Deflationary Times


Imagine running a business when your selling price plummets by 42% in the course of a year, and you can do absolutely nothing about it. This, when your input prices have risen 6%, or how about 156%? Well some businesses are already facing just that. Such is life if you produce Brent Crude in the UK[1], pay for your supplies in dollars[2], or even worse if your business is based in Russia.[3]


Now combine that with reduced access to investment capital to achieve change and less working capital to maintain daily cashflow, and this is a tough squeeze. Does it represent falling prices or some deeper malaise? Real world volatility is alive and kicking, and however remote this may seem in the UK (unless you already work in Aberdeen’s oil industry) it is part and parcel of a deflationary environment. Everything gets a bit smaller and just a bit harder.


Could it happen here? Well it already is. In November both RPI and CPI were in negative territory over the month. December’s announcement will reinforce the trend. Sustain that over a year and both RPI and CPI will fall 2.7%. That may seem like a modest trickle, but what will the impact be when our country is so heavily indebted (both state and individuals) and we run such a high current account deficit?


Falling prices will come as quite a shock for those businesses used to steadily escalating prices year after year after year. Rising prices are a useful ‘get out of jail free’ card, smothering a host of trading and investment errors over the years. Compound 2.7%pa over say 5 years, and it becomes a 12.8% drop. It could be a lot more than that. Now what will that do to your margins, your return on investment, and just how flexible and reactive are your overheads to cope with this change?


History tells us how this can work out when deflation goes wrong. In 1929 the supposedly strong Austrian Bank Creditansault was forced by its Government to assume the liabilities of one of the country’s largest and troubled Industrial groups. As a result within 2 years the bank was bust, triggering a global financial crisis, The Great Depression and the launch pad for political extremism. Such is the potential for wealth-destroying monetary deflation, which nowadays includes the risk of bank bail-ins as your bank deposits are compulsorily confiscated. For more on that please refer to my previous article here and here.


But now lets also look on the bright side, with the more socially acceptable price deflation. Many consumer-facing businesses have been used to managing tight pricing for many years now, and for consumers this is great news. So the point where prices move from modest disinflation (falling inflation where prices are still rising) to deflation (where prices actually fall) should be manageable provided the right steps are taken early enough.


You will hear media pundits, politicians and economists telling of how deflation must be avoided at all costs. Yet price deflation is a natural and positive consequence of capitalism as producers compete to provide users with better or cheaper products to buy. Prices also fluctuate up or down with demand and supply. But deflation is an all-pervasive influence, which can take hold for years. The current threat of deflation is a consequence of the abuse of our financial systems by the State and Central Banks in whom we place our trust, who have brought us such huge monetary inflation for so many years that it is long overdue a correction. For a background in banking, central banking and the state please refer to my series of five articles I, II, III, IV and V.


Where deflation becomes ugly is when too much debt is involved. Governments, businesses and homeowners must suddenly pay back real debt with real pounds, a much tougher proposition than when debt is inflated away. So Government loves to proclaim the evils of deflation, when in fact price deflation generally suits the citizen. It is only when monetary deflation gets out of hand (usually as a result on inappropriate state interference) that we are all in trouble.


We can’t know precisely when and where deflation will hit hardest, but we need to be prepared. So having romped through some basic background (and there will be much more on this topic over the year), what do businesses need to plan for?

