Being First, and Getting Started
Lifting the Boulder
Developing a brand new business in an industry or trying to break into a new avenue outside of your specific field in your industry can be like attempting to lift a 150 pound boulder when you’ve only ever seen someone else lift high loads. You know what your legs are supposed to be doing at different points, you may know you need to bend your knees and you may have heard people say not to lift with your back, but you may not even get the boulder of the ground – and if you do, you may be lifting in a way other people that know how to lift think looks weird. So how do we get around that? How do we learn how to lift the boulder? How do we start that new revenue stream?
There are two different pillars to be mindful of in this.
The first pillar is process. Define all of the unknowns and systematically eliminate them. Attend classes or take an online course, buy some lunches for people already in the new industry, and make detailed notes on every individual process a business in this new industry may use. Once finished with this step, you should be able to competently talk with industry professionals about the new industry – not necessarily meaning you’re an expert, but “fluent in the language”. Next, make models, surround yourself with people who are already successfully “lifting the builder”, and fully flesh out the end goal. In this stage, a solid team of people excited about the idea should start to form gravity and a five year plan should start to take shape. Finally, define your capital limitations and look back at the foundation you’ve created when choosing an avenue to break into the sector your pursuing. The proper avenue should be pretty clearly defined, even if you have to wait for a deal that fits your criteria to come around – but the background legwork is entirely meant to minimize the risks posed by capital investment in a new industry or sector within your industry.
The second pillar is personnel. New business or product development is important and can expand a successful business or even rejuvenate a stagnant business, but not every person on a team will have the time, energy, or mindset to pursue a business development project in the time frame you need. Survey your managers and supervisors and make sure you learn the strengths of your team. If you or any of your managers or supervisors have staff that are consistently working ahead and asking for more tasks, those individuals would be a great choice to task with new business development. Allow those high performing, energetic professionals to grapple with the boulder on your behalf and run these ideas to ground. With guidance and careful risk assessment, you could have an organization that expands itself and begins rapidly generating additional revenue streams because you’ve fostered an environment where new business development and innovation are rewarded and discussed freely rather than having an environment focused on only what you’ve proven works.
Call To Action
Look at your business’ earnings by categories:
Where are you in the new Business development process?
1. If you don’t know call us. We’ll determine it.
2. If you do know it, ask yourself what’s next. (We can help here too).
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Business Is Simple
We’ve talked about this before but I’m bringing it back up, because the uptake on this concept is low. So I’m just laying it out and eliminating the usual banter. Business is simple. It’s money in minus money out. Don’t get confused by the fit and finish of the business. If it cash flows in God mode then it’s good. Often we get enamored with winning logos or other distractions that make us feel important or successful. If that new logo cash flows and produces earnings its good. Otherwise it’s not.
I can hear you saying something like “All my customers are good. They all pay.” But let me tell you the truth which Coopers and Kaplan unearthed and docuemented in an article WAY back in 1991. 20% of your customers are producing 225% of your profit. “How can this be?”, you ask. “I know at the end of the year I only have 100% of my profit. Cuz… math.” But I am telling you that some of your customers are very profitable and some eat the profit of the others bringing you back down to 100%.
If you can’t tell me how you fixed this, this principle is operating in your business. Call me now and we’ll have it fixed before year-end. …provided your contracts give you the freedom to do this.
Case in point: a small client, $15M in revenue going into the great recession, reduced their revenue by 50%. Some involuntarily, some deliberately fired. As a result, the company made MORE profit, about 2X, on $7.5M in revenue. I’m not kidding. These are actual numbers.
‘nuff said.
Call To Action
Look at your business’ earnings by categories:
Where are you in the New Business Development Process?
1. If you don’t know call us. We’ll determine it.
2. If you do know, ask yourself what’s next. (We can help here too).
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Exit Planning as a Part of Strategy
This will be a quick post but read the unrelated sidebar below because it may be relevant to you and how you recover from a ransomware attack.
More and more clients are asking us to consider their exit strategy when we are helping them with their strategic planning initiatives. I could justify this using Stephen Covey’s advice to begin with the end in mind. But it goes a little deeper than that.
We can always conduct strategic planning as though the business will continue forever. Examining generically the actions that will increase the value of the business and we wouldn’t be wrong. BUT we might be able to be “righter” if we look at the specifics of an exit plan if we know what they are. For example, if we know that the owner would like to exit the business in order to retire in five years, the plan we create should emphasize preparing the next leader of the business to take over. …or alternatively, preparing the business for sale. Leaning it out and making it attractive to objective, disinterested buyers.
In order to capture this opportunity and act on it if necessary, the strategic planning process should always ask the question, do we know what the exit looks like… or what we would like it to look like.
Sidebar: The reality of ransomware
I kind of thought that ransomware attacks were waning as people had learned how to deal with them, but I’m not sure that’s the case. We may be seeing a spate of increased activity. Two firms I know and a third I just know by reputation have been hit recently. All three firms decided to pay the ransom. …and in all three cases they also went through extensive recovery efforts which ignored the data that was decrypted by the hackers, all of whom, by the way, were likely Russians.
In at least of the three cases, the decrypted data was not undamaged. I think the hackers unintentionally damaged the linkages and relationships of the files because they can’t encrypt the files instantaneously. This leaves some files out of sync with one another and essentially unusable in certain cases. So the businesses not only paid the ransom, but also paid dearly for the recovery of their systems. Some of this was covered by insurance and some was not. It depended on the policy the clients had, the limits of those policies etc. One client captured the logic of this succinctly; “Even if the files appeared to be completely undamaged, we would have restored the data ourselves, because we had to be sure the systems were clean. We don’t want them re-encrypting them if they need more cash.”
Keep this in mind as you are considering your course of action following a ransomware attack. Also you should know that the proceeds from these attacks go directly to finance the ware in Ukraine.
Call To Action
As you are conducting your annual strategic plan update, consider the owner’s assumptions about the disposition of their business and eventual exit in the formulation of the initiatives and plans to drive the value of the business
Call To Action
Select an initiative, either personal or business and begin working on improving your capabilities. If you would like help with this process, give us a call.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
How Ice Melts
I’ve been reading, actually rereading, James Clear’s Atomic Habits. There’s a lot to unpack there for individuals and for organizations as well. How habits and routines are established, how you can stack them to build your capabilities, and how to extinguish ones that don’t serve you.
He writes about how many improvement efforts are like ice melting. You raise the temperature from zero to one degree. Nothing appears to be happening. You raise the temperature another degree. Still nothing. You have to repeat this investment of energy a total of 32 times. On the final effort, the temperature of the ice rises from 32 to 33 degrees at which points the ice melts completely.
Why I am I telling you something you already know? Because often we try establishing a new habit or a process in our business and we are successful for the first trial or even the first few trials. And then we don’t see results and we doubt the efficacy of the new habit and stop practicing it. So before abandoning a new improvement initiative, whether personal or business, make sure nothing it actually happening.
If you’ve experienced this, let me first congratulate you taking the first steps. Going from zero to one is the most difficult step. It involves researching methods, preparing materials, consulting with experts or experienced people and overcoming inertia etc. I suggest you measure the crap out of everything. Measure your activity, at-bats so-to-speak, the temperature of the room the ice is in, even the temperature of the ice itself. Analyze your at-bats and see which ones work better than others and what makes them better. We refer to this process as “more like this, less like that.”
Call To Action
Select an initiative, either personal or business and begin working on improving your capabilities. If you would like help with this process, give us a call.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Do You Need an Exit Plan or an Entry Plan?
I was recently working with a client that is one of those infuriating people that is good at all sorts of things. He races sail boats and sings in a rock band when he’s not running a successful consultancy. Late last year he asked Redbank to develop an exit strategy for him. This is the story of that effort and the surprising end point.
The Actual Exit Plan
When we work with clients on exit planning, which more and more is becoming integrated with strategic planning for our clients, we look at four phases: the unplanned plan (or estate plan), the ripcord, the interim plan and the indefinite plan. Each has its place, and you really should have all three in place. BUT they aren’t redundant, and they meld together. The unplanned plan is simply your estate plan. Because the ugly truth is, you may not survive to see us complete your plan. You could walk out of the meeting and be hit by the proverbial bus. So you need to get an estate plan in place. Honestly, most of our clients already have one, but just as honestly, they often need a tweak because they haven’t been updated and/or they don’t reflect the realities of exiting a business that has grown for decades.
The Ripcord Plan is the second plan to put in place an it covers the case in which you just need to get the … out of the business. This could be a forced situation like a health issue that prevents you from continuing business as usual or it could be a rapid deterioration of the industry segment that you serve. It doesn’t really matter, the point is, you need to exit the business with all due haste. In this case little can be done to improve the performance of the business, but it can be neatened up a little, personal assets taken off the books etc. This is a classic make ready for sale project.
The Interim Plan is the third plan and it flows naturally from the Ripcord. In fact, you will complete all the Ripcard plan activities and flow directly into the interim plan. This is the time for making big changes to the business to increase the value of your asset when you sell it. This phase can run from 18 months to 3 years or more, depending on the condition of the business and the opportunities to be harvested through intensive work. This is the heavy lifting phase and will often involve the hiring of a President or COO to complete the work as often the Owner is not interested in this sort of hill climb so close to their exit.
The final plan is the Indefinite plan. In this phase, the President that was hired has improved the performance of the business that honestly, the Owner can’t imagine selling it. It runs itself, the Owner attends quarterly board meetings to review the performance of the business. The President is trustworthy and well compensated so they aren’t going anywhere. …what’s not to love?!
Back To Our Hero
When last we spoke about our hero, he was contemplating exiting his business. So we conducted a workshop to assess the situation and his needs. It turns out that he LOVES what he does. All of it. Racing, singing AND consulting. So rather than create an exit strategy we creating an abbreviated Ripcord plan and then when straight to the Indefinite plan. The goal here, for this client was to streamline all the minor irritations of owning and business and make the business as much about joy as possible. So that’s what we did. Now he only does three things: racing, singing and consulting. …and he has eliminated all the administrivia and energy sucking activity from his business and almost from his life. As a bonus, we worked on and found an approach to generating new business from his extensive rolodex that doesn’t even take a lot of time so his revenue has stabilized, contributing significantly to the sleep at night factor.
Call To Action
Think about your situation and whether a reduction in daily busyness wouldn’t add value to your life. If it would create an entry plan:
1. Identify the energizing portions of your life.
2. Identify the energy sucking portions of your life.
3. Identify the risks in your life.
4. Develop a life entry plan to maximize the first and eliminate or mitigate the second and third.
5. Feel free to call us for this. It seems simple, but having a third party really get to know you and point out things about you that you didn’t know is VERY helpful in this process. Not to mention, we’ll actually get it done for you and minimize your time required!
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
The Truth About Brainstorming (Or, Why We're Better Alone Together)
Crowd sourcing wisdom and harvesting the great thinking of the group is a good thing right? It prevents us from only being as good as our singular leader, right? …well the truth is more nuanced than that. There is absolutely value in the diversity of thought. But in trying to get at that value, some of our practices may actually kill the very value we are trying to harvest. Let’s unpack this.
Diversity of Thought IS Valuable
I don’t think I have to say this anymore, but having a diverse source of ideas about almost any business problem is useful. At least in the early stages of a challenge where ideas are being generated about how to address the challenge. Then, having a lot of ideas, at least on the surface, makes it more likely that there is a good one to be had.
We Can Trigger Groupthink Trying To Get To Diversity
So we should all brainstorm at the beginning of a initiative in order to generate ideas right? Brainstorming is how we harness the diverse thinking of the group right? We, this is where theory starts to depart with reality. Or should I say, brainstorming done right works to harvest the diversity of thought. Done wrong and it leads to the same voices being heard… again.
A 1958 Yale study that compared individual thinkers to groups brainstorming found that:
1. Individuals competed well with brainstorming groups…
2. They generated more solutions
3. They generated higher quality solutions and
4. They generated more original solutions.
I don’t think I have to explain how this works, but here’s the breakdown. In large groups, people act more like herd animals than individual leaders. Typically a few leaders emerge and the group follows what they do. James Clear cites this in his book Atomic Habits. He relates a study in which individuals were placed in a group and asked a simple question. When the group, which was rigged, agreed that the wrong answer was the correct one, the individual, who knew the correct answer, often went along in order to avoid being out of the group.
Individuals thinking alone DO think more individually and with a greater degree of freedom than those working in a large group.
So group brainstorming in which the group works together on a single solution are likely to produce conventional solutions. If you are seeking out-of-the-box thinking and ideas, you need to protect the individuals’ individuality.
We’re Better Working Alone Together
So how does one do this? Brainstorming can be used, but individuals must work alone initially to develop their ideas. Then the team can be brought together after the initial ideas are generated and even fleshed out to the first phase gate. Then the team can work together to identify which ideas are the best among all the ideas that have been generated.
The original research is published in the article “Does group participation when using brainstorming facilitate or inhibit creative thinking?” by Taylor, Berry, and Block, in Administrative Science Quarterly 1958, Volume 6, pages 22–47.
Call To Action
The next time a team of yours needs to conduct ideation to generate new, creative solutions to a problem, keep them working separately initially and only bring them together once the ideas have been developed enough to defend.
Our clients routinely ask us for help with product life cycle, customer life cycle and similar new concept development and management. We’re happy to help you do this as well.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Stop Planning to Win by a Field Goal
As I watched the final field goal attempt in the Ohio State – Georgia game in the first few second of the new year, I could hear one of the excellent mentors I had over the years. I’ve been blessed with five and Dave Fouts, a devout and out Michigan fan by the way, used to admonish us to stop planning on winning by a field goal. Bring the world class team, not the bagel boy to ensure that the client selected us. Bagel boy, by the way, was the firms’ acronym for Best Available Guy Locally. His point was; make sure that you put a team on it that would MORE than equal to the task. Don’t leave to chance or heart… know that you were destined to win. This is similar to Tsun Tsu’s admonition to avoid engaging the enemy until you know the battle is won. So Dave, if you’re listening, that’s still good advice!
One quick note on over resourcing, as opposed to excellent resourcing. Making sure that you have resources to overwhelm the problem is NOT the same as having exactly the right team of outstanding people to do the job. A football team cannot add more people in order to win. It must add better people or create them from the raw talent it is able to recruit. I am reminded of Margaret Mead’s words:
“Never underestimate the power of a small group of committed people to change the world. In fact, it is the only thing that ever has.”
Adding run of the mill talent or resources does NOT get the job done, in fact, it often hurts performance. That’s one reason why Redbank is a SMALL band of excellent thought leaders.
Call To Action
Review your critical must win strategic initiatives and make sure that you are planning to win by an overwhelming margin.
1. Look at the resources allocated and ask the question can we afford better?
2. Look at your strategic action plan and ask yourself the question, could we be smarter about what we’re doing?
3. Remember, better does not mean more in a lot of cases. Adding more programmers to a project has been proven to be counter productive for instance.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
What Do You Think About 2023?
This month we continue to fiddle with the format/contributors of the MBR. I am joined this month by Sarah Ahern who discusses the most powerful driver of earnings; Pricing. I kick us off with some personal notes. These probably won’t be a monthly feature, but I thought you might be interested in a little adventure.
The Economy and Investments in 2023
I don’t make economic forecasts but some credible sources I respect suggest we are at an inflexion point. Certainly, we need to arrest the inflation spurred by all the government free cash in 2020 and 2021, but Dalio and Munger have both put out YouTube warnings that this might be something more. Give some thought to your financial positions and balance sheets in the next couple of weeks.
On Video Recently
I was impressed by Musk’s recent interview with Ron Baron. Very clear and on point for issues important to our way of life. I especially appreciate his use of Redbank’s Principle of Profitable Growth #9: “More like this, less like that.” All that time he was looking foolish, unable to get cars out the door in the quantities he predicted, they were optimizing the plant by simplifying the design of the car. Making it more manufacturable. Lots more of value in that interview including some heartening news about Twitter’s anti-bot measures. (Update: he may have walked back that change.)
Invitation to a Life Changing Event
Redbank Outfitter is in the planning phase of its first Grand Expedition. This expedition may not be very far at all, depending on the weather it may be here in Ohio. But still life changing. If you have not seen a total eclipse of the sun, that is if you haven’t stood in the center of the totality, you should join us as we view the totality in 2024, because you don’t know what you’re missing. I was there in 2017 and I decided then that I would make this experience available to a small group of individuals in 2024 when the next total eclipse occurs. So if you are interested in seeing the total eclipse of the sun, and making your life worthy of a Karli Simon song, complete with excellent equipment, the right location and an excellent professional guide, let me know and I’ll include you in the planning.
Pricing and CEx with Advisor Sarah Ahern
In the thousands of customer conversations our research leads us to have, the feeling is clear – people are unsure about what’s going to happen. 2023 earnings predictions continue to drop, and the competitive landscape is murky. We know that uncertainty is toxic for business. Do you, as a business leader, have the revenue strategy you need to confidently plan for 2023?
Pricing is a key part of a company’s go-to-market strategy. The effective use of pricing strategies can revolutionize a business – if done well. It all starts with deciding what actions best position you to win in the market.
Customer experience data can make that clear. Pricing strategy based only on internal metrics – for example, cost plus margin – is not enough to outperform the market. The most strategic, capable businesses focus on how much value they can deliver for their customers and what customers will pay for it. This is called the “Experience Premium”.
Understanding The Competitive Pricing Landscape Requires:
• A clear understanding of the cost of delivering your product/service
• A data-driven picture of your competitors’ pricing
• An ongoing conversation with customers – your own and your competitors’
Providing too much value compared to price compromises your pricing strategy as much as providing too little. It can also be damaging to earnings. We recently delivered glowing customer experience insights for a $97 million transportation company. Upon deeper analysis, it was clear the company was overdelivering. Their customers felt like the value they received was well above the price for the service – and it showed up in the negative effects on the company. Systems were stressed, scaling capacity was maxed out, and additional capital for much-needed resources or improvements wasn’t available. Growth was limited because money was left on the table.
In a constantly evolving market, doing research to keep prices right is an absolute necessity. Pricing is not a set-it-and-leave-it exercise. Price is one of the most important decisions affecting a company and should not be left to chance. The price you go to market with is the single most powerful lever to impact earnings.
Are you building a pricing strategy that will position you to win in uncertain times? If not, Redbank can help.
Call To Action
Use Customer Experience measurements to determine your pricing posture; headroom, legroom or Goldilocks.
1. If you’re not using customer experience measurement today. Start this first.
2. As part of that process, sense your customer’s posture regarding the value of your exchange.
3. Adjust your performance accordingly
4. Lather, rinse, repeat annually.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Why Forecasting Isn't Just an Exercise
This month we take a look at the power of forecasting and projecting and reminding ourselves that these tools are powerful and made a huge difference in the recent crisis… and will again in the next (current?) crisis. I open this month with a reminder of why forecasting is useful and not just an exercise and our guest writer, Advisor Patrick Hynes, takes us through the process.
