I have yet to meet an entrepreneur who hasn’t wanted to hire a “rainmaker”—that magical salesperson who, like the companies that say they can give you access to your great-grandmother Sally’s unclaimed fortune, will save the day by bringing in big sale after big sale. Never mind the fact that we, the owners and leaders who love our companies and what we do, are the ultimate rainmakers; it is this top line approach to solving a cash flow crisis that holds companies back. Cranking up the sales team in order to “make it rain” is not going to help your company if you don’t have efficiencies in place, because ultimately, whatever new client revenue you generate will have corresponding costs. And these are likely to go unchecked.
If you want to increase profitability (and you’d better friggin’ want to do that), you must first build efficiencies. Focusing solely on increasing sales is like setting up a bunch of rain barrels next to your house and doing some frantic rain dance in a loincloth while ignoring a massive water source right beneath your feet.
Take Idaho, for example. Ninety-five percent of the state’s water supply comes from underground. The 135 mile-long Big Lost River collects water from the Rocky Mountains as it winds through Idaho and then just “disappears” as it goes subterranean. The water from Big Lost River, Snake River and other underground water sources collects in the Snake River Aquifer, which measures 400 miles wide. That is enough water to serve the majority of Idaho’s agricultural needs. So that Idaho spud you’re munching on is thanks to an underground water supply—not some rain dance Idahoans learned on the Internet (albeit, Idahoans know how to get their funk on), or a band of merry farmers capturing rain in buckets and turned-over cowboy hats.
Why should you care about Idaho and its underground lakes? Because 95% of your company’s profitability is contingent on what goes on beneath the surface (after the sales), not what happens in the sky (the sales themselves). And it is what’s going on “underground” that will help you “find” gobs of money.
WHY EVEN FAT CATS NEED EFFICIENCY
Recently, I was asked to keynote the Global Student Entrepreneur Awards in Washington, DC, where leading collegiate entrepreneurs from all over the world gather and are recognized for their incredible impact. At breakfast on the morning of the event, I ended up sitting next to Greg Crabtree. Greg is the author of Simple Numbers, Straight Talk, Big Profits. Greg caught my attention immediately, talking with another gentleman at our table about college football. I inserted myself into their discussion (“Go Hokies!”), and soon enough the conversation drifted from how this team is better than that one to entrepreneurs and profitability. I remember thinking: “Hold on—we are talking about college football and profitability. There is a God!”
After Greg recounted some information he shares in his book about how to maximize profitability, I asked, “Is there such a thing as too much profit? Is there a ceiling?”
“You always want to expand profit,” Greg replied. “In fact, you must, because there are outside forces that will continually take your profitability away—your competition. As you find ways to increase profitability, or even if you don’t, your competition is doing the same. Everyone is trying to become more profitable. And as businesses become more profitable, the competitive pressure sets in and prices drop to attract more customers.
“When you figure out a big leap in profitability, the competition will sniff it out, and it is just a matter of time before they do the same thing. Then someone drops prices to get more clients, and everyone else, including you, has to do the same to stay in business. This is how profits get squeezed.”
We’ve seen the phenomena Greg outlined over and over. Consider flat-panel televisions, for example. They became commercially popular in the early 2000s but were still a luxury item until around 2005, when the cost of big screen TVs started dropping 25% each year. By the end of the decade, vendors had dropped the prices so significantly that it seemed retailers were practically giving them away. Then, because manufacturing televisions got easier and easier, profits jumped, but only for a short time. It wasn’t long before everyone started dropping prices again to capture demand, to the point where it now seems as though a retailer needs to pay you to take a small or last year’s flat-panel model. James Li, the chief executive of Syntax Groups—maker of the Olevia brand of flat-panel televisions—said of his competitors, “If they go to $3000, I will go to $2999.”
