MAKE MORE PROFIT

How do you generate the most profit with the least effort? How do
you maximize margins without sacrificing quality?
I'm not talking more customers, nor more revenue, nor more offices
and employees. Profit.
Based on my interviews with high-performing CEOs ("high-
performing" determined using annual-profit-per-employee
measurements) in more than a dozen countries, I've listed 11
common "rules" below. This is a return-to-basics call.
Here's your cheat sheet for consistent profitability -- or doubling of it
-- in 3 months or less.
1. Repetition is Usually Redundant — Good
Advertising Works the First Time
Use direct response advertising (call-to-action to a phone number or
website) that is uniquely trackable – accountable advertising —
instead of "image" or "brand" advertising (e.g. billboards with no
URL/phone/messaging), unless others are pre-purchasing product to
offset the cost (e.g. “If you prepurchase 288 units, we’ll feature your
store/URL/phone exclusively in a full-page ad in….”).
Don’t listen to advertising salespeople who tell you that 3, 7, or 27
exposures are needed before someone will act. Well-designed and
well-targeted advertising works the first time. If something works
partially well (e.g., high click-through with low percentage
conversion to sales (CVR), or low click-through with high conversion,
etc.), indicating that a strong ROI might be possible with small
changes, tweak one variable and micro-test once more.
Cancel anything that cannot be justified with a trackable ROI.
2. Pricing before Product – Plan Distribution First
Is your pricing scalable?
Many companies will sell direct-to-consumer by necessity in early
stages, often through a simple website. Only later do they realize
that their margins can’t accommodate resellers and distributors
when they come knocking. This is true whether your "distributor" is
iTunes, a worldwide widget distributor, or Orbitz.
If you have a 40% profit margin and a national distributor needs a
70% discount off of retail (or "cut") to sell into wholesale accounts,
you’re forever limited to direct-to-consumer… unless you increase
your pricing and margins after-the-fact, or launch new "premium"
products to fix the problem. For a bootlegged start-up, this
distraction can equal sky-high customer churn or death altogether.
Plan out your first two years of distribution plan before setting
pricing.
Think digital is different? Think again.
Test assumptions and find hidden costs by interviewing those who
have done it: will you need to pay for co-op advertising, offer rebates
for bulk purchases, or pay for shelfspace or featured placement? I
know one former CEO of a national brand who had to sell his
company to one of the world’s largest soft drink manufacturers before
he could access front-of-store shelving in top retailers.
Test your assumptions and do your homework before setting pricing.
It's not a small thing.
Related: How Much Do We Spend on Foreign Aid? Much Less Than
You Might Think. (LinkedIn)
3. Less is More – Limiting Distribution to Increase
Profit
Is more distribution automatically better? Not necessarily.
Uncontrolled distribution leads to all manner of head-ache and
profit-bleeding, most often related to rogue discounters. Reseller A
lowers pricing to compete with online discounter B, and the price
cutting continues until neither is making sufficient profit on the
product and both stop reordering from you (or selling/referring your
product). This race to the bottom requires you to launch new
products, as price erosion is almost always irreversible.
Avoid this scenario and consider partnering with one or two key
distributors instead, using that exclusivity to negotiate better terms:
less discounting, prepayment instead of net payment terms, preferred
placement and marketing support, etc.
Whether Apple or Estee Lauder, sustainable high-profit brands
usually begin with controlled distribution. Remember that more
customers isn’t the goal; more sustained profit is.
4. Net-0 — Create Demand vs. Offering Terms:
This is related to Rule #3.
Focus on creating end-user demand so you can dictate terms. Often
one large advertisement, bought at discount remnant rates, will be
enough to provide this leverage.
Just because everyone in your industry offers payment terms doesn’t
mean you have to, and offering terms is one of the most consistent
ingredients in start-up failure.
To avoid getting strung out and cash-flow poor: Cite start-up
economics and the ever-so-useful “company policy” as reasons for
needing prepayment and apologize, but don’t make exceptions.
If you agree to receive payment on net-30 terms (they pay 30 days
from invoice, or receipt of product), it will become net-60, which
becomes net-120. Time is the most expensive asset a start-up has,
and chasing delinquent accounts will prevent you from generating
more sales.
On the hand, if tons of customers are asking for your product,
resellers and distributors will need to buy. It’s that simple. Think a
big order from Wal-Mart is a godsend? Be careful. Since they're
almost always net-180+, and they can return unsold product, it could
actually be the death of your company. How are you going to pay for
the needed inventory? Typically, debt. What will you do if they return
half of it because they didn't give it proper placement, so it didn't
have sufficient sell-through? Be careful, lads and lasses.
Put funds and time into strategic marketing and PR to tip the scales
in your favor. Consumer demand = your ability to negotiate better
terms.
5. Limit Downside to Ensure Upside — Sacrifice
Margin for Safety
Don’t manufacture products in large quantities to increase your
margin, unless your product and marketing are tested and ready for
roll-out. In other words, only when you already have a proven
demand and can forecast sell-through rate.
If a limited number of prototypes cost $10 per piece to manufacture
and sell for $11 each, that’s fine for the initial testing period, and
essential for limiting downside. Sacrifice margin temporarily for the
testing phase, if need be, and avoid potentially fatal upfront
overcommitments.
6. Niche is the New Big — The Lavish Dwarf
Entertainment Rule
Several years ago, an investment banker was jailed for SEC
violations.
He was caught partly due to his lavish parties on yachts, often
featuring hired dwarves. No joke. The owner of the dwarf rental
company, Danny Black, was quoted in the Wall Street Journal as
saying: “Some people are just into lavish dwarf entertainment.”
Niche in the new big, I tell you. And here’s the secret: it’s possible to
niche market and mass sell.
iPhone commercials don’t feature dancing 50-year olds, they feature
hip and fit 20-30-somethings, but everyone and his grandmother
wants to feel youthful and hip, so they strap on Apple gear and call
themselves converts. Who you portray in your marketing isn’t
necessarily the only demographic who buys your product — it’s often
the demographic that most people aspire to. The target isn’t the
market.
No one aspires to be the bland average, so don’t water down
messaging to appeal to everyone–it will end up appealing to no one.
7. Revisit Drucker — What Gets Measured Gets
Managed:
Measure compulsively, for as Peter Drucker stated: what gets
measured gets managed.
Useful metrics to track, besides the usual operational stats, include
CPO (“Cost-Per-Order,” which includes advertising, fulfillment and
expected returns, chargebacks, and bad debt), ad allowable (the
maximum you can spend on an advertisement and expect breakeven),
MER (media efficiency ratio), and projected lifetime value (LV) given
return rates and reorder %. Consider applying direct response
advertising metrics to your business.
Look at "lean start-up" metrics for more methods of measuring
during the start-up phase. The work of Eric Ries is a good starting
place.
Related: What I Really Want for Christmas (LinkedIn)
8. Hyperactivity vs. Productivity — 80/20 and
Pareto’s Law
Being busy is not the same as being productive. In fact, being busy is
a form of laziness -- lazy thinking and indiscriminate action.
Forget about the start-up overwork ethic that people wear as a
badge of honor–get analytical. I'm not going to say "work smarter;
don't work harder," as I'm fine with hard work...but only as long as
it's applied to the right things.
The 80/20 principle, also known as Pareto’s Law, dictates that 80%
of your desired outcomes are the result of 20% of your activities or
inputs. Once per week, stop putting out fires for an afternoon and run
the numbers to ensure you’re placing effort in high-yield areas:
What 20% of customers/products/regions are producing 80% or more
of the profit? What are the factors that could account for this?
Invest in duplicating your few strong areas instead of fixing all of
your weaknesses.
9. The Customer is Not Always Right — “Fire”
High-Maintenance Customers
Not all customers are created equal.
Apply the 80/20 principle to time consumption: What 20% of people
are consuming 80% of your time? Put high-maintenance, low-profit
customers on auto-pilot. Sure, process their orders, but don’t pursue
them or check up on them. And “fire” high-maintenance, high-profit
customers by sending a memo detailing how a change in business
model requires new policies at your company: how often and how to
communicate, standardized pricing and order process, etc.
Indicate that, for those clients whose needs are incompatible with
these new policies, you are happy to introduce other providers.
“But what if my largest customer consumes all of my time?” you ask?
Recognize that 1) without time, you cannot scale your company (and,
oftentimes, life) beyond that customer, and 2) people, even good
people, will unknowingly abuse your time to the extent that you let
them.
Set good rules for all involved. Minimize back-and-forth and
meaningless communication.
10. Deadlines over Details – Test Reliability Before
Capability
Skill is overrated.
Perfect products delivered past deadline kill companies. Better to
have a good-enough product delivered on-time. Google "minimal
viable product" for more on this philosophy. Even the great Reid
Hoffman, co-founder of LinkedIn, has wisely said that, "If you are not
embarrassed by the first version of your product, you've launched too
late."
Test someone’s ability to deliver on a specific and tight deadline
before hiring them based on a dazzling portfolio.
Products can be fixed as long as you have cash-flow, and bugs are
forgiven, but missing deadlines is often fatal. Calvin Coolidge once
said that nothing is more common than unsuccessful men with
talent; I would add that the second most common is smart people
who think their IQ or resume justifies delivering late. Don't tolerate it.
11. Keep it simple. Complicated answers are rarely