That's a question I often get asked by clients. And of course there is no easy answer. In my experience for most small businesses there's not even a process by which they decide.

More often than not, SMEs equate advertising with marketing and base their budget on a combination of what they think they can afford and what they spent last year. Rarely is it based on the results they wish to achieve.

While you shouldn't spend more on marketing than the returns warrant, haphazard budgeting for marketing will produce little return for the investment over time.

Before moving on to a process you could, or should, follow I can tell you the average expenditure of small businesses in various industries in Australia according to financial benchmarking studies. For example:

  • Auto accessories & spare parts dealers - 2.61%
  • Auto Electricians - 1.73%
  • Beauticians - 2.82%
  • Bed & Breakfast - 7.0%
  • Building Contractors - 0.18%
  • Cabinet Makers - 0.82%
  • Computer & Phone, Sales & repair - 1.55%
  • Plumbing Contractors - 0.55%
  • Smash Repairers - 0.90%
  • Metal Fabricators/Engineering Works - 0.57%

There's a fair bit of variation across these industries.

Are these a good guide? Well, probably not, because as mentioned above the expenditure is probably not the result of a planned process.
Some quick research on Google suggested all US companies; on average, regardless of size and position in the market, spend 9% of revenue on marketing. That's not surprising when you consider very well performing companies like Microsoft (21%), Adobe (33%) and 1-800 Flowers (33%) spend a lot more.

Could their marketing expenditure have something to do with their performance?

So marketing, and lots of it, may well be absolutely critical, and you need to develop systems you can use for new marketing campaigns.
An alternative approach to picking a figure, whether it be industry averages or past expenditure is to work at what you actually need to achieve your objectives.

For example: An objective of an extra $100,000 in sales means;
1. How many/ what kind of sales are needed to achieve that number?
2. How many leads do you need to achieve those sales?
3. What marketing tools (frequency/reach) will be required to achieve those leads?
4. How much will it likely cost to generate those leads?

Of course that means having some data on your conversion rates from enquiries to sales, and responses to the different marketing media you use.

To quote from Small Business - Big Opportunity" Sensis in partnership with Rob Hartnett "A common oversight made by many small business owners is that they simply don't measure their advertising. Even fewer actually know what they want to advertise."

What you allocate for marketing and which media you use depends on your business, your customers, your location, and your industry. But at least make the effort to plan what you want to achieve. Ineffective marketing is indeed very expensive.

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© Copyright 2010 Adam Gordon, Profits Leak Detective

The business year has now well and truly begun, and no doubt you will be settling down to making it a bigger and better year than last year.

A recent survey suggested the top priorities for Australian small businesses this year were:

  • Finding new clients and customers (58%)
  • Growing my business (33%)
  • Gaining worklife balance (8%)

That's worth thinking about but I would be more interested in hearing about the issues that might be troubling you about the year ahead. What are the issues that you feel you need to be wary about, that could have an adverse impact on your business?

I can tell you what is concerning some small businesses, in Australia at least. The Council of Small Business of Australia (COSBOA) and Telstra Business conducted a poll of small and medium enterprises (SMEs) to gauge their expectations about the economy and their own business in the year ahead.

You may not be surprised about the results. It is the things that are outside their control that concerned most SMEs surveyed.

Let me quote from a newspaper report on the results:

"Interest rates, a carbon tax, the cost and availability of finance, changes to the Australian industrial relations system all weigh on the minds of respondents, to different degrees.

The survey also revealed a lot of the pain that SMEs are going through at the moment.

Only 26% of respondents said that their business had improved in the last 6 months, while 39% said that they expected theirs to improve in the next 6 months, although the same businesses were far more positive about a recovery in the economy overall."

Higher interest rates and the cost of obtaining finance to expand were the top issues of concern. That is interesting given the priorities quoted above from the other survey. People want to find new customers and grow but feel they may not be able to find the money to do so.

At the same time they believe the economy is more likely to recover than them, perhaps because of those finance concerns.

What about you? What are your concerns? Is the cost and availability of finance your major concern, is it finding the right staff, their costs, or is it your market and the willingness of customers to buy? Those surveyed seemed to think there were opportunities for growth but are you as confident?

Certainly for small businesses outside Australia the picture may be more problematic. Reports I read suggest potential problems in the US and UK but Canada?

Please click on the "Add Comment" button below right and let me know what you are thinking.


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© Copyright 2010 Adam Gordon, Profits Leak Detective

Ignorance is bliss

Before you set up your business, did you ever give any thought to what you needed to know about running a business, let alone running a business in your industry?