Another recent example of the profit squeeze phenomenon is the influx of Internet marketers. In early 2000, a few guys figured out that you could make a crappy information product, promote it with a grainy video made in your wood-paneled kitchen, email people with a “last chance to purchase” offer and make a killing. The costs were next to nothing—a webcam, a couple PDF files, an email marketing system and really, really bad lighting—and the returns were huge. Profits approached nearly 100%, but only for a short time.
I suspect the early, “Wild West” years of information marketing were amazing for those entrepreneurs, but within five years the landscape changed. Because the industry was known for achieving high sales and record profits, the competition came in strong. First there was the flood of GRiQs (Get-Rich-Quickers—the folks who pursue fast, easy money and give up just as quickly when they find their scheme requires work). Supply quickly started to outstrip demand, and consumers started requiring higher and higher quality. More sophisticated marketers started making higher and higher quality stuff, which in turn pushed prices down for everyone. That crappy, grainy video and PDF that sold for $1997 (supposedly there is something magical about a seven at the end of a number) in 2000 now sells for a $1.97 and comes with five years of one-on-one coaching in the seller’s wood-paneled office. . . ahem, kitchen. Just as in the flat-panel TV business or in any other business, it’s “hard” to become profitable in information marketing. And that’s how it always goes.
Profit is a slippery animal. When profit margins are big, usually in excess of 20%, people sniff out and almost immediately start to duplicate what you’re doing, and look for ways to do it better, faster, and above all, cheaper than your company. I’m not, in any way, saying that you should stop investing in efficiency and thereby (temporarily) increase profit. I’m saying that even if you think you’re good with profit, you’re not. The competition will squeeze you eventually, and soon, so keep finding ways to do what you do better, faster and cheaper.
DO THIS FIRST
By now you’ve figured out that focusing solely on top line thinking (sales, sales, sales!) does not lead to profitability. In fact more sales, without efficiency, lead to further inefficiency. In other words, more sales make you less profitable. It’s a vicious cycle. So before you can focus on sales, you must first nail Efficiency 101—and then take a few advanced classes.
Efficiency increases your profit margins, or, the amount of money you earn as profit on each product or service you offer. It’s basic logic, easier than a freshman math class—increased profit margins will boost your company’s profits without the need for increased sales. And when you do kick the selling machine into gear (which we will discuss in a few), profits will skyrocket. So the method is simple—achieve greater efficiency first, then sell more, then improve efficiencies even more and then sell even more. Over time, speed up the back and forth between efficiency and selling until the two happen simultaneously.
Making your company more efficient is about more than just nixing extra coffee breaks and redlining your expenses. To tap into the river of profit flowing just under the surface of your company, you need to look at efficiency in every aspect of your business. Serving the same types of (great) clients with the same or very similar problems, using your one consistent solution to fix the problems, is the route of efficiencies. You want to duplicate your best clients, because that means they have a consistent need; and in turn, you want to reduce the variety of things you do to the fewest that will best serve your best clients’ needs. Think McDonald’s. That company is a moneymaking machine because they feed hungry people—who don’t care, at least in the moment, about their health as much as their hunger—with a few products: fries, hamburgers and breaded chicken. The fewest things you can do repetitively to serve a consistent core customer need—this spells efficiency.
I want you to set a massive goal for yourself. Look at every aspect of your business and determine how to get two times the results with half the effort. That’s a biggie, so I will say it again:
How do you get two times the results with half the effort?
Effort is financial cost and time cost (your time, your people’s time, your software’s time, your machine’s time). For example, if you own a snowplowing company and currently plow one parking lot per hour, I would ask you to figure out how to plow two parking lots (two times the results) in thirty minutes (half the time). Huge profits can had if you can pull this off—rivers flowing, my friend. Rivers flowing.
Your first thought might be, “That’s impossible, Mike!” (You wouldn’t believe how often I hear this. Wait. Maybe you would.) If you believe that it’s impossible to increase efficiency in this way, you are trapped in “let the other guy figure it out” mode. If instead you say, “Hmm. . . let me think about that. Let me find a way,” you will skyrocket to profitability. Why? Because innovation occurs in small steps, big leaps and everywhere in between. To double the results with half the effort is a big goal that forces big thinking, and it brings about small and big progress—all of which goes to the bottom line.
