered by a meeting after the meeting where they hold forth on “what we are really going to do.”  The worst of them are blatant about simply ignoring expectations and just doing things the way they want rather than the way the are asked to do them.  Effectively daring management to “Make Me.”

An example is worthwhile.  Recently the more progressive funeral homes have implemented monthly, weekly and even daily staff meetings.  Attendance is mandatory.  Yet every owner that has been successful in establishing regular meetings has shared with me that it meant they had to chase down and face down at least one staff member repeatedly to make them attend.  Many owners and managers simply gave up trying and either exempted them or stopped having meetings.  This obviously caused other employees to lose heart and wonder (sometimes openly) who was really running the business.   Formal power said the owner –but informal power didn’t agree.

Why do owners and managers allow this behavior?  They say that it’s because they believe the person is too valuable to lose.   They have convinced themselves that they would lose 10, 20 or 30 calls.  And maybe they would.  But over time the lack of progress in responding to the many challenges we face and the loss of employee morale (not to mention the loss of owner morale) cost much much more than the loss of those calls.  I call these trouble makers “ten call men” because the owners live in daily fear they control that many calls.

I don’t like “ten call men” because they arrogantly wield informal power and prevent opportunity without assuming any risk.  They play owners and managers like puppets.

Jim Collins, in his “must-read” book, “Good To Great” makes this observation about them:

“We have a wrong person on the bus and we know it. Yet we wait, we delay, we try alternatives, we give a third and fourth chance…we build little systems to compensate for shortcomings…We find our energy diverted…that one person siphons energy away from developing and working with the right people.

Letting the wrong people hang around is unfair to the right people…

The reason we wait too long often has less to do with concern for that person than our own convenience…Meanwhile all the other people are still wondering: ‘when are you going to do something about this?'”

It is not unusual in my consulting practice to find inspiration in The Bible.  On more than one occasion a verse from Proverbs has enabled clients to take long delayed but desperately needed action:

“Cast out the scorner and contention will go out; yea strife and reproach shall cease”                  Proverbs 22:10           

                                                                                                    

 

A Different Way To Think About Packaging

Written by Alan Creedy on . Posted in The Creedy Commentary. 3 Comments on A Different Way To Think About Packaging

for the past 4 weeks I have been attempting to spark a conversation about Pricing Strategy against the backdrop of a recent Harvard Business Review article: “How to Stop Customers From Fixating on Price.” Candace Franco responded with great insight: 

“Very thought provoking … but here is one I’d like to talk over with someone … why are most of the package offerings I see on GPL’s categorized by final disposition? Such as cremation with full service etc. why not categorize by ceremony … such as “religious remembrance”, “life celebration”, maybe even a “destination” offering? I really like the idea of an “expeditious” package for those who think they want quick. To me the value of what you all do is in the service not the final disposition. The way it is now service always feels like an add on when I think it should be the focus.”

We need to think about this insight and, hopefully, talk about it.  My take is we categorize this way partly because customers often start with “I want cremation” so we think we are responding to that issue.  But I also think that it is our way of saying: “With casket or without casket”. 

Candace’s point has gotten me to wondering if we couldn’t sidestep that issue and do a better job of relating with families if we just let go of the casket issue altogether.   Why not have a Catholic Funeral Plan, a Military Honors plan, a Simple plan, etc, etc, etc.   I can anticipate that someone might say “too complicated”.   38 caskets on display is complicated…not to mention expensive.

I wonder…

How To Stop Customers From Fixating on Price Part 4

Written by Alan Creedy on . Posted in The Creedy Commentary. 4 Comments on How To Stop Customers From Fixating on Price Part 4

Partition Prices to Highlight Overlooked Benefits

 This is the 4th and last in a series on pricing strategy based on an article from Harvard Business Review of the same title.  The purpose of this series is to stimulate thought and conversation among practitioners about pricing as a strategy rather than simply as a way of driving revenue.   So far we have covered the following 3 pricing stragies:

            “Equalizing Price Points to Crystallize Personal Relevance”

            “Using Price Structure to Clarify Your Advantage”

            “Willfully Overpricing to Stimulate Curiosity”

We have also presented a brief discussion of the commoditized consumer.

Partitioning Prices to Highlight Overlooked Benefits is the most difficult to grasp and execute.  The research found that poorly executed it has the ability to alienate customers.  They see it as burdensome and a form of “bait and switch”.  Think luggage fees that have been partitioned out of the normal ticket price for airlines. 

If done correctly, however, partitioning can have a powerful effect on buying behavior.  Basically, the partitioning strategy is based on the proven premise that customers don’t really tune into benefits they might find valuable unless they know their value.  So, if you include items within a package and the buyer doesn’t know the value of the individual items included in the package they don’t really have a way of distinguishing between product or package offerings. 

According to research, “Presenting a cost as a set of smaller mandatory charges invites closer analysis and therefore increases the likelihood that a customer will revise a routine consumption behavior.”   Basically, this means that if you use package pricing you need to set a frame of reference by either identifying the individual prices of the items in the package or by clearly showing that the cumulative value of items in the package exceed the package price by a specific amount.   Say, for instance, that to induce people to buy your best burial package you include better quality caskets, a video memorial and DVD, 10 death certificates and your premium level register book.  If you don’t partition those items as having a specific price customers may not see the value of going from better to best.

Let’s be even more specific: Let’s say you offer a “good”, “better” and “best” packages.  In your good package you offer two caskets.  In your better package you offer 3 and in your best package you offer a choice of 4 caskets.  Partioning strategy tells us that you should should show the value of the caskets in each package.  That doesn’t mean the price of each casket but something more like you would see in a retail advertisement.  Think of a “callout” bubble next to the pictures of caskets that says something like: “A value of $2,995” or (for your Best Package) “A value of $4,495”.

The research concluded that “to those who saw the price partitioned, quality mattered: the better package induced more people to choose the more expensive [product]…people are unlikely to factor a benefit into their choice unless an explicit charge is made for it.”

funeral pricing, funeral home management, funeral consulting, funeral price strategy, funeral price shoppers

How To Stop Customers From Fixating on Price Part 3

Written by Alan Creedy on . Posted in The Creedy Commentary. 2 Comments on How To Stop Customers From Fixating on Price Part 3

Part 3 Willfully Overpricing to Stimulate Curiosity

Last week we discussed the commoditized customer and the second of 4 pricing strategies: “Using Price Structure to Clarify Your Advantage.”  If you didn’t think I was certifiable last week there is a good chance you will be thinking about sending me for treatment this week.  Please remember: our goal is to use these insights to begin to rethink funeral service’ pricing strategy.

According to the article from Harvard Business Review, from which these discussions originate, this week’s strategy has proven to be particularly effective for mature industries.  Their examples range from coffee to high priced elevator systems.

In a price competitive mature market the logic behind willful overpricing seems counterintuitive.  At the same time, I can well remember that our primary pricing strategy at the funeral home I managed was to be $100 higher than anyone else.  This “strategy” is one I have often encountered as well as its evil twin: being $100 lower than anyone else.

According to research, customers don’t automatically dismiss the higher price model.  Instead, a  higher price often seems to motivate them to take a closer look.  That closer look could (and should) reveal information they care about that works in your favor.  (it bears repeating here that the point of all these strategies is to get consumers focused on value over price)  Some of the things I can think of are quality (“your mother never leaves our care”) or reputation, or an unconditional guarantee, etc. 

In one experiment products were priced at an 80% premium.  Subjects were able to recall twice as much product information than the comparison products; this enabled them to cite more arguments in favor of buying the products.  “The overpricing also evoked a more passionate response to the products which led to a willingness to pay much more than was originally intended. By contrast, people who were exposed to a premium close to their expectations (10%) or one that was outlandishly high (190%) simply acted according to their pretested inclination…”  THIS IS IMPORTANT because most funeral homes in price competitive markets are only marginally higher than the lower priced firms.  This research would tell us they are not enough higher to provoke the necessary attention to value.

The implication is that a price range exists above what customers thought they would pay that causes them to ask value questions.   Willfull overpricing can reverse the downward “price cutting” trend common to mature products and services.  Starbucks deliberately set a price point for a product that, at the time, most restaurants gave away. The price made people rethink the importance of coffee in their lives.

In another example Kone, the Finnish elevator company, used willful overpricing to introduce innovation.  In the 1990’s the elevator industry had become very price competitive.  In this highly commoditized market Kone introduced an innovation that the market (being entirely price focused) was unprepared to take into consideration. 

In order to provoke consideration of their advantage, Kone began responding to RFP’s with two proposals:  A normal proposal with old features and normal pricing and a much higher priced proposal for their innovative elevator system.  It took a while but it caused buyers to talk about the new concept and even to call Kone for an explanation.  The high price enabled them to have conversations about value with people who wanted to know why it was higher priced.

How could this work in funeral service?

Why not create two price lists:  one that is price competitive but strips out all the liability and quality of service (in fact one that maybe highlights some of your competitor’s disadvantages without mentioning them by name) and another that highlights features, safeguards and other benefits that are included.   For instance:  Transfer of remains to the funeral home: 

Normal: use of a 3rd party trade service at our convenience.  We are not responsible for problems or errors $350

Full service:  The deceased never leaves our care, two attendants and a Cadillac Funeral Coach within 2 hours of the first call. $650

I just made these up but maybe you can think of some better ones.

A last point of caution:  the research suggested that if you use this strategy the overpricing should be 50-80% above what people expect.  What price shoppers expect is generally a function of your competitor’s prices.

So, the next time someone says “your price is a lot higher than the others.” see it as an opportunity.  The trick is not to focus on the value that YOU think is important but the value THEY think is important.

funeral pricing, funeral home management, funeral consulting, funeral price strategy, funeral price shoppers

How To Stop Customers From Fixating on Price: Part 2

Written by Alan Creedy on . Posted in The Creedy Commentary. 4 Comments on How To Stop Customers From Fixating on Price: Part 2

Part 2:  “Using Price to Clarify Your Advantage”

Increasingly, funeral markets are being commoditized.  This series is adapted from an article in Harvard Business Review entitled “How to Stop Customers from Fixating on Price.” You can purchase a pdf copy directly by clicking on the link.   In the article the authors point out that:

“Most people think commoditization occurs only when competing products or vendors are indistinguishable in terms of features or capabilities.  But research tells us that commoditization is as much psychological as it is physical.

A commoditized market is one in which buyers display rampant skepticism, routinized behaviors, minimal expectations and a strong preference for swift and effortless transactions regardless of product differentiation.  The key is not what you do to your product but what you do to your customer.  You must find a way to reengage a customer who is past caring.  Commoditized customers choose on the basis of price because they have become convinced that the options available are equally palatable and the minor differences are not worth investigating.  Fresh rounds of innovation go unnoticed and better formulated marketing messages don’t get through.  The best way to get them to sit up and take notice is to take price and alter it in a surprising or challenging way.”

In part 1 of this series we discussed the first of four strategies for altering your pricing strategy: “Equalizing Price Points” Today’s approach uses price structure to clarify advantage.  Remember our goal is to cause the commoditized customer to take notice of the advantages we offer by altering the way we price.

In the reference article the authors cite Goodyear’s struggle many years ago as they developed newer and better tires.  We are enamored of the many real and valuable benefits legitimate funeral homes offer relative to such things as service, quality, merchandise and our ability to facilitate the bereavement process.

Goodyear adapted their pricing strategy in a way that caused customers to stop and think about the differences instead of thinking that “a tire is just a tire”.   Like us, Goodyear engineers were enamored with the many technological and complex improvements in quality and tread life they were innovating.  The problem was that customers didn’t care because tires were priced by quality not what customers valued about quality.  When Goodyear changed their pricing strategy by aligning price with tread life consumers stopped opting for the cheapest tire and changed their buying behavior completely.

How could we alter our pricing strategy in ways that consumers would focus on value?  I am not sure I know any longer what consumers value; but the majority, I am convinced, still feel that “Mom’s Body” is a sacred thing.   Given that as an assumption, here are two ideas that I am throwing on the wall for reaction:

1. All the funeral homes I work with are operated by people who have a high level of personal integrity.  That integrity creates “value” boundaries expressed in a variety of ways.  But the most common is the attention to detail and the quality of the measures they take to protect and preserve the body…including the process of cremation.   Such things as “chain of custody”, internal control procedures, safeguards, licensing and the consistency and clarity of processes are important to them.  This may or may not be true of low cost providers or discounters.  I am told that often it is not.  Most frequently they cut corners, outsource a lot of work and are not always as diligent about safeguards.  The problem is the customer doesn’t know this. Or worse, they don’t know if they care.

So, let’s say integrity and trust are valued at your firm and you hope that they help distinguish your service.  Hampered as you are by integrity, it makes it difficult for you to offer the same low price to compete.  And your integrity prevents you from cutting the corners to enable you to do that.

What if you made cutting corners the customer’s choice? You could do this by creating packages based on the level of care the customer wanted rather than the quality of service.

Here is one small example.  Let’s say you do all your own cremations, “chain of custody” is rigorously observed, etc etc.  But, you have a discounter who says he will do a direct cremation for $549.  You might create a competing offer in which it is carefully and respectfully disclosed that for that low price you outsource in the same way your competitor does, you cannot guarantee any of the values you normally offer and you require a “hold harmless” agreement in the event anything happens whether within your control or not.

According to the principal of using price structure to clarify your advantage potential customers will be forced to think about how sacred mom’s body really is.

2. How about suggested prices? Here is one that is totally outside the box.  We are required to offer General Price Lists listing our prices.  But what if those prices were only a suggested reference point instead of fixed.   In other words you would make it clear to customers that they need only pay for the value they feel they have received.  For those of you who offer unconditional guarantees think of this as a reverse guarantee.

Am I out of my mind? Not really, The Museums of Modern Art and American History in New York City have been doing this for years.  The admission fee is clearly presented as a suggestion.  Restaurants in cities like Vienna, Berlin, Seattle and Denver are trying it too.  They are finding the “Pay-What-You-Want” model is both sustainable and competitive.  Research shows that customers, on average, pay 86% of the suggested price.  This average is a blend of those that paid full suggested price and those that paid less, but everyone paid something.  I shared this with a funeral director friend (thinking he might ask me to step out of his car) and he recalled a time when a family was so delighted with his service they deliberately overpaid his bill by $500.

The point is: by offering price as a suggestion you create a situation where people start thinking about what they value and pay for it accordingly.

We have two more strategies to discuss, but this one deserves input.  Think about how you could alter your pricing strategy by aligning what customers value with price instead.  Be creative.  We need to get their attention.

The “Retailization” of Funeral Service

Written by Alan Creedy on . Posted in The Creedy Commentary. 4 Comments on The “Retailization” of Funeral Service

How “The Hawthorne Effect” got us off focus

The formal casket and vault merchandising systems so common today in funeral homes are a relatively new innovation.  But their impact is disproportionate to their value.

The industry began experimenting with formal merchandising systems sometime in the late 1960’s.  I don’t know whether it was Buddy Hunter of OGR or Wilber Krieger of NSM who first began to promote it in a systematic way.  By the time I arrived on the scene in 1980 there were more than a dozen “self-styled” merchandising “experts” consulting with funeral homes.  Interestingly, none of them were directly associated with a casket supplier.  The National Foundation of Funeral Service had a full selection room set up in their building in Evanston, Illinois and many of the “experts” would hold week-long classes on the proper way to present caskets.   Each had a different approach but one thing they held as gospel: The maximum number of caskets displayed should not exceed 20 and, preferably 18.

The first official vendor-supplied merchandising system was offered in the early 1980’s by National Casket Company.  It consisted of a “garden” setting featuring caskets “floating” on plexiglass biers placed in pine bark settings threaded by Astroturf pathways.  It worked.  Users claimed a $500 increase in average sale.  And that’s something else that was consistent.  No matter what system you used the average increase in revenue was $500.

Being new to the scene and wanting to make my mark I judiciously decided to stay out of the casket merchandising business.  Too much “Red Ocean.”  More important, I believed the casket obsession to be a distraction from the true value of the societal contribution we make.   I am not saying caskets aren’t important.  I am saying that they are only a prop in a much more important event.  

In the early to mid 1980’s the major casket vendors began to offer their own proprietary merchandising systems all offering the same $500 average increase.  I confess I didn’t pay too much attention.  But one important thing I did notice was that the gospel had changed.   These new vendor-created systems required no less than 35 units on display.  This attracted my attention because all the “self-styled” experts had declared with much authority that the maximum was 20. (as an aside current non industry research would seem to support the position of those “self-styled” experts).  In any event, it finally dawned on me that this was an ingenious way to drive more inventory into the field with the resultant bump in cash flow for casket vendors.

Then Alton Doody enters the picture with the theory that the “look and feel” of a retail store will make customers feel more comfortable and user friendly. (really??) I can only imagine the angst that the introduction of “cheeks” and “butts” caused those companies that had to retrieve all that excess inventory.  Amazingly, funeral directors all over the country were spending upwards of $50,000 to refit their selection rooms with, of course, the standard $500 increase in average sale.

At a conference in the late ‘90’s my naiveté on this matter was finally busted.  Three funeral homes presented on the topic of merchandising.  The first speaker shared his strategy which included investing in excess of $50,000 per selection room to achieve…you guessed it…an average of $500 increase in average sale.  The second spent spent $30,000 for his new selection room but he had done all the work himself with the same results.  But the third and final speaker brought down the house in his opening remarks as he apologetically said he felt embarrassed to share what his new selection room cost him.  After one of those pregnant pauses he said, “I only spent $1.49…and, by the way, I brought it with me.” Whereupon he demonstrated his three ring binder.

A lightbulb went off in my head as two things became clear:  First, if all these iterations of casket merchandising over  (then) 20 years actually produced an increase in average sale of $500 then the current average burial sale (as reported by Federated) should have been several times higher than it was.  Second, it wasn’t the systems or techniques that were producing results.  There were too many variations claiming the same thing.  Rather, what we were seeing was originally identified by a study of workforce production by Westinghouse in the 1950’s.  Called the “Hawthorne Effect”, it basically states that improvements in performance don’t always occur because of a new  way of doing things but because one is paying attention to the behavior that produces the result.  In other words your awareness of your activities and the corresponding results is increased. 

So, my point is simple: Virtually any system you use will be effective in direct proportion to your enthusiasm and focus.  If you need to spend $50,000 it will be effective.  But maybe you are one of those lucky ones who only need to spend $1.49 to accomplish the same thing.

But here is the key, whether you spend $50,000 or $1.49 are you spending it for the right thing?   Casket merchandising is about Best Practice.  It has distracted us from Best Purpose which is what we contribute to society and the compelling reason people  call us.  By the way, am I the only one curious about why all these cumulative $500 increases in average sale over the last 30 years don’t show up in the trendline for adult funerals?

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