After all you were probably pretty good at what you did, whether it be a trade or a techie. That's the reason so many people start a business; they reckon they can do a better job than their boss, and they've probably got good reason for so believing.

And it is probably good enough for the moment - "do what you do, do well boy, do what you do, do well" as the old song went. If you did what you did 'well' then word of mouth will have got you customers and given you at least a wage.

But if you are going to be in business for awhile, you need to be earning more than a wage. You need to be recompensed for the risks you are taking, and for the hours you are working.

Don't tell me you are working fewer hours than you were working when somebody else was the boss. It rarely happens as I sure you well know.

And training as a tradie or techie doesn't tell you how to handle the business when times get tough, as they will. All too often events outside your control can come and give your business an almighty belt around the ears. Or for some reason you can't explain the cash is no longer there.

You see, when you say "What you don't know can't hurt you" you are completely misleading yourself. You are also saying in effect that "what you do know, can hurt you." You need some business management knowledge as well as those good technical skills.

Ignorance is not bliss. Ignorance is dangerous when you're running a business.

Whether it is that big wallop from outside the business, or inexplicable things starting to go wrong in the business, for the profits seemingly to have silently leaked out of the business, lack of knowledge can and will prevent you doing the things you need to do to protect your business.

To quote a good client - "I didn't know where to go to fix the problems, or how to fix them." "We owed money to our suppliers and were not able to make ends meet. We were not even making a profit."

"Until we saw the facts and figures we didn't know what to do, all we knew was that we should be doing better. I was disappointed with myself, not happy because I knew we COULD do better. I was frustrated and felt helpless because I didn't know what to do."

"You don't see the pitfalls before you set up your business. You should sort out the hurdles before you start; otherwise you are just operating in the dark."

A little ignorance can go a long way, but only some of the way. What you don't know will always hurt you when you are managing your own business.

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© Copyright 2010 Adam Gordon, Profits Leak Detective

A slogan for an interesting year.

The small motel just above the beach where we live has a small blackboard beside the entrance. We pass it on our morning walk just to make sure we catch up with the proprietor's pithy comment for the day chalked on the board. I don't know his source but his daily comments can be amusing, irreverent and sometimes thought provoking.

Today's offering "Why not - a slogan for an interesting year" falls into the latter category.

It's a bit more about you and what you might do in your business than about the old Chinese curse; "May you live in interesting times", which seems more about what the outside world may inflict upon you. I think we've had enough of that in the last year or so.

With the holiday rush over, you may be thinking about settling back into your routine, getting more comfortable. But I suggest you don't get too comfortable. Once you do you'll find yourself stuck in the same routine, repeating the same patterns and producing the same results. Keep on this track and your business can't grow or evolve.

Challenging yourself by stepping out of your routine and doing something different in or with your business is the only way you'll grow.

The oft-plagiarised quote from George Bernard Shaw "Some men see things that are, and ask "Why?" I see things that never were, and ask "Why not?" reinforces this.

Continually asking "why" is an open invitation to doing nothing, making no changes to how or what you are doing. You will end up taking no steps forward, trapped in a comfortable lethargy, producing those same, familiar results. Do what you've always done and you'll get what you've always got.

If you want a challenge ask instead "What today is impossible to do in your business but if it could be done, would fundamentally change what you do?" Now there's an opportunity to say "Why not"!

That's not to say that change automatically leads to improvement but to recognise that improvement won't happen without change. Asking "why not" to the impossible is a challenge, and will allow you to make some fundamental changes to improve your business.

Such changes may be:

  • Taking your current products and services to new markets;

  • Developing new products or services for your current markets.

But it may also mean different ways of doing things. Imagine, for example :

  • if you got serious about marketing in your business and learnt how to address the key drivers in your various market niches (or even what were the niches you serviced);

  • or developed proper systems and procedures so people did not keep on making the same mistake over and over again.

Improve, change, profit! Asking "why not" can indeed lead to an interesting year.

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© Copyright 2010 Adam Gordon, Profits Leak Detective

Would you think better?

Meeting successful entrepreneurial types is always an interesting experience. What drives them, how do they achieve their success, how do they stay on top of what they do?

I met a couple of very successful such people the other day, brothers actually, and in separate conversations with them a number of factors emerged. By the way these were general conversations, not interrogations.

Hard work - to build the foundation of their first business they worked hard, very hard. One talked about the number of years they had worked 100 hours per week over peak periods. Not everybody is prepared to put that kind of effort in, and they don't do those kinds of hours now, but it was the building block for their future.