The biggest innovators ask big questions. Do you think Elon Musk asked, “How do I get a few extra miles per gallon?” when he thought up Tesla? Or, “How can people transfer money a little bit faster than a bank wire?” when he started PayPal? As he worked on his Hyperloop supersonic speed-train concept—the one that travels through a complete vacuum system running from LA to San Francisco—do you think he was considering how to be a little bit faster than the Greyhound bus? Hell, no! Innovation in business and innovation in efficiencies comes from big, bold questions.
Most entrepreneurs focus only on tiny improvements—“How do I do this a couple of minutes faster?” Small questions yield small answers. Plowing a parking lot five minutes faster is not going to make much of an impact on your bottom line. Just skip the coffee break, or just “hold it” when you need to go to the bathroom.
But the more you focus on substantially improving efficiency (like with a design for a plow that can move snow twice as fast), the closer you’ll get to achieving double the results with half the effort. This gain in efficiency is amplified the more you sell. That is the power of percentages. Since you now plow every parking lot more efficiently, every new account is an opportunity for increased profit.
Did you know that United Parcel Service (UPS) trucks almost always take right turns? In 2006, UPS dared to ask the efficiency question about fuel costs. They discovered that the less time UPS drivers spent in left turn lanes, the less fuel they burned waiting at lights and to cross traffic, and the less idle time there was for each driver. UPS is now experiencing a savings of $6,000,000 a year from the change.
The “brown truck” company didn’t stop with their first efficiency discovery. Next time you see a driver delivering a package, look at him and try to spot his keys. Let me give you a hint: They are not in his pocket (that’s a banana). UPS drivers found that fumbling for their keys in their pockets when they got back into the truck cost them five to ten seconds (or more) every time. UPS figured out that it is more efficient to keep their keys hanging from their pinky fingers. Now, a UPS driver makes a quick flip of his wrist and the keys are in his hand. Multiply that saved five to ten seconds by fifty stops a day and five gazillion drivers and you have a very huge savings indeed.
UPS also found that they could save millions by washing their trucks once every two days rather than every day. Over time, this gave them huge savings in time, energy and water—and the trucks looked just as shiny.
Look, it may seem impossible when you first hear my challenge, but if you’ve never asked yourself, “How can I get two times the results with half the effort?” how will you know if you can? You might be missing your own no-left-turn, pinky-flip, don’t-wash-yourself efficiency miracle and not even realize it.
FIRE BAD CLIENTS
If you read my book The Pumpkin Plan, you know that, while the book is outwardly marketed as a system to help business leaders grow their companies into industry giants, it’s secretly a book about efficiency. Letting go of clients who suck us dry and eat up our profit margins is a way of making space for clients we can serve exceptionally well by doing what we do best and with fewer resources. It is all about improving not only the top line, but the bottom line, too.
A study facilitated by Chicago-based growth-consulting firm Strategex analyzed the revenue, cost and profit breakdown for a thousand companies. What they found was nothing short of a “duh” moment, as in the “Duh, I already knew this but I still haven’t done anything about it in my own business because I’m a glutton for punishment”-type duh.
Strategex sorted the clients for each company into four sections, in descending order based on revenue. For example, if a company had a hundred clients, the twenty-five clients that generated the most revenue were put in the top quartile, the next twenty-five highest revenue-generating clients in the second quartile, and so on. Strategex found that the top quartile generated 89% of the total revenue, while the lowest quartile only accounted for a meager 1% of total revenue.
Wait. It gets worse. The study found that each group of clients required pretty much the same amount of effort (cost and time). This means that it took the same amount of effort to serve a big-revenue client as it did a client who barely affected revenue at all.
Then came the awkward “gulp” moment. Strategex’s profit analysis showed that the top quartile generated 150% of a company’s profit. The two middle quartiles were effectively break-even, and the bottom quartile, the one that generated 1% of the total revenue, resulted in a profit loss of 50%! In the end, the profits generated from the top clients are used, in part, to pay for the losses accrued in serving the bottom clients.
I’m sure you know this scenario all too well. Those clients who barely pay you peanuts, yet constantly complain about how much you charge and how you do nothing right; the clients who demand you rework everything you’ve done for the third time and then never pay you for your work, or never pay you on time—those clients are costing you money. Get rid of them. Fast!
Dumping your worst clients may seem counterintuitive at first. But never forget what I said earlier: All revenue is not the same. If you remove your worst, unprofitable clients and the now-unnecessary costs associated with them, you will see a jump in profitability and a reduction in stress, often within a few weeks. Equally important, you will have more time to pursue and clone your best clients. I’ve lost count of how many readers have shared their stories of how both their top line and bottom line improved after they implemented the growth strategies I revealed in The Pumpkin Plan. I know that sounds like bragging, but it’s not. The system isn’t some miracle that I came up with; it is just simple math.
I know how scary it feels to dump any client when you are scrambling to cover this week’s payroll, especially if you fought hard to get that client in the first place. But remember, profit is about the percentages, not a single number. So take it easy on yourself. Start by dumping one rotten little pumpkin in your patch, the one you occasionally fantasize about leaving on a deserted island or shipping off to Mars. The emotional distraction that client caused you and your staff will disappear immediately. The profits you earned from other clients and were spending to keep this bad client on board will now stay in your pocket. And since his special requirements no longer need to be serviced, you have time and headspace to find another, better client—an ideal client, a clone of your very best clients.
CLONE YOUR BEST CLIENTS
Just for a moment, I want you to think of your favorite client: the call you will always take, the person or company you say yes to without hesitation. This is the client who pays you what you’re worth, on time, without question. This is the client who trusts you, respects you, and follows instructions. This is the client you love, and they love you. Now imagine if this client had five identical twin companies that all wanted to work with you. Wouldn’t that boost your business? Wouldn’t it be easy to serve those clients? Wouldn’t it help you keep your bottom line healthy? Now imagine ten clones, or a hundred clones.
For almost any B2B business in the world, landing a hundred clones of their best client would put them at the front of the pack. They would dominate. The same is true for B2C businesses. If just a mere 10% of their clients behaved like their number one client, those businesses would rule, too.
Having clients with similar needs and very similar behaviors offers a few magical profit-making benefits:
1. You will become super-efficient, because you now serve very few but consistent needs, rather than an excessive array of varying needs.
2. You will love working with your clones, which means you will naturally and automatically provide better service. We cater to the people we care about.
3. Marketing will become automatic. Birds of a feather flock together (for real) and that means your best clients hang out with other business leaders who have the “best client” qualities you’re looking for. Your best clients are awesome, remember? You love them and they love you, and that means they will talk you up every chance they get.
Clones of your best clients are the very definition of efficiency, which is why they are like gold. Find them. Nurture them. And then find out where even more best-client clones hang out and cultivate them, too.
I mentioned Ernie briefly already, but I want you to know a little more about his story. It speaks to how fast things can go down the “upselling” rabbit hole. In the fall, I pay my lawn service to come clean up all of the leaves in our yard. This past year, Ernie, the owner of the business, knocked on my door. He had just finished the leaf clean-up and said, “I noticed that there are leaves in the gutters.” He offered to remove them, for a fee. And I, my friends, was what they called a “captive customer” and an “easy upsell.”
I said, “Yes, do it,” without any hesitation.
Ernie had just expanded his service offering. Easy money. Yippee. To complete the job, Ernie had to run out and buy some ladders for his truck. He came back thirty minutes later and got right to work. Because he pulled out the leaves by hand, he wasn’t super efficient, but he got it done fast enough. However, he didn’t have the tool to snake out the downspouts, so he made a note to buy it and come back at a later date to finish the job.