  • Falling sales values:
    1. Businesses risk a reduction in both sales volumes and prices. One economic belief is that people buy less if they think that it’ll be even cheaper next week, next month or next year. But generally people are buying because of need (and so are unable to defer purchases) or want (where the desire for the latest product offsets any desire to wait). So focus more than ever on meeting needs and wants.
    2. Review your customer mix. How will their spending power and confidence be affected (for example reduced employment opportunity and lower house prices?)? Think about how can you help these customers buy from you rather than your competitors. And can you reach into other markets to help maintain or grow your market share?
    3. Consider your product or service. How unique is it, and will it, like the price of oil, be seen as just a commodity to be bought anywhere, or can it be seen as “unique” or “special” to carry its own or premium pricing in the marketplace. Consider fresh approaches to product, packaging and marketing to stimulate ‘wants’.
    4. Don’t just look to protect prices. There will be an optimum point of price and volume which maximizes your sales, which could mean offering lower prices in return for higher volumes, or higher prices for lower volumes. Try various price tests to help find this optimum point, and explore numerous pricing structures if your business is seasonal.
    5. Maintaining your selling prices is a great start to tackling deflation. So consider offering longer-term contracts to your customers to help to ‘lock-in’ current prices and protect your sales value from deflation.
  • Margins under pressure:
    1. Whilst optimizing sales volumes and pricing, the other aspect of Gross Profit is better purchasing and less wastage. Do not expect your suppliers to come to you offering price reductions. Get ahead of the curve, and seek them out yourself. If they are not forthcoming offer them a ‘win-win’, for instance where they can expect more of your business in return for keener pricing.
    2. Don’t lock yourself into purchase volume and price deals, as falling prices may soon turn them uncompetitive. You must remain free to move your buying terms down with the marketplace.
    3. Examine wastage in your direct costs. If you use raw materials (whether you run a printing-press or a commercial kitchen) check every production run for accuracy and unwanted surpluses. If you supply to tolerances check that you are doing so most effectively. Ensure that you minimize shrinkage through damage, age, theft or mishandling, and if you offer a returns service these must be handled cost-effectively. If you offer a service, check how you buy your essential costs in meeting that service, from sub-contracting to travel to communication. The aim is not necessarily the lowest possible costs, but ensuring the greatest efficiency of cost (for instance ensure that your staff have the tools to work whilst travelling can be a positive outcome).
  • Lower labour and other costs:
    1. In a marketplace of lower total sales you need to keep a lid on staff costs. With compulsory pension enrolment your staff costs may already be on an upward trajectory, and that needs to be tackled.
    2. If your staff are used to annual pay rises or automatic salary progression within a pay grade structure then you’re in for a shock! You cannot enter deflationary times with escalating costs like this. Deflation will hurt wages, so look to renegotiate contract structures early, carrying your staff with you. Remember that in deflationary times they should be able to buy more with the £s in their pocket.
    3. Reducing nominal salaries will be a tough ask, even in deflationary times. Try offering flexible working hours or extra unpaid holiday, provided the ‘voluntary holidays’ suit both staff and the business. Or can you control the business better with fewer layers of management? Often the best business has fewer chiefs just giving great direction, and plenty of good Indians. Aim for better communication and a can-do culture where staff know what is expected of them, and why.
    4. It is kinder to be early in culling unwanted staff in order to protect the majority for the future. Ideally this can be achieved through natural wastage as staff leave or retire, whilst raising the flexibility of those remaining with training, skills and knowledge development. If redundancies or lack-of-performance departures do occur, act now,  as this will not only protect your business and its continuing employees, but also help those who do leave to find another job more easily than when deflation really takes hold.
  • Inventory, Stock & Work-In-Progress issues:
    1. You may be used to times when stock rises in value as it sits on the shelf, as the next batch that you buy always costs more. Those days will be gone. Get used to the fact that stock sitting around will fall in value, and try to buy it in just in time, ordering smaller quantities in shorter cycles to take advantage of falling prices.
    2. Whilst limiting your stock-holdings, do it in a way that is consistent with what your customers need and expect. Tie this in with your purchasing decisions so that stock is capable of being bought keenly when needed.
    3. Rotate stock well. If you are left with old stock it will become increasingly hard to shift at sensible prices, especially if your competitors are slashing prices to clear their surplus stock. Better to turn it into cash sooner rather than compete with the crowd later.
    4. If you have funds tied up in a production process, whether house-building or processing or order to delivery/invoice time, look at ways to shorten the timescales.
  • Premises & Investments:
    1. If you own your premises or other assets these may be about to be devalued. Consider the impact this would have on your balance sheet, and the knock-on impact on any borrowing.
    2. If you lease premises, avoid upward only rent reviews and seek to negotiate market rent reviews (including downwards). Be prepared to take professional advice from agents who will value your long-term business.
    3. If you hold assets in investments, or surplus cash in a particular manner, have a plan ready to react to bank downgrades and other changes in the market. Know what the trigger-point is, and if that trigger is flicked, react very promptly to protect your assets.
    4. If you are about to commit to an investment, whether property or an acquisition, consider just how deflation could impact your risk and expected return on investment, and adjust your plans accordingly.
  • Innovation and Productivity:
    1. Prepare to be disrupted by innovative competitors. Better, cheaper ways of delivering wants and needs will always be found, so ‘think outside the box’ to deliver these fresh approaches yourself.
    2. As businesses fight for market share and prices fall, some competitors will go to the wall. This may eventually enable a growth in margins, but only if you search for the better ways of doing things and deliver those improvements.
    3. Innovate internally. Consider the efficiency of every process through the business, from sales to order processing to product/service delivery to administration. Is everything done to add value and minimize time/cost at each point, or because it has always been done that way?
    4. As the cost of technology falls, use it not just to reach your customers in better ways, but also to make your business processes more productive, streamlined and cost-effective.
  • Working capital management:
    1. If all businesses are under pressure then you can expect greater challenges in collecting payments. So look at revising your credit terms and/or credit limits and ensure that you and your customers adhere to them. Be prepared to wave goodbye to customers who cannot pay their bills on time, and don’t ignore early warning signs.
    2. Access to bank facilities will be constrained as the profitability and cashflow of business, and the security of banks themselves, comes under pressure. Cash is king, so aim to ensure that you keep enough of it in the right place to control your own destiny.
    3. Expect to pay higher deposits on leasing and HP deals, including replacement vehicles that you may not have factored into your budgets. Consider whether you can keep such assets going for longer rather than sticking to the same replacement timings as before.
    4. Aim to maintain your reputation and credit rating so that your suppliers and customers view you as strong, reliable and the best place to do their best business. Communicate with customers, suppliers & funders to ensure they retain confidence in you.
  • Debt in deflationary times is bad:
    1. Not only can debt facilities be withdrawn, but the assets acquired with debt can fall in value. This is how negative equity occurs. Can borrowing terms be changed or extended now in order to make your access to finance more secure?
    2. Look to be totally on top of your debt commitments, and review the assets that you borrow against. Do you really need that debt? Do you really need to replace leased assets?
    3. Interest rates may appear to be low, but if the value of what you borrow is mal-invested then borrowing will be very costly indeed.
    4. If everyone is looking to repay debt, this may prompt significant moves in currencies, such as the US$ in which much debt is denominated. Demand for dollars to repay debt will rise, impacting other currencies. So depending upon the intrinsic strength of your currency, interest rates could become volatile or very low (even negative). If this is important then protect yourself against rising rates, but do so whilst rates remain low (the price of protection rises significantly if everyone is already expecting rates to rise) and take regulated professional advice.
  • Keep an eye on Socionomics, strategy, tactics and detail:
    1. Business cycles move in line with ‘social mood’ rather than whatever the Government of the day thinks is best to do. Socionomic change will become the buzzword rather than raw Economic figures.
    2. Listen to your customers and not the traditional media for the real facts on demand, and manage your response accordingly. If consumers are looking for reassurance in their lives then comfort and tradition can become strong marketing factors.
    3. Besides planning ahead, ensure you really understand the levers in your business to be able to set strategy and tactics to respond to events.
    4. The devil is in the detail. Analyse your business thoroughly now so that you truly understand the factors that will make a compelling difference.
  • Don’t panic, but don’t expect it to go away:
    1. Prepare a Plan A, and act on it early. Aim to take positive advantage of deflation in a way that your competitors don’t.
    2. Prepare a Plan B should changes in the marketplace be more severe than anticipated. Remember that some of what is in Plan B may be easier to achieve if done early, in which case make it part of Plan A.
    3. Do not expect deflation to affect business sectors equally. There will be many losers, but the odd winner too. Aim to stay on the winning side.
    4. Be alive to the greater risks of monetary deflation. If hording of money occurs across the economy you’ll need a Plan C.

Above all, surviving deflation requires good information, the confidence to act, and to do so decisively at an early stage.

If you’re looking for support in meeting the challenges of deflation then do give us a call. We’ve experienced in handling early-stage deflationary planning through to tough survivorship cases in industries hit with deflation, all with positive outcomes.

[1] 42% fall in Brent Crude oil priced in £, twelve months to 30th December 2014.

[2] 6% fall in £ sterling versus US Dollar, twelve months to 30th December 2014.

[3] 61% fall in Russian Rouble against £ sterling, twelve months to 30th December 2014, equivalent to a 156% price rise for Russian importers.

A dose of stress for Europe

shutterstock_88963480What do the latest ECB European bank stress tests tell us about the health of our nearby continentals and their economy? They’ve taken a year to work on, and have just been published as 170 pages of the grandly titled “Aggregate Report on the Comprehensive Assessment”, so lets hope the stress of waiting was worth it.


Well, the headlines sound OK, with the EU’s banks showing a total capital deficit of just €9.5 billion to meet the latest stress tests. Before the crisis “just” had a rather different meaning, but these days when Central bankers have shown that they can sustain the unsustainable for many a year, €9.5 billion is a relative drop in the ocean. Remember these tests do not include British banks.


European banking stress tests have been much derided in the past, as banks who had recently passed fell under the wheel of the crisis within a matter of months. But now, of the 130 tested, just 13 are being told to raise capital to strengthen their balance sheets. €9.5 billion amongst 13 sound modest, especially when set against the net €40.5 billion raised amongst the 130 banks so far this year. So maybe this will make risky leverage a thing of the past? Sadly, no.


Over 6,000 clever people tested provisions for bad debts on 119,000 borrowers against the 170,000 pieces of security supporting them, and efforts to achieve a common standard in analyzing vulnerable loans, mostly amongst corporates and retail property lending.


Top of the class is Deutsche Bank (Malta), with an apparent “Common Equity Tier 1 capital ratio adverse scenario” of 138%. That sounds strong. Bottom of the pile is Eurobank of Greece, with potential negative capital of 6.4%. Four of the 13 sat in the naughty corner are Italian.


The adverse scenario anticipates rising interest rates, a fall-off in GDP of 6.6% below the expected level by 2016, and many other nasties, leading to aggregate loan losses of 4.5%. That doesn’t sound like much, but that 4.5% totals €378 billion. So, if these tests are adrift by say 0.1% that’s an extra €8 billion, or 1.0% out and that’s €84 billion!