Good advice - whether it was legal advice, financial advice or accounting advice they made sure they accessed the best possible advice they could find. They described it as underpinning their businesses. Good advice is another foundation block for business success. Although not mentioned by these entrepreneurs having access to good business mentors is strongly recommended to start up businesses. You are less likely to make mistakes and when problems arise, as they will, are more likely to find your way out of the mire.

Information - both brothers talked about their use of information. One referred to the spreadsheets he used to collect and analyse what was happening in the business, and to make his business decisions. The other brother, when asked about how he kept control of the myriad of disparate businesses they had built referred to the eagle eye he kept on them through the reports he required.

As regular readers of this blog and of the Profits Leak Detective newsletter know lack of management information is a key factor holding back most small businesses and the cause of many of their profit leaks. In fact it is frightening how uninformed so many small businesses are.

To quote the late American business success philosopher, Jim Rohn:

"If we were to ask people why they feel the way they do about certain issues, we would probably discover that the reason why they FEEL the way they do is because they don't really KNOW a great deal about those issues.

Lacking all the information, they form conclusions based upon bits and pieces that have come their way (not that they sought). With their limited knowledge, they often make poor decisions about how things are. If they knew better they would think better."

Hard work, good advice and information, three foundation stones to business success. If you have them you will both know better and think better about your business. Something to ponder on over Christmas.

Thank you for following my thoughts this year. My best wishes to you and your family for a wonderful Christmas and a happy New Year.


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© Copyight 2009 Adam Gordon, Profits Leak Detective

The data are surely wrong

Now I don't want to get into a debate about climate change but I do want to look at a little business lesson from the somewhat infamous leaked emails from the UK's Hadley Climate Research Unit that were splashed around the media and blogsphere last week.

In one email, Kevin Trenberth, a climatologist at the US Centre for Atmospheric Research, who supports the theory of man-made climate change, says: "The fact is that we can't account for the lack of warming at the moment, and it is a travesty that we can't."

Dr Trenberth says data published last August "shows there should be even more warming . . . the data are surely wrong." In effect he allowed his beliefs to affect his judgement of the data, rather than the other way around.

The lesson we can take from this relates to the use of data in business to make business decisions. Put simply, better information leads to better decisions.

Dr. Bob Smith in his book "Blind Spots - How to End Everyday Business Mistakes" shows that the more deliberate the thinking, and the wider the range of information we use and process then the decisions we make as a result are good decisions 85-90% of the time. The likelihood of a good decision being made when making the decision in the moment or under stress, i.e. without consideration and information, drops to 25-50%.

In other words having good data and considering all the issues before making a decision is more likely to lead to a good decision.

When it is your money at risk this could be important.

Professor Fred Hilmer, former Dean of the Australian Graduate School of Management also had something useful to say about having good information to make decisions. "If textbooks underestimated the time pressures faced by chief executives, they completely understated the problem of incomplete and misleading information. Accounts may be soporific but poor accounting makes it extremely difficult to make good decisions."

You must have the facts before you can solve a problem or make an informed decision, and in business you are asked to make decisions all the time.

Unless of course you are in government and not in small business. As John Maynard Keynes observed "There is nothing a government hates more than to be well informed; for it makes the process of arriving at decisions more complicated and difficult."

There is of course a further facet to this. Bad decisions are not always made because people don't have all the facts. Bad decisions are sometimes made because people ignore the facts, do not understand the facts, or do not give the facts enough importance.

So where does that leave decisions made by people who understand the facts, but ignore them because they don't suit their views. In business you can't afford to do that.

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© Copyright 2009 Adam Gordon, Profits Leak Detective

In my Rugby playing days we used to refer to a lazy sidestep as that practiced by someone large, usually a Kiwi, who would drop a shoulder and go straight through you, rather than take the slightly longer way around. And very painful it could be too.

Lazy dollars can be just as damaging for your bottom line. They are dollars that you are investing in your business that are not giving you the return that they should. Can you invest them elsewhere into dollars that work for you?

First you have to identify them. The problem is that lazy dollars can be found hiding away anywhere in your business.

Lazy dollars can lurk in all sorts of areas, such as:

Advertising and promotion - you'll know the famous old saying, which I believe goes back to a retailer called John Wannamaker in the 1920s; "Half the money I spend on advertising is wasted; the trouble is I don't know which half." Now that's alright for the 1920s but there is no excuse today.

You can measure the returns from your promotions, and you should do so. Why would you want to spend money on advertising or promotional material that doesn't work to generate sales? Lazy dollars indeed!

Stock - In 2006 Australian retailer Myers had 40% of its stock stacked in warehouses where customers could not see it, growing older and accumulating storage charges. Today, in 2009, that figure has been reduced to 10%.