While Ernie was up on the roof, he spotted another opportunity— fixing damaged shingles. More easy money! More revenue! Again he asked me, I said yes and he ran out and picked up some roofing tools (and a downspout snake tool thingy). He came back an hour later, replaced the shingles, cleaned the downspouts—and, while doing that work, noticed a crack in the chimney and a soft spot on the roof, a sign of rotting wood. When Ernie approached me about it, I asked him to fix those things, too. This time he went out to get more tools, band saws, cement, brick supplies and temporary labor. Ernie came back near the end of the day and pushed through to get it finished. He even bought floodlights to keep the work area lit as dusk approached.
At the end of the day, I paid $1500 for all the work. Not a bad deal, considering Ernie “only” gets paid $200 to clean the lawn. But… the $1500 he earned cost Ernie an investment of about $2000 for tools and supplies that day, plus a lot of driving back and forth and the cost of hiring a laborer.
Ernie lost money on me, but he grew his sales by a lot. Tomorrow he intends to use his new equipment and tools to take care of other clients and will, in theory, earn his money back and then some. The problem is, that rarely happens. As the bills mount, the pressure grows to sell more and more; and you end up working on projects in which you have limited experience and sometimes little interest.
As the variety of things you do increases, you need to buy more tools and equipment and hire more specialized labor. And none of this gets used to its maximum potential, because you do many different things, not one thing. Your stuff sits there unused. While you rake lawns, your ladders just lie there. As you fix roofs, the leaf blowers just sit in your truck.
You get stuck in the Survival Trap and end up not doing a very good job at any one thing. For example, when Ernie wrapped up for the day he said, “I’ll be back early tomorrow to clean the lawn again.” Why? Because he threw the leaves from the gutters onto the lawn he had just cleaned, as well as shingles and other things. His additional work required that he actually redo his original work, while all that new gear he bought just sat on his truck, not being used. What’s efficient about that? Nada.
Across the street, my neighbors Bill and Liza hire a different guy, Shawn, to clean up their leaves in the fall. He also charges $200. On the same day Ernie worked on my house and earned $1500, Shawn serviced four more properties and also knocked on the doors at two other properties that, by the look of their lawns, needed his help.
I suspect that if Ernie and Shawn had had a beer together that night, Ernie would have boasted about doing one-and-a-half times the sales Shawn pulled, but Shawn would have ended up paying for the drinks. Shawn has achieved efficiency, and recognizes it as the magical sauce of profitability—getting more of the same things done with better and better results, using fewer and fewer resources.
Selling more is the most difficult way to increase profits, because in the best- case scenarios, the percentages stay the same; and in the worst-case, more common scenarios, expenses generated to support sales increase faster, resulting in smaller percentages and a smaller profit margin.
• • •
A man went in search of the perfect picture frame at a flea market in Adamstown, Pennsylvania in 1989. He found it holding a torn painting of a country scene. When he got home and dismantled the frame, he determined that it was not salvageable. But something else was.
Folded and hidden in the backing was the Declaration of Independence. Five hundred official copies had been used to spread the news of America’s independence to everyone in the twelve colonies, and John Dunlap had printed this specific copy on July 4th, 1776. The man who found it took actions both to sell it and to remain unidentified. I’m not surprised—that $4 frame purchase turned over to 2.4 million dollars two years later, when it was sold by Sotheby’s to a private investor.
The guy looking for the frame is a success by any measure, right? He found the money under the surface. But if you think of him as a success, you’re wrong. Sure, stumbling across success is cool, but making a process for finding profits under the surface is the real success.
This guy figured out that there is potentially big money hidden in frames. But if he only hopes to find another historical document one day, he is hoping for it to rain, not pursuing efficiency by identifying regions where such documents originated and searching flea markets only in those areas, focusing on frames made during a specific time period and buying inspection tools to look through the frames to see if there is anything inside. Can you imagine combing the flea markets without these and other efficiencies in place? He’d go broke trying to find that elusive rare document, trying to make it rain.