As we have seen recently with Tesco, we are finding that approaches to accounting are not black and white, but can involve considerable areas of grey. Assessments that once seemed rational to sensible people relying upon a continuation of the norm can get caught out by rapid change.


So what are these “safety” %ages calculated against? Risk-weighted assets is the answer, with the regulators applying risk weighting, so that a loan to a state is seen as lower risk than a loan to a small business. That’s great if you assume that states will always repay their debts, but if not it causes all sorts of panic such as we saw recently in the potential Scottish denunciation of their “share” of the British debt.


So what did the tests not allow for? Deflation. As we know, years of steady inflation can help to reduce the real burden of debt, and/or raise the value of security set against those debts, which is a real boost to a stress test. These stress tests allow for cumulative inflation of 1.9% across 2014 to 2016. Yet 10 of the 28 European countries are currently experiencing flat or falling prices, so this is already looking questionable, with the report almost squirming on the point without admitting that it may have been overtaken by events.


In testing a bank’s assets (i.e. what they have lent out) we also need to consider how they apply their surplus funds. It’s great having surplus cash, often placed with other banks, central banks or short-term government bonds, but what if it is in the wrong place when catastrophe strikes and the music stops? Happily 12 of the 130 are deemed to have no or minimal banking risk, and remarkably 3 appear to have been excluded from this test all together despite high intra-group exposure which has not been tested.


So what happens if we re-run the stress tests assuming flat or falling prices and collateral values, tweak the risk-weighting, allow for intra-group exposure and a higher default rate? Whilst we all hope that is beyond the realms of possibility, it is not beyond the realms of probability. As we have seen, the challenge posed by 0.1%, 1.0% or even wider variations is extreme.


The European Central Bank must be hoping for the best, as what this test does is to once again demonstrate the vulnerability of our monetary and banking systems. Sometimes sticking plaster isn’t enough.


The full report is available here:

The Sheep have Turned

shutterstock_91083782Now that the Scottish have had their say, it has been interesting to review a few headlines. My favourite, from a US website, was “The Sheep Have Bleated”. It makes the point that the majority, whether through positive choice, fear or misunderstanding voted for the apparent security implied by “together is better”.


Our democracies have become entranced by the 51% principle, despite the fact that it is only those floating voters at the margin who decide the outcome of most issues. The floaters who voted against independence have now committed the 100%, for better or worse, to be stuck with the depreciating British Pound, and greater tax-raising and spending powers. Plans for those greater tax-raising powers are already underway with higher property stamp duty North of the border.


No mention during the campaigning of tax reductions for a stronger economy, but hey-ho, the world will eventually understand that those who champion the idyll that Government Spending boosts the economy are little more than hustlers plying their alcoholic elixirs in the Wild West. This fate imposed on us by so-called Keynsian is due to the fact that our politically directed society has little incentive to change their ways. Authorities still proclaim a 3 to 1 multiplier as a “benefit” of state “investment”, and yet little of this spending is actually in sustaining long-term economic betterment, and most is highly counter-productive, boosting beloved Government statistics whilst leaving the majority behind.


At the centre commonly held standards are vital, such as the respect for property, although that is now under attack with certain parties threatening mansion taxes. It should be remembered that taxes that just hit the few invariably end up being paid by the many. See how the word “property” has become tarnished over time, for property once included “income”, yet income taxes have become a part of life.


Attending a recent symposium in Oxford, I was engaged by a debate on the country’s finances 200 years ago. Were not those providing their savings to fund the government’s expenditure on the Great War (for that is what they called the Napoleonic Wars at the time) taking a deep interest in the conduct of the war? Well, lets review just what enables a country to sustain its Government spending.


200 years ago, most of Continental Europe was shattered by a rampaging war lasting over two decades. Trade was stifled by the Continental System that Napoleon used in an attempt to bring Britain to it’s knees. Britain controlled the seas, and so was free to generate wealth through the early development of Empire, trading more freely and further afield than other nations. What duty and taxation there was distorted important product markets, just as duties do today. The introduction of modest income tax raised some useful funds for wartime coffers, but at the cost of reducing the available pool of local and regional investment. And so the wars required debt to fund them.


As my friend Dominic Frisby pointed out in his book Life After the State, government debt enables wars to be prolonged far more than they could otherwise be. Maybe for this reason the Whigs, in 1815, would gladly have made peace with Napoleon, and Waterloo would never have happened … but they were not in power, and history evolved with a famous allied victory.


But do the savers who lend to government really care how it is spent? And are those savers really important to the government? No. The recent experiences in the Eurozone demonstrate that savers only care if they suddenly fear that their face-value won’t be repaid in full, on time, a la Greece. Repayment is generally achieved by states issuing more debt to replace that being repaid, and more debt to cover the interest costs on continuing debts, in a cycle of greater and greater debt. No wonder politicians love this land where the choices they make don’t seem to matter to them!


Furthermore, savers are not necessary. 200 years ago, savers were all that some countries had. In Britain our system of fractional reserve banking meant that banks could and would expand their balance sheets to lend more and more to governments, in return for interest, just as they as they still do today. To ensure the continuation of the banking system that feeds them so well, governments across the world regulate and provide deposit guarantees to savers, which creates a world of “believers” in the economic system that we see around us. Indeed the UK has just extended it’s deposit guarantees to include temporarily large deposits from house sales.


Are there drawbacks? Too right there are. Our monetary systems are at the heart of mal-investment, and do little to provoke active competition between the safety provided by different banks.


This week we see Britian’s first elected UKIP Member of Parliament enter the house. Economically, Dominic Carswell is a particularly interesting character. Read his books, and you’ll see that he really does “get it”. Invariably this means Government getting out the way, rather than pretending that it can somehow “steer the economy”. Read Douglas Carswell’s book “The End of Politics and the Birth of iDemocracy” and you’ll see what I mean.


Now politics isn’t really my cup of tea, and probably not yours either. But if someone in the street suggested they could improve your personal economy by firstly taking a huge slice of your income each month, and then add to the cost of most of what you buy with extra taxes and duties you’d laugh … and yet we regularly vote for such clowns.


At times like these we need a plan. So it is fortunate that Douglas Carswell also published such a book in 2008 with Daniel Hannan, “The Plan, twelve months to Renew Britain.” It refreshingly starts with “Why everyone hates politicians” and finishes, constructively, with a thirty point plan over 28 pages. Now there is an oven-ready manifesto just waiting to be printed.


I wonder how much of that will reach a certain manifesto next year? If it does, it could be that rather than bleating, the Sheep will Turn. Perhaps we have already turned. If workers and investors are given the right incentives there is no end to what we can achieve together. Forget big government, and bring on trade.


As Woodrow Wilson, 28th President of the United States said “Liberty has never come from government. Liberty has always come from the subjects of government. The history of liberty is the history of resistance. The history of liberty is a history of the limitation of governmental power, not the increase of it.”

Financial Alchemy


Little has changed. Six years after the depth of the financial crisis, our financial alchemy has achieved … not a jot.


Our remarkable era of low interest rates, high debts and deficits has become the unremarkable new normal. Yet the media speak is all about employment recovery and asset price recovery (indeed record-breaking peaks in many markets). So has the alchemy worked?


Some concerns are raised and shared, from whiffs of interest rate rises to come, London house price escalation, and disapproval over the extent of consumer credit driving the new car market. Read enough and it is easy to be baffled by the mix of positive noises, set against the fear of Eurozone deflation, where some interest rates have already gone negative. All things eventually revert to trend, and all pundits, even me, will eventually be proved correct if we live long enough. But one has to ask whether history will be kind to the current generation of policymakers.


I spend my days working positively, and great opportunities abound within new industries, businesses that get their customer offering just right, and those that effectively disrupt existing markets. Yet the economic backdrop for all of us, and the prospects for the bulk of the old economy, is engineered, for better or worse, by the fantasies of the old financial and political elite as they drive our state to ever-greater economic lunacy.


Permit me to list the top points of my current thinking. In no particular order:


  1. We are not living and working in a normally functioning market economy (nor have we been for decades, but its more delusional now). We suffer from a socially engineered economy driven un-democratically by central bankers and political fixers. They need to learn that the best way of stimulating an economy for the good is to leave it alone!
  2. We have 3 principal options to deal with our huge state debts; major economic growth, debt default, or continuing years of fiscal repression and currency debasement … the latter course remains the most likely political expedient, to the detriment of every man, woman and child in the country.
  3. Forget what we are constantly told that QE pushes interest rates down. Because the evidence is that whilst rates have declined, the bursts of QE have actually pushed rates up! This is a direct effect of diluting our currency. Without QE rates could have been even lower. Now that most pundits are expecting rates to rise, I’m personally not so sure … when the horde are travelling in one direction it is time to look the other way!
  4. Stratospheric debt increases cannot continue forever, and eventually we’ll have to decide whether to voluntarily abandon state and personal credit expansion, or hurtle, alongside other economies, towards a final collapse of our currency. History on this topic is not good, as it backs up the fact that no paper currency lasts the test of time.
  5. Financial engineering is all well and good in driving the feel-good factor, but in engineering dumb statistics like GDP and house prices we forget that only true value-added work sold to other economies creates the true prosperity to sustainably enhances living standards. To evidence this, whilst GDP is now pretty close to 2007, the real test of GDP per capita remains woefully back at 2004 levels: We have made no progress in a decade. Indeed, look at the constituents of GDP and we see that much of it is just money circulating the system rather than true wealth creation.
  6. Fiddling by the powers that be has absolutely failed to trickle down to the true trading economy. UK bank lending[1], which has broadly leveled off since 2011, has still declined by £345bn (15%) from the early 2009 peak. Bank lending is likely to remain constrained until all non-performing loans have been provided for, which is likely to be many years yet.
  7. Banking remains a risk business, and depositors placing their money with banks should remember that fact.
  8. Over this time, from a subset of the same data, whilst mortgage loans are actually slightly up, lending to small business and consumers is down by 25% … and without debt expansion, funding growth is tough to achieve. Not that growth for growth’s sake should be an ambition, but this is a real catch 22 for lovers of GDP.
  9. To close the gap with current government expenditure plans, tax receipts need to rise by 5%pa to 2018. This is exactly the opposite of what we need, which is for the government to take less so that the economy can perform!
  10. George Osborne has done a good job of keeping the wheels on the road, but like Gordon and Alastair before him, he has yet to even attempt to turn the direction of travel. The sooner the better please.


As the great Ludwig von Mises stated: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion of the currency system involved.”


So keep on, be confident, but lets recognise that the heavy lifting on the economy is yet to come. Whilst politicians will preen themselves as the ones to “make things happen”, lets use every opportunity to tell them to get out the way and stop their petty economic manipulations. For the hard truth is that the heavy lifting must be done by real people in the real world, and thats you and me. The earlier we can start the better.


(By the way, my economic blogs have been few and far between this year. Blame the fact that I’ve been very busy with good business for good clients, and my other interests in life. Thank-you for tuning in, and I hope to ramp up the pace of writing again soon).


[1] M4 lending excluding securitisations etc. Note this also includes UK bank lending overseas.


Currencies and Borders: Why would the Scots want the Pound?


Just like all full-blooded Englishmen I have a view on Scottish independence. Putting aside my annoyance at Mel Gibson for his inaccurate Hollywood portrayal of history, there has been plenty of justifiable historic animosity. But cross-border raiding seems now to run wholly in the Scots favour, with their elected representatives inappropriately shifting the balance of power in Westminster on solely English issues.

This Westminster vote-rigging is not the fault of the Scots, just the wretched UK politicians who established the system that way. But it does mean that many of the English who would welcome a split with Scotland think that way not because they wish the Scots to go, but because of frustrations with the distorted voting powers that have imposed such damaging and persistent voting bias. It would be far better to hold a referendum across the UK on removing Scottish voting powers in Westminster where they relate solely to English matters, on which the Scottish parliament has equivalent devolved powers … but then when did the political class do the right thing?

There is no doubt that there is strength in togetherness. At the Battle of Waterloo, 1815, a Welshman (Picton) led Cameron Highlanders, Royal Scots, Black Watch and Gordon Highlanders, serving within his division alongside English regiments from Gloucestershire, Cornwall and Essex, all under the overall leadership of an Irishman (Wellington). Add some help from the Dutch, Belgians and Germans and we find that sticking together is always the best way to beat the French! … a lesson we still need to learn when playing the French at rugby!

The Scottish independence debate has recently revolved around currency and resources. Both sides seem to think that the Pound is desirable, one side wanting it, the other smugly wishing to deny its use, whilst in private allegedly arranging for its continuation. As we have seen in Europe, currency union does not and cannot and never will work without political and banking union … end of debate. Not that political and banking union is particularly desirable either.

Our declining pound:

But restricting the debate over the pound really is shallow thinking. If the £ is so desirable, then why has it lost 95% of it’s purchasing power since my birth? A £20 note today has the same purchasing power as £1 in the maternity ward. I’d rather have something real and better, thank-you. The continuous debasement of the Pound, through a combination of political neglect and deliberate intent has enormous adverse impacts across society, from diminished spending-power, lack of affordability of every day items, asset values being pushed out of reach, dependency upon debt, and widening the wealth divide between generations.

It is no wonder that a society which fails to truly educate it’s children and voters on the meaning of money becomes a society that accepts inflation, fails to cap the borrowing powers of the state, and fails to put an end to fractional reserve banking. Education really does need to include the basics of gold, silver and seashells used as money, and the fact that throughout history no paper currency has ultimately survived. Once out of school, even many top Universities continue to sustain failed economic thinking.

The Scottish choice:

So a forward-thinking, outside-the-box politician of any colour would be using the independence debate not to consider who can continue to use the plunging pound, or a link to the pound, but to consider something altogether different and better.

The Scots have oil, although Alex Salmond’s intent on regulation and “spreading the benefits” seems more likely to be seen as a threat to the investment needed to maximise prosperity. The Scots also have a heavily-geared financial system. Given that the pound is backed by little more than future taxation, that gives any Scottish currency a rather vulnerable reliance upon petro-currency and financial earnings, both of which can ebb, and flow, and ebb again. This is why currencies need to be backed by real physical stores of value rather than what we have now, which is debt. (For more history on this issue, see Time is Money).

Currencies and borders:

Which brings us back to independence. Whether in Scotland, Catalonia or Ukraine, we are increasingly seeing the potential for disruption of borders as societies protest, whether peacefully or violently, triggering unexpected economic consequences.

In the space of little more than 2 months this year Ukraine’s currency fell against Pound Sterling by 40% (Source: National Bank of Ukraine, 6th Feb to 14th April). The problem? Well besides political uncertainty, it is the realisation that a modern fiat currency is backed by debt, where interest and return of capital is dependent upon the goodwill of future voters to pay sufficient taxes to keep the system rolling.

In the UK our National Debt, dependent upon future taxpayers and generations, exceeds £1,268 billion, and yet we declare ourselves the 6th richest nation in the world! In a year’s time it’ll be closer to £1.4 trillion, that’s well over £20,000 for every man, woman and child in the country.

This is why confidence in currencies can ultimately prove so fickle … as groups of individuals realise that they can walk away from that debt, or leave it to others across a newly created border. Confidence in currencies will become a far greater issue over the coming years. The current bunch of politicians will tell us to be patriotic, and all manner of rubbish to “keep things together” as they seek to sustain their currencies and borders. But as socionomic trends gather pace, holders of debt-backed currency should take heed … and the Scots should grab their opportunity to reject the pound.

What happens next?


The apparent suddenness and rapidity of the UK recovery has greatly encouraged those who rely upon sound-bites to sustain their place in society, and has even thrown Mark Carney’s much-vaunted interest rate guidance off course.  With the wind apparently set fair even those market bears seem to have joined the consensus in their predictions for the year. But what do the next few years really have in store?

Well last week I had the pleasure of dinner with a small gathering of out-of-the-box thinkers, ranging from fund-managers, a banker close to the 2007/08 crisis, a trans-continental property developer, those drawn from the world of arts, philosophy and small business. Our common bond was a real understanding of the monetary system, the ills and potentially explosive consequences that it creates. But how, practically, might that impact on us all down the road? Read on …

But before we get too deep, let me summarise some of the issues that we face in the UK alone:

  • The inflation rate is apparently benign … albeit consistently and heavily under-reported in official statistics.
  • Unemployment is reducing, employment is rising … although many are having to take part-time jobs, whilst employers struggle with real skill gaps to build genuine wealth-generating roles. After transport and childcare costs many benefit little from work other than the enjoyable company of their colleagues.
  • Deflation “risk” is starting to be discussed in polite circles … although those in power really do see lower prices as a great evil to be avoided because it hits their debt load.
  • Our major trading partner, the Eurozone, remains a morass of un-reconciled cultural and economic differences … the can has just been kicked down the road.
  • Youth unemployment is too high … and too many have left University mired in debt before they even start their productive lives, unable to find relevant roles in society, and unable to dream of a home of their own.
  • Banks continue to be heavily inter-connected, leveraged and over-exposed to government debt … whilst regulation protects them from exposure to the competitive free-market that would restore sound practice.
  • Corporate profit margins benefit from government spending and low labour costs … yet investment is too low.
  • Our economy continues it’s over-reliance upon consumer spending and state services … with little of GDP representing real value-added sustained wealth generation for now or the future.
  • Vast sums are drawn from productive society in taxation, to feed unproductive “ring-fenced” sections of the public sector … indeed even those that have not been ring-fenced have generally increased their spending, with education and healthcare unable to provide the necessary results.
  • The suppression of interest rates through QE has created great returns for some, increasing the gap between those with capital and those who must rely on taxed income … and distorting the time preference for money leading to malinvestment.
  • The country’s safety margin of energy generating capacity is rapidly diminishing … whilst the cost commitments on new green and nuclear capacity are rocketing, undermining our international competitiveness.
  • Our competitive devaluation of the last few years against other currencies is hailed as beneficial … but only succeeds in removing our wealth and imports inflation.

So whichever way you look at it, whether it be the impositions of debt, tax, energy costs, unemployment, inflation, education and uncertainty, the state has done much to diminish opportunity for the majority, whilst steadily increasing it’s grip upon us all. This is the big problem with our monetary systems … they enable the state and vested interests to get away with all this damage, whilst convincing too many that only more state is the answer!

Despite the so-called recovery, we are now left with just as much, and perhaps even more distortion that we faced at the “height of the crisis” a few years ago.

So what happened to capitalism?

As a proponent of the free-market, what difference would real capitalism have made? Well for a start, free-market capitalism optimizes the balance between employment, wages, education, consumer prices, asset prices, bank security, interest rates, healthcare and all other wants and needs, whilst enabling us to benefit from lower prices through international competitiveness, innovation and specialization. It matches demand and supply to maximize the fulfilment of wants. It uses a monetary system that cannot be fiddled and fudged. Through accurate price signals it is an automatic balancing mechanism that protects the many against the few, and offers strong motivation for betterment. Through the most effective allocation of investment and labour, demand and supply at all levels is optimized, enriching the living standards of wage earners for generation after generation.

One day, politicians and central bankers will be found-out to be the costly irrelevance that they are. Too many arbitrary decisions are taken by the powerful and remote who have no understanding of each individual’s needs, wants & priorities. In our monetary system price signals are distorted by inflation, and regulation empowers crony-capitalism. Nassim Taleb, that wonderfully radical free-thinker, in his latest book Antifragile, makes the case that our apparently robust institutions are continually fighting yesterday’s battles … and are therefore anything but robust … whereas we would benefit from anti-fragile organisation that grows stronger from adverse events.

Whilst we as a nation, both the state and individually, continue to spend more than we save and invest, our growth is not sustainable. How Government might be expected to positively assist us in this necessary process of saving and investing for our future is a laughable travesty.

To the extent that we do move forward, any excitement surrounding the potential of new energy, biotech, robotics, nanotech and communications could easily be wasted or regulated away by an over-involved state. We need to return to basics. But back to that dinner …

So what future possibilities did I glean at this dinner?

  • Far too few people are educated in or seek to understand money, so they are unable to query the monetary and political systems that enslave them … for those that are educated much economic teaching is riddled with inaccuracy.
  • Crisis equals opportunity. The politicians had a 6 month window to change things at the height of the crisis, but bottled it. Another crisis will come, because nothing has changed, and we must hope that enlightened thinking prevails … although the majority of the current political class are seemingly too cynical or naive or ignorant to do the right thing.
  • Whilst taking more and more people out of income taxation altogether sounds great, this means that even fewer have a stake in the society they vote for … such activity will only serve to break the system sooner rather than later.
  • Historically, debt monetization has a proven track record of bad endings as sufficient people loose faith in their paper currency. The trigger for that (at least for us in the UK) is likely to be an adverse external event … it’s just a matter of when.
  • Demographics will steadily increase the proportion of young who have no stake in the economy, burdened by debt, taxation and without assets … so should we still be awaiting that external event, a tipping point will occur where their anger will count for more than the votes of the retired.
  • Bank bail-ins are unlikely to happen in the UK, but to the extent to which they do, they will be focused politically on the banks seen as being used by the wealthy … in fact we would all be better off without bank deposit insurance … banks would then compete on their safety for the “return of  investment” rather than the “return on investment” and much of the enormous and inappropriate leverage would dissipate from the banking system.

But what do I think?

To understand the power of demographic change, consider that in the ‘90s retirees consisted of only 15% of the population, and there were more than 3 workers for every retiree. We will soon be closer to 2 workers for every retiree. How that translates into sustainable pensions for all is a mystery. Perhaps that will be the ultimate trigger for change.

There will be change. For the past few years we have seen unabated inflationary zeal and financial repression to maintain the status-quo. That has not created real wealth, nor will it. Yet until we have an “outlier” or “black swan” event the ability of the powers to sustain the unsustainable with moral hazard may well continue, but things must eventually unravel … demographics will see to it.

I personally believe that we will see default and bail-ins, just as we saw in Cyprus and through continued political financial repression … but deciding how we retrace from the failures of social democracy back to the benefits of unbridled capitalism will fall to an enlightened younger generation, for whom the benefits of capitalism are waiting.

In the meantime we are left with the 6Ds: Demographics, Deficits, Debts, Deleveraging, Deflation and Default. Life’s a gamble. But like any New Year, have a number of plans in place so you are prepared to react to all eventualities … when the dynamite goes off, wherever in the world that may be, it’ll pay to be prepared!

For international and domestic businesses that wonder where that leaves them with the risks and rewards they face … well, please do get in touch. And have a great year!



2013 Top Ten

shutterstock_5607295Just as a collection of bright ties is a matter of taste, of hits and misses, one year on from the launch of FYI’s website its time to highlight the hits that have drawn the most attention.

So if you’ve had neither time nor inclination to wade through the lot, here are the edited highlights of 2013:

Economic Blogs:

1st: The Hobbit: Tolkien the Economic Libertarian?

Drawing global interest and recommendation. Proving that you can’t beat contemporary relevance.

2nd: The Economics of Daily Bread

Voted the top economic blog of the week, beating The Washington Post into 3rd place! Examining the lessons we have failed to learn since the French revolution.

3rd: Surprised by Cyprus? You shouldn’t be

Basking in the glory of predicting the Cyprus problem just a few weeks earlier, when everyone else was looking the other way.

4th: Be Prepared: The Game Has Changed

A guide to surviving in a world of bankrupt states.

5th: Lemmings and the Cliff: The false obsession with GDP

The utter irrelevance of the state and media’s measure of a successful economy.

6th: A Parable for Europe: The Tower of Babel

Some biblical fun at the expense of the EU.

7th: The Economics of Daily Bread Part 2

The follow-up to top blog of the week, which itself made the Economic Research Council’s No.3 slot.

8th: The Europe of Broken Dreams, Part 1: An introduction to the Modern Monetary System

Part 1 of my magnum opus, topping a series of 5 on leveraged banking, baffling borrowings and financial repression. Read it if you really want to understand whats going on.

9th: Frederic Bastiat: The Broken Window

The best economist by far, with his best sketch, explaining the simple folly of economic society.

10th: Corporations: No Taxation without Representation

Popular because it struck so many chords. Read it and you’ll see how full gainful employment needn’t be just a dream.

11th: The Trouble with Inflation

I know, I’ve gone beyond ten, but for anyone wanting to understand inflation statistics, this is the real deal.

12th: The Europe of Broken Dreams, Part 5: Default

The tail end of the magnum opus, closing the serious analysis with words that all should ponder.

Of course besides my economic blogs, the selection of Business Articles drew inspiration for many in business, and has been actively used by both clients and the curious in their thirst for improvement:

1st: Troubleshooting:

Proving that hard times aren’t over yet … and the wise know that coming out of recession is often tougher on cashflow than going in.

2nd: Increasing the value of your business

Who wouldn’t want to?

3rd: Financial Forecasting

An essential component in any business, looking ahead! 

4th: Introducing the Sellability Score

A service as much as an article … an invaluable aid to many who sought to think “outside the box” about their business.

5th: Pricing

A new kid on the block, only published in November, but invaluable to marketing strategy.

And as for 2014? No doubt there will be much to say, and like any good businessman, I shall seek to focus on what really matters…



Increasing the value of your business

shutterstock_105377591As we mature most of us will hope to reduce our involvement in day-to-day work activities and extract value from our businesses, either through a business sale, family or management hand-over, or financial restructuring. After all, life is about priorities, and whether it is a fresh challenges or the allure of grandchildren, we all need to enjoy getting the balance right.

For some a business exit may happen in their 20s, for others in their 70s, but there tends to be just one opportunity to really get it right, and often this is occasioned by an approach from a suitor or the impact of some positive or negative external event, perhaps in the economic marketplace or to our health. As with most things, planning ahead tends to bring its rewards.


The basic principles of selling …

Just like any good business should be focused on it’s customers, a business sale needs to be focused on the needs of the buyer, and doing it right takes thinking and preparation in order to optimise the deal value and structure for the seller in a way that also works well for the buyer.

Buyers are principally looking for one thing; a future cashflow. This will be their return on investment, and they will calculate this based on their expectations on the future profitability and tax burden of the business, the investment required to achieve that performance, the funding commitments they will take on to buy and invest in the business, and the resulting free cashflow.

If you are fortunate you will find a strategic buyer, who is looking to secure market share or territory in the expectation that they can keep competitors out, or achieve economies of scale, or integrate your business in ways that add real value to their own so they are prepared to pay a premium. This is why many acquisitions start off by diluting the shareholder returns of the acquirer, as they are focused on longer-term gains.

So the starting point is to establish how to achieve and demonstrate the optimum sustainable profitability and cashflow, and other valuable aspects of the business like the brand, intellectual property and other aspects that may be of high worth to the buyer.

By understanding the needs of the buyer, we can concentrate on selling the benefits of your business.


Risk …

Many careers have been dashed by bad acquisitions, and however carefree the buyer, their funders will be taking a long hard look at what they are stumping up money for. So often you will be satisfying two different entities, each with different objectives, in order to get the deal away. This means ensuring they can both focus as much on the value of your business rather than the risk of your business.

So minimising the perception of risk is critical to ensuring the buyer focuses on the right things. There will inevitably be a due diligence process, and you want this to go smoothly to impress both the buyer and funder, and to keep their concentration on the opportunity rather than niggling detail.

Risk embodies many things, but minimising the perception of risk may include;

  • Dependable revenue streams and margins, with any variations explainable and forecastable.
  • Dependable customer base, by sector and clients with a strong level of repeat business.
  • Dependable staff, with a motivated management team exhibiting strength in depth, supported by appropriately skilled and trained staff.
  • Dependable infrastucture, with capital expenditure and administrative systems robust and up-to-date.

It may be that a “risky” feature of the business is what attracts the buyer. Perhaps the fact that you have sustained far more than your expected market share for many years, or a niche part of the business with great growth prospects. But ensuring that other risks are not an issue enables the buyer to focus on these positive aspects.

This requires a real focus on ensuring that the day to day activities of the business, and the contracts you rely upon, can be clearly and accurately presented. The approach to this presentation is key, for instance profitability may have been curtailed because of heavy investment in growth, and you need to be able to present not just the full picture, but also the beneficial underlying strengths in your business that a buyer could enjoy.


Buyers, buyers everywhere …

Sadly buyers don’t grow on trees, and finding the right potential buyers with the right funding capability is critical.

Ideally you want a range of them who will compete against one another. At other times even if dealing with just one buyer it is possible to extract extra value for “exclusivity to deal”, after all they don’t want to waste money and energy on an abortive competitive acquisition and may pay a premium for that.

Understanding potential buyers’ strategies, and where you may fit in, is also important. With public companies the Chairman’s/Chief Executive’s statements in the annual report and accounts can be very instructive, as will be any investor presentations they make, both of which will be available on their websites. It isn’t just in what they say, but looking at what is missing that may indicate how your business might add real value to theirs, for instance in the scale or margins you achieve, or in the distinctive offering or synergies that they could adopt.


Concentrating on the business…

Many business sales go awry because the business owner is so distracted by the business sale that they take their eye off the successful running of the business. Optimising both is important, and this is why external support is so necessary, after all there are only so many hours in every day, and you are unlikely to have a wide range of business sale negotiation and structuring experience.

Think of all that can go wrong with a house sale, and multiply it many times over. The critical thing is to find the right buyer with the right funding at the right price, agree the deal structure in detail before it reaches detailed legal drafting stage, minimise the time during which things can go wrong, minimising your risk and tax. This all takes timely, effective and decisive project management.


Not your only strategy…

A business sale should never be your only strategy. Businesses that are purely built to be sold on generally lack the dependability and sustainability that is attractive to buyers.

Your core strategy should be about building and sustaining success, and having that as a fall-back if a sale doesn’t happen isn’t a bad place to be.

Of course your core strategy needs to be good, and if it is then there are a myriad of other ways of extracting income and capital from a business which can ultimately be more rewarding than the one-off delight of a completed sale.


At the right stage…

FYI is happy to work at an early stage to support the business and its work towards achieving a sale, moving into project management at the right time with a range of existing or new specialist advisers to ensure that all bases are covered.


FYI… Making it happen.

Since this article was written we have introduced The Sellability Score … click here for more information.

The Hobbit: The Desolation of Laketown


Fresh from viewing The Hobbit: The Desolation of Smaug, I am struck by my abiding memory of the film. Not the elves, the orcs, nor the mighty dragon. Perhaps harking back to my most popular post of the year, The Hobbit: Tolkien the Economic Libertarian? I was struck by the commentary on the state in a reinforcement of Tolkien’s beliefs. As I state in my earlier blog, in a letter to his son in 1995, Tolkien wrote about planning, organization and regimentation being an “ultimately evil job”.

In the original book the dwarves, having escaped from the elves and orcs, climbed out of their barrels, stinking of apples, and walked around the shoreline to the bridge leading to Laketown. But the film tells a different story, with the Dwarves freely negotiating exchange of their pieces of silver with Bard for safe passage, shelter and arms.

This act of free trade appears rather differently to the regulators, as Bard sought to smuggle the dwarves into town, still in their barrels, smothered in fish, until reaching the customs house he is ordered to stop! “You have a permit for carrying empty barrels, not fish! Throw the fish away!” Bard hurriedly explains the folly of such regulation to the Master’s dark councillor, and the conniving civil servant Alfrid Lickspittle (a character new to the film) backs down.

So well done to the scriptwriters for this comment on ancient and modern folly.

For many, smuggling has been an honourable profession over the centuries, indeed an essential means to survival, as it was to many Cornish communities little more than 200 years ago. Preservation of the seasonal catch of pilchards was vital for trade, for community and individuals, and yet the state had imposed restrictions and taxes on salt which increased the price of salt forty times over. Nowadays the regulatory image of the EU looms large over the fish market with equally unintended consequences. How are a people supposed to prosper under such meddling restrictions?

Meanwhile, up in the Lonely Mountain, such is the repute of Smaug the Dragon that he used to appear at the head of Forbes’ Fictional rich list, although today with an estimated worth of $54 billion he comes in second to Scrooge McDuck! (See here). This is no made-up guesswork, as the compilers have carefully analysed the dragon’s length, sleeping position, the height of his mound of treasure, the value of diamonds embedded in his belly etc.

Of course Smaug was a horder, and today we are increasingly told that those who hord their money do no good. Too many politicos, in their desperate drive to sustain short-term GDP, falsely believe that wealth is created through the issue of debt rather than through efficient investment. Certainly if Smaug’s treasure was suddenly released onto the marketplace it would change the dynamics of demand and supply in a great inflation, but it should be remembered that trade requires the effective allocation of both capital and labour. If there is inadequate opportunity for the effective investment of capital then it is better to be saved up to be used when there is a need for wants to be satisfied rather than lost on some deficient scheme to the detriment of capital and labour.

Had Smaug not breathed his fire on Laketown, it would no doubt have achieved its own desolation, being destroyed from within by regulation and unintended consequence. As friend and author Dominic Frisby displays in his great book Life After the State, the unholy trinity of money, taxation and the state act as a ring of power from which it would be good to escape.


Pricing Strategy


How do you optimise your pricing? If the answer to this question is a mystery, this blog will help … and being based on a series of presentations that I recently gave to business professionals, I know it hits a chord!

Pricing in isolation is nothing … waving a flag with a price in the middle of a field is unlikely, on its own, to drive anyone to buy your product or service … so to be effective, a price needs to be a fully justifiable component of your strategy … and only then will it hook the right number of customers at the right price.

Pricing is one of the 4 Ps:

Price, Product, Place & Promotion. You can’t separate them; they are intricately entwined. You can’t set a price without looking at the qualities associated with the other 3 Ps, which include:


  • The product/service itself
  • The cost of generating it
  • The extent of competition & specialism
  • The usefulness or exclusivity of the product/service
  • Does the product/service fit in, or stand-out, from your range of offering?


  • Read this as “the marketplace”
  • Traditional or leading-edge ways of reaching the market?
  • The price-sensitivity of clients and potential clients?
  • What resource restrictions do you face, including people, technology and location? … And can these be turned into a positive?
  • What are the competitive features of the market, and are there plenty of others offering the same or similar “commoditized” product?


  • How is it to be offered?
  • Sell the benefits rather than the features
  • How can you differentiate yourself from the competition to appear unique?
  • Learn to demonstrate the advantages of dealing with you
  • How can you create a leading edge and talked-about distinctiveness?

Get the Product, Place and Promotion right, and (with the exception of a fully regulated market) you have greater control as a price leader than a price follower, and the opportunity to set your price across a wider range.


Long-term, a successful Price also needs to represent Value:

  • Clients must want to expend their hard-won income and capital on what you are offering, rather than the myriad of other services, products and savings competing for their attention 24 hours a day, 7 days a week.
  • Did you read that correctly? … remember that you are not just competing with your direct competitors, but for a share of your potential customers’ disposable income or capital.
  • Value certainly does not mean Cheap.
  • Consider the ladies fashion industry, which is a great example of value being found at all price levels. At one end of the chain we have Primark and charity shops, whilst at the top-end many favour Burberry or bespoke boutique design … each successful business up and down the value chain succeeds in offering a distinctive value to their sector of the market.
  • Value encourages clients to return, to recommend, and become recurring revenue generators.

 The Aim of Pricing:

The perfect price should optimize the balance between sales price and volume to maximize profitable activity, consistent with your strategic objectives.

You may have short-term goals (such as stimulating interest and volume for a limited period) or long-term goals (such as establishing a permanent premium price for your distinctive service).

If you understand how your price has been arrived at, you’ll be in a much better position to negotiate confidently and consistently with clients to meet your overall strategic objectives.

The best pricing strategies are matched to a competitive edge. Consider the pricing approaches taken by:

  • Corner-shop v Tesco
  • Audi v Seat
  • Direct Line v Broker
  • Harrods v Debenhams
  • Exeter Airport v Stansted
  • British Gas boiler servicing/repair v its regulated utility services

… Consider how;

  • some succeed in achieving higher prices through convenience
  • some succeed in offering different levels of product at different price-points
  • some succeed with repetitive marketing where they really know their customer
  • some use up-scale brand image, design, technology, desirability etc. to establish a distinct offering
  • some use different routes to market, and exploit price perception
  • some use top-end product to draw attention to their business, whilst others aim for a very different position in the market
  • some use their regional location to charge a premium
  • some offer added-value services, monthly payment, service guarantees to enter a different marketplace alongside their core business

Things to avoid:

  • Avoid lowest-cost pricing … you cannot succeed on price alone. Any long-standing business has a raison d’etre other than just a price.
  • Avoid copying your competitors pricing … look at their whole package and how you can beat it, otherwise you all risk copying each other in a circle of diminishing returns. You need to be innovative and distinctive.
  • Avoid spending too long thinking about your competitors … dedicate the time to understand what your clients and potential clients will value, and aim for that.

Pricing Strategies:

Your pricing strategy should support you in delivering value and achieving an appropriate rate of return on your time and investment.

Here are a few methods of pricing:


  • Establish the unit cost of delivery of the product/service, comprising
    • Variable costs
    • Fixed costs
    • Required drawings/dividends & taxes
    • Re-investment needs
  • Break these down to a workable meaningful number, such as cost per hour, per head or square foot.
  • Remember to factor in any downtime, such as non-billable time, meetings, administrative time, bank holidays etc…
  • Work out how these unit costs vary with volume, and see how as you increase or shrink your capacity your costs change (as your fixed costs, drawings and re-investment get spread over a larger or smaller volume of billable time).
  • Establish the profit you wish to make, based on the volume you expect to deliver, and simply mark-up your costs accordingly.
  • Remember to consider different mark-ups for different products.
  • But please don’t use cost plus pricing as a lazy substitute for a proper pricing strategy!


  • Anything will sell at a price, its just the market price … but remember that you can influence demand through Product, Place & Promotion.
  • Remember that your customer’s perception of value is far more relevant to their demand for your product/service than the time and effort that you spend delivering it.
  • So look to add demonstrable value to your offering that generates a positive perception.


  • Your largest customers may enormously value your work, or they may stick with you because of your low price; understand which is the case.
  • Some may bring more spending to you if you offer incentives to cross-sell other products/services that you offer.
  • If you do adjust your prices to reflect quantity, ensure that the workflow is evenly spread, or appears when you have the capacity to cope with it.


  • Traditionally quieter at certain times of the year? During slack times aim to at least cover your fixed costs (e.g. staff, premises, insurance, re-investment etc…) and any direct costs you incur in the provision of the service (e.g. suppliers and sub-contracting).
  • Consider special promotions to existing clients for particular services at specific times of the year, and educate or market to your customers accordingly.
  • But don’t expend too much of your marketing budget in the quiet times if the majority of your target audience are distracted by other events, like Christmas.


  • Having covered your costs, be aware of how much extra profit your business can make from every additional £ of sales.
  • If you have a gap in workflow, and resources that would otherwise lie idle, consider pricing one-off work or sales incentives to fill the gap at levels that cover your variable costs and contribute towards your fixed costs.


  • Fixed prices for services are great for the customer, but can present a risk to the supplier. So be specific about exactly what is included in the price, the boundaries, and how if the job changes whilst underway that the price will also be revisited.

Making Prices work:

  • Look to amend your prices little and often, rather than putting off the change until it seems huge.
  • Present your pricing confidently, and ensure that you value your own efforts and time correctly.
  • Monitor KPIs (key performance indicators) and financial accounts frequently to ensure that your pricing strategy remains valid and is generating the desired results.
  • Test the market before launching brand new pricing structures.
  • Don’t feel that all prices must be raised across the board; know and listen to customer feedback and look to raise them where customers perceive the greatest value to be.
  • Find a distinctive style. But ensure that your message is relevant to your target market, and package your services in interesting ways


In order to set the best price for your strategy, it helps to be cost-efficient. Consider this: £1 of cost saved is often worth £2 or more of revenue gained, as savings create enduring value.

There are different ways of looking at costs:

Accounting Cost

  • The accounting cost is the expenditure incurred for supplies, services, labour, products, equipment and other items purchased for use.
  • These accounting costs will be visible in your annual accounts, management accounts and forecasts.
    • Ideally the management accounts and forecasts should break down the revenue and costs by division or service.
    • Where people are used for a number of divisional tasks, or they are truly central costs (like book-keeping, insurance, management) they need to be allocated across the business. But think carefully about how this is done as any assumptions made can have a huge bearing on the interpretation of figures.
    • Consider keeping these central costs distinct in the accounts, as your revenue-generating divisions will then know how much they must achieve to cover both their own costs and their contribution to central costs.
    • In the past I have seen perfectly profitable divisions, which were usefully contributing to central costs, closed down because an inappropriate allocation of shared overheads suggested they were making a loss!
  • Put a cost to time that you spend on work issues out of the office.
  • Always look at the current and future costs rather than just basing your decisions on historic costs.
  • Remember to factor in issues like tax and depreciation (or ideally anticipated replacement costs).

Opportunity Cost

  • The opportunity cost is what is foregone because the accounting cost has already been incurred.
    • For instance, ask yourself what better use could those resources have been dedicated to instead?
    • In preparing your business strategy, look at the resources available to you, and seek to deploy them on work that will achieve the highest returns.
  • Pareto’s Law
    • This is the chap who created the 80/20 rule. It may be more like 70/30 or 95/5 in your business, but the point is the same.
    • Look at the work you do and the customers you do it for. Look at whether your business would be better off without that work, and the opportunity cost of doing it … could you be doing more productive work having freed up that time?

Your costs will put a floor on your price, and the market may put a ceiling on your price.


Having found the right pricing strategy, ensure that your cashflow also matches your needs:

  • Businesses don’t fail because they are unprofitable … they fail because they run out of cash.
  • A clear cash policy isn’t necessarily “30 days end of month” or “14 days from invoice” which is open to abuse. It is more likely to be something clear like “a third up-front, a third mid-project, and a third on completion.”
  • Enjoying a strong cashflow can open up your strategic options, which in turn may generate better pricing and enhanced profitability.
  • Cashflow often becomes more critical as you grow, as you have more costs and investment to fund whilst awaiting revenues. So plan for it!

And finally … a few dos and don’ts:

  • Be honest about pricing
    • Tell your customers up-front and be prepared to justify them with reference to the market and your expertise. Don’t apologise … if you need to then your pricing strategy is wrong.
    • Ensure that your staff buy-in to your pricing strategy
  • Tell and thank your customers
    • Contact your key clients and ensure that they understand and appreciate why price changes are being made.
    • Remind them how you continue to differentiate the value you offer to them.
    • Use the opportunity to demonstrate any additional features and benefits that you have introduced.
  • Add features, extra value and options to create choice
    • Extra features can command extra prices.
    • But give customers the option of sticking with what they are most comfortable with rather than turning them away.
    • Attract positive attention every time you do so.
  • Before raising prices, consider offering your customers the chance to bulk-buy at pre-increase prices.
  • Keep your pricing and costing simple, understandable and promotable!

… and most importantly, THINK OUTSIDE THE BOX

FYI can help with pricing issues, so do contact us to discuss your needs.