I’ve been doing a fair bit of planning and projection-ing lately, and it got me thinking about how much planning and projecting is really valuable and how much is just a complete crystal-ball-gazing, hai-i-can-has-mathematics waste of time.

So, the fine people at 37 Signals have noted that planning is guessing, and I generally agree. That said, there’s certainly value in considering questions like:

• How much money could we make next year?
• What initiatives should we work on and what might be the best use of my time?
• Should I hire some XYZs and how many of them? Can we afford it?
• What do you do if you’re in Space and nobody can hear you scream?

So how much planning is enough planning, and when should you stop? What value is there in working on projections 1 year ahead? Two years ahead? More?

I think the answer lies in the fact that longer term planning quickly becomes recursive guessing. Your “estimations” become built on the  assumed validity of the previous “estimations”. And that’s not a good thing. Because when you’re starting to make guesses based on other guesses, you’re getting farther and farther away from reality.

In other words, you should make one set of independant “guesses” and quit. I’m not saying you should stop considering potential futures and consulting the crystal ball. I am saying you should quit with the detailed planning and financial analysis.

Here’s an example. Let’s say I’m working on projections for the next two years. Here’s what you’d do.

1. Take some known or assumed metrics and constants for the previous year
2. Consider the planned initiatives for the next year
3. Make some intelligent and reasonable estimations (aka good guesses) about the metrics in (1) and how they might change over the year
4. Apply your growth assumptions (3) to your known metrics (1)
5. Now you have some simple projections for year 1.

At this point, I’ve taken some solid data about last year. Now I’m making some educated guesses about next year.

But I said I wanted a two year plan. To do that, I’m going to take the projected results for the next year, then I’m going to feed the results into step 1) above…. and then the warning bells should go off – I’m making guesses on top of guesses… Abort!

In big companies, people love to make 2 and 5 year plans. Sometimes, the industry might be mature enough that they’re not really making too many guesses because there is enough data to feel confident about your projections.

General rule of thumb – your ability to project into the future is proportional to the maturity of your business.

But that practice isn’t driven by the desire for accuracy; it’s driven by the need to build a security blanket and a false belief that we’re smart enough to see into the future.

In reality, such long term plans and projections are not just a waste of time. They’re harmful. Two reasons:

• They set false expectations. Employees, managers, board members, shareholders, all of these people build their expectations based on these long term projections. When their expectations are broken, the employees are disappointed, people don’t get their bonuses, share prices plummet. Whoopsie.
• They create false inertia. Once a plan is in place, it’s like laying down psuedo-tracks for the train. Moving the tracks can be done, but there’ll be some resistance to the change – people will question the wisdom of the new direction versus the old, you need to get everybody on board just to change a direction that you never should have set in the first place.

I am a big fan of making plans and running up some projections – it helps give you clarity and the opportunity to think about the future. But detailed plans and projections that build guesses on top of guesses – that’s bad juju.

“You’re too expensive.”

Sound familiar? I’d bet that every business owner has heard a customer say this, be it true or not.
Before we dismiss this and start justifying that our price is just right – or even worse, start discounting – let’s think about the last customer who told you that you were too expensive. What were they thinking? Why? How could you have changed their minds?

This is a question that gnaws at the mind of many business owners, and, when confronted, the natural reaction is to make arguments as to why you aren’t overpriced. You’ll make comparisons. You’ll draw analogies. You’ll give discounts. And maybe you’ll ultimately win the customer over.

Hooray, and well done. You’ve got the sale.

But here’s the not-so-obvious bit: many customers have made a decision about the price your product should be before they actually learned your price.

In other words, their price was set before your price was revealed. They made a decision about what they were willing to pay before you told them what you wanted them to pay.

And that means that you could have changed their minds before they even saw the price.

A Traveler’s Expectations

Great Expectations

A couple of years back I lived in Beijing for about 6 months while studying. As with most travelers who find themselves in country where they have a currency advantage, I found that many everyday things were much more affordable. Catching a taxi cost around a tenth of what I’d usually pay; eating out was similarly inexpensive. With less walking and more luxurious eating habits, my waistline started expanding pretty quickly.

My perception of what was expensive and what was cheap was set by my expectations of what I’d be paying at home – what I was used to paying for the same service or product.

It wasn’t long before my perception began to change. I began to evaluate things more natively, and Chinese prices became their own benchmarks. My thinking became: “this restaurant is expensive compared to the one around the corner” rather than “this meal is so cheap compared to my local noodle joint back in Sydney”.

This set up me up for a terrible shock when I got back home, since everything was suddenly insanely expensive! Over time this feeling fades and a $10 meal is no longer highway robbery. But the point remains – my price expectations changed because of my environment. How much I was willing to pay went up, then down, then up again… all based on my perception of value and worth set by my environment.

So – what are your customer’s perceptions of value? What are they comparing your product to, and what experiences might they be drawing on?

Welcome to Wal-Mart

When you go to Wal-Mart, you expect low prices. Everyday low prices is their mantra; their advertising emphasises this endlessly, or once did. Walk into one of their cavernous stores and the endless aisles with their intentionally not-yet-unpacked pallets of goods on sale scream to you that you’re in a warehouse. You’re one step closer to the supplier. You’re cutting out the plush middle man. You’re saving money.

This is a well crafted image that gives you the feeling that you’re being frugal. Doing battle with the crowds and walking half a kilometer back to your car translates to saving money. Your expectation at Wal-Mart is that prices will be low because of the environment you’re in, the experience you have and because their branding and marketing tells you that they will be.

Luxury stores are the exact opposite – spacious and clean, with neatly spaced merchandise and wide racks made of sturdy materials. Each bag perches on a pedestal arranged just-so. The store looks and feels pricey, the staff are insanely fashionable… you already know that the products here aren’t cheap.

How is your marketing and your store’s look and feel conditioning your customer’s expectations of price?

What’s that?

To infinity. And beyond!

You point at a strange looking wheeled object in your friend’s loungeroom. You ask your friend: ”What’s that?”   And they respond:”That, my friend, is the most advanced vacuum cleaner in the world; completely automatic and cleans the house itself. It’s a Roomba.”

Now you’re already wondering how much it costs; you want one. And who wouldn’t want a Roomba, they’re freaking cool.

But what if your friend answered differently, saying:”That’s some vacuum cleaner my mum got me for my birthday. It’s a little spooky and doesn’t work properly. Who wants a little robot running around their house pretending to vacuum things?”

You might disagree with your friend’s statement about robots, because robots are awesome. But the lack of a testimonial or recommendation in that statement devalues the product. The way that you as a marketer or you as a user talks and presents your product makes a significant impact on perceived value.

How are you talking about your products? In your marketing materials, on your website, on the phone… are you actively using words that convey the value?

Your Checklist: Expectations, Images, Words.

My three stories above illustrated these three core points. Let me recap.

Expectations. Your expectations about a product and it’s price or quality are shaped by your experiences with comparable things.

Image. The look and surroundings of a product affect the perceived value of the product.

Words. The words and attitude you and your customers take when describing the product affect the perceived value of the products.

That’s it. If people are saying you’re too expensive, then you’ve messed up on one (or all) of the above three.

I’ve been writing on various blogs for a while. For at least a year at GoodBarry, I would blog once a month. I used to write on Business Catalyst‘s blog from time to time too. Like many others I’ve played with Tumblr and have been on twitter for a while.

So it’s time to start again with some more long form thoughts on Business, Marketing, Tech, Startups and what not. I’m going to kick off by including some of my old posts that are general in nature and worth sharing.

So, lets get this party started.