“Complications arose, ensued, were overcome.” – Captain Jack Sparrow
Why Forecasting Isn’t Just an Exercise
For a long time in the run-up to the pandemic, things were generally good. We hit sales records every year, like you are supposed to, and while business is never without challenges, the discussion was generally around a minor deviation from expectations or last year’s performance. And then the pandemic hit. And for the first time in a long time, in a career for some, everyone was saying; “I don’t know what is coming.” At that moment, we thought things could grind to a halt or the demand for what we did could spike. And both things happened depending on whether you were a restaurant or a hospital. And so leaders generally said we’ll just have to work through it. And generally the result that was expected was what occurred. If the business was in the construction market, in general it did very well. If the business was a restaurant, in general it did poorly. So the impression was left that the result was the result from the beginning, and little we did would have an impact. This impression was enhanced by the government intervention which tended to make people feel that the outcome was not something they had a large impact on.
However, this is not really the case as you look closer. Within the broad swathes there were restaurants that survived and came out stronger. And this was due to the owners taking agency over what happened to them. Making course corrections in the moment and responding to the situation. A powerful tool in this process is forecasting and cash projection.
In a dynamic environment, forecasting and cash projection can keep you on the fairway. It may seem like a waste of time to predict when the market or external factors make prediction difficult or unlikely to be spot on. However, the process of creating a forecast, the best forecast you can, takes you through the details of operating the business and familiarizes you with the degrees of freedom you have and the sensitivity of the business to certain types of moves. Restauranteuers that looked, maybe in desperation, at how their businesses operated and what they could do came up with new an innovated changes to make in an effort to not lose this battle. In the same way, businesses that distribute building supplies looked closely at how they could put their hands on more inventory in order to satisfy their customers, many of whom were frustrated or even irate that they couldn’t get materials to keep their projects on schedule.
The point is not to predict the future as much as it is to look at the specifics of your operation in order to determine what changes to make to improve it. Either to mitigate negative impacts or to amplify positive ones.
Financial Forecast Process as a Decision-Making Tool
Very little in business is certain. When it comes to predicting the future, you can be 100% certain that any forecast will be...wrong.
So, why even bother? Does a financial forecast help me grow my business profitably? YES! If you focus on the financial forecast process.
A process is defined as "a natural phenomenon marked by gradual changes that lead toward a particular result." Think of better decisions, not just a number, as the desired result of a financial forecast process. Through this lens, the value of this process becomes evident well beyond the prediction of a single profit or loss number.
Let's be clear. I am not saying there is not value in projecting future profit or loss. I am saying there is greater value in creating the ability to make better decisions to change future outcomes.
When I discuss financial forecasting with startup entrepreneurs, I focus on representing the mechanics of the business within the financial model. Through this process, we produce various financial scenarios (some refer to these as "pro-formas"). These scenarios are designed to challenge assumptions within the business plan. This process of building scenarios using a financial model based on the mechanics of the business leads to a more robust business plan and improved decision-making.
Let's see how this work in practice with a hypothetical example. There is a growing electrical service company who provides two service lines: electric technician services (commonly thought of as their primary service line) and certified electrician training. Currently, most of their time and energy is spent supporting the electric technician service line. Through their financial modeling, they discover half of their profits are generated from the certified electrician training service line. The analysis suggest profits will grow faster, with less risk, by shifting focus to growing the training service line. As for the electric technician service line, their strategy shifts from growth to long-term health by focusing on better quality and efficiency. As they build out their three year plan, they see their expected profits are much greater than originally thought with a higher level of probability.
Let's expand this thinking to a larger and more complex business with established processes and structure. This structure brings complexity as well as a lack of flexibility to shift in response to economic or market changes. The complexity in this business needs to be represented in their financial model. Assumptions of growth in existing channels should be challenged, creating multiple financial scenarios. Each scenario should be assigned a probability. Opportunities and risks are identified with mitigating strategies proposed and debated. Proposed new products and channels are modeled as well, putting the spotlight on the most vital assumptions that will drive success or failure. These influence go / no-go decisions regarding these new products and channels. Collectively, this robust financial forecast process supports and influences decisions to drive better results.
The financial forecast on its own is a valuable tool. However, a robust financial forecast process is a game changer and a vital part of any business striving for healthy financial growth.
Call To Action
Take stock of your business.
1. Take stock of the business and determine its current trajectory.
2. Peel the onion and identify the key impactors of performance (do a little sensitivity analysis).
3. Develop three scenarios with forecasts for each: 1) the most likely scenario, 2) the disappointing scenario and 3) the wildest dreams scenario.
4. Do enough planning so that changes can be made quickly once you determine the scenario that actually plays out.
5. Make adjustments in the business that you find as result of examining the scenarios. (You don’t have to wait for a crisis to exit something that isn’t working out.)
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
Finding Earnings Anytime
This month we expand our horizons. In addition to my voice, we add that of Advisor Jeff Heyer-Jones. My discussion this month is how to scan your business for earnings at any time. This economy is full of zigs and zags. Some of our clients are holding their breath for things to improve, some are trying to figure out how to deal with another record year. …and next quarter the roles may be reversed. This month we look at how to assess your business for earnings opportunities in any weather, then Jeff takes us a little deeper into customer profitability analysis through a brief case study.
Finding Earnings in Any Weather
I spoke last month at IBIE in Las Vegas and presented on this topic. Attendees of my session received our 2022 monograph: Earnings Growth which covers this topic in more detail. If you’re interested in receiving a copy, MBR Readers may receive it. Just send me an email request.
There are two answers to the question of how should I increase earnings? If you are in a hurry, and you need to move the needle this quarter, or possibly even this month, look to pricing. Pricing is the most powerful lever of earnings (Buffet says so) and it works the fastest, provided you are conducting transactions throughout the year. If you negotiate all your contracts once a year, this is not so fast, but for most it is both the most powerful and the fastest route to earnings improvement. Bear in mind, I’m not talking about giant leaps in pricing that make up for a decade of not raising prices, but rather small increments that are available by making changes that we refer to as “on us”, where the business has discretion as to how things appear on the invoice.
Pricing is a discipline of details. We’ve got a list of 150 things to review in a client’s pricing activities, many of which don’t apply to any given client because in their business they aren’t relevant. However, by creating a few charts, a pricing waterfall, pricing by margin bucket, margin by customer volume, the business can quickly identify areas of improvement that can be put in place with immediate effect. We’re talking small percentages here. Perhaps 3.5% of revenue. Which goes straight to the profit line. When you improve price performance, there is no increase in costs.
And for most businesses, an increase of 2-3% won’t even be noticed by their customers. But could mean bug relief in their efforts at making sustainable earnings growth. Of course, depending on where your business is, there may be other lower hanging fruit. We deal with the more nuanced story in our monograph, but for many, this is a great start and will fund future efforts.
What Does a good customer look like?
Not all customers are good customers and some customers you pay for having the privilege of providing a service or product. Do you know how your customers measure up? All businesses, whether commercial or missions driven must make money to be sustainable. Having a diverse and profitable customer mix drives profitability.
Figure out your cost pools
Cost pools allow you to view your P&L and determine the 80/20 rule for your business. Are your costs mostly labor with a little material? Or are they mostly material with a little bit of labor? The types of costs your business has drives the actions required to improve those costs. So just getting in touch with your cost pools and which ones are the big ones is valuable. Cost pools are especially valuable in that they can be associated with customers to understand the attractiveness of individual customers. In addition to categorizing them by the sort of cost they are, they can be identified as direct costs, indirect costs, and selling, general & administrative costs (SG&A). Direct costs are those than can be associated with a specific product or customer.
Using a simple car example, direct costs are the materials and labor required to make each car. Continuing with this example, Indirect costs are costs related to making cars, but that don’t wind up in the car so-to-speak i.e. cost of lighting the factory. If you make fewer cars, you don’t have to turn the lights on as long, so the cost of lighting (electricity) varies with the number of cars you make. You can’t make cars without the lights on, but the electric bill isn’t associated with one specific car. SG&A costs are necessary costs, but they don’t cary with production or operations activity. AN example would be the cost of the sales force or your accountant. You need them, but if you produce fewer cars this month, you won’t need half an accountant. In the long run, as the adage goes, all costs are variable. If you produce fewer cars long enough you could reduce your accounting staff, but you wouldn’t do it month to month.
Develop your drivers for each cost pool
Now that you have identified your major cost pools, brainstorm and determine what drives the cost for each of the pools. These should be things that can be counted and assigned to customers. This is a mix of art and science. Experience is valuable here. The goal is to have the driver be granular enough to drive expenses down and be a true reason for the costs. Examples that we’ve set for our clients include things such as product or service units, customer special demands, internal work products etc. In the car making example, these might be option level of the cars being made, model etc.
Allocate Costs & Segmentation
Allocate your costs to customers using your drivers. The goal is to assign the costs to customers and compare a customer’s total costs to the revenue that the customer generates in a specific study period such as a fiscal year.
Make decisions
Using the model, you can drive business decisions focused on driving profitability. Some things to consider:
• Do you need to raise prices to cover a customers costs?
• What would happen if you deepened your relationship with the most profitable customers? Can you expand your relationship with them?
• What customers are hallmark customers that are costing you money, but might make sense to continue to have as a customer? And importantly, how much other business do they need to bring you to make up for their cost structure?
• What does an ideal customer mix look like for your business?
Call to action
Ask yourself – how well do you know your customers and how they drive profitability for your business? If you’re unable to answer this with data, looking at profitability by customer is a great way to understand what a good customer looks like to drive company profitability. To do this you’ll need to:
1. Identify your cost pools
2. Develop your drivers of cost
3. Allocate & segment customers
I hope you found something to apply to your business in this MBR. Let me know either way.
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The Impact of CEX on Revenue
I have struggled to describe the power of Customer Experience Measurement (CEX) over the years. But I think I have it down visually now.
University of Michigan research shows that CEX winners among the S&P 500 grow 3.8X as fast as the average in the S&P 500. And of course, laggards are worse off. This looks like this:
Here is a slide based on a client of ours that went through the CEX alignment process. You can see how they hockey stick in year 5. This was a commodity space when they began. Knowing what we know, we can just cut to the chase and start with year 5 actions.
I believe this is what the business should be attempting to achieve with Customer Experience measurement initiatives. It starts with broad research, asking open ended questions. Targeted questions are fine, but the bias the sample. Open ended first, then targeted.
The University of Michigan ASCI index predicts exactly this sort of impact from CEX driving firms in the S&P 500. Of course, it isn’t the surveys that drive the growth, it’s the Operational Excellence and Commercial Excellence initiatives that come out of it that drive the growth. But without the surveys to drive actionable decisions you risk drifting and sub-optimal investment of capital.
This will seem like a plug, but you can’t measure this yourself. You can’t be objective because you know too much about your business and your processes. You cannot listen with the beginner’s mind, because you no longer are one. Have a third party do it. Besides, you don’t want to keep PhDs on the bench when you’re not running research. Let someone else aggregate this work and do it for you.
Call To Action
Do the following to grow at a multiple of your peer group:
1. Conduct scientifically designed open ended, telephone research with your customers.
2. Agregate their concerns using human minds, not computers, into buckets.
3. Commission initiatives/teams to address the top 1-3 items. Decommission teams doing other work. This will speed the improvements and growth and free up capital to do so.
4. Measure the results and course correct.
5. Celebrate your growth.
6. Use the information from the survey to right size your pricing. This will grow your earnings fastest and pay for more improvements.
I hope you found something to apply to your business in this MBR. Let me know either way.
See us here on LinkedIn.