If they can't see it, they won't buy it. If your products are sitting on the shelf, out of sight and out of mind, customers won't buy them. Dollars sitting down on the job and going nowhere.

How much of your hidden stock is saleable.

Stock turn - the longer you have something in stock, the more likely you will have to write it down. Slow stock turn could be related to the above comment, or it could be that market demand is low. There are circumstances where you may have to keep some low moving stock, like key spare parts, but if there is little demand, do you have to stock as much or any of that product.

Processes - the laziness is allowing inefficiencies to exist. The dollars invested in your processes may not achieve the returns they require because your processes by which you satisfy customers needs take too long, or have too many steps in them.

With one client we tracked a process that took 15 steps to deliver a result over 30 days on average. With a bit of work that was reduced to 8 steps and 2 days. The dollars tied up in the process were working much harder.

Don't get knocked down by lazy dollars. Lazy dollars damage your bottom line by leaking your profits and reducing your Return on Investment. They need to be identified and made to work harder to earn their keep.

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© Copyright 2009 Adam Gordon, Profits Leak Detective

What should people be doing in marketing and management NOW


Sometimes something crosses my desk that strikes me as being particularly useful and relevant to small businesses owners and managers. This question, asked recently of one of the top writers of sales material in the world, the very old and worldly Drayton Bird, was the trigger.

But it wasn't the question, but his answer that I thought you would find useful. So my challenge to you is - how well do you measure up to the 5 points Drayton makes?

The question he was asked was: what new things he thought people should be doing in marketing or management because of the present misery.

He replied:

"There is absolutely NOTHING new in management or marketing to be learned from the current crisis. But there are many OLD things that people have NEVER learnt.

1. In Marketing

a) Always measure, not gamble on what you or your boss or your wife likes.

b) Never spend without testing on small numbers before wasting money on large numbers.

2. In Management

a) Look outside at customers, not inside at your own organisation - "There is only one profit centre in business. It is your customer" - Peter Drucker.

b) Ask constantly about every person in your business: "What is this person doing to make or save money for the business?"

3. And, in marketing and management:

Never have a meeting unless it has a purpose that you are SURE is aimed at improving profits and that any decision will be acted on.

I am rather depressed that I decided these things made sense about 40 years ago. I have learned nothing much since, which is no surprise. But nor has anybody else, which is. Or am I wrong?

Thanks Drayton.

So there are your challenges; now answer honestly - of the five OLD things that Drayton identifies in how many would you score?

Of course, having been assisting small business owners and managers improve their profitability for more than 20 years I have my own view and what most answers should be.

By the way Drayton's web site is www.draytonbird.co.uk.


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Why your competition can be your best friend

Are you like most small businesses? Do you see your competition as the enemy, the biggest threat to your business? Someone to be resisted and held at bay at all times.

Have you ever been limited in taking advantage of an opportunity because you didn't have sufficient capacity to meet the requirements called for? You may have all the required skills but can't meet the volumes required.

Or maybe an opportunity may call for a range of skills, products, or services beyond the capability of your business. You may be able to meet some of the requirement, but not all.

In both these situations you can be faced with a dilemma: do you forgo the opportunity or do you find some means of adding to your capacity or capabilities. Partnering or collaborating with other businesses, either formally or informally is one solution.

The dilemma arises because the businesses most likely to have the required capacity or additional capability may well be your competitors. And most small businesses are extremely distrustful of their competitors.

Partnering is taking advantage of an opportunity presently out of reach of individual businesses operating in their own right. Advantages include:

  • Learning from each other and sharing the knowledge
  • Developing closer working relationships with suppliers
  • Undertaking joint research, marketing and development
  • Improving opportunities to meet customer demand for products/services
  • Strengthening negotiating and purchasing
  • Access to new expertise & experience

We call partnering or collaborating with your competition - co-opetition.

So what is the basis of co-opetition?

Co-opetition can be developed in a number of ways. They can be in the form of:

  • a formal joint venture for a particular project or opportunity;
  • an on-going formal relationship looking for a variety of opportunities, where a new business is formed to provide the vehicle for the co-operation;
  • an on-going formal relationship looking for a variety of opportunities, where one business agrees to be the lead vehicle for the co-operation;
  • an on-going informal relationship looking for a variety of opportunities.

Where three or more businesses become involved the partnership can be regarded as a business network.

Successful co-opetition has five characteristics which must be met:

  • Each business needs to stand to benefit, and so to have the motivation to join the partnership or network;
  • Members of the partnership need to have a good relationship with each other and develop commitment to each other and the business project;
  • Each firm needs to have something to offer;
  • There needs to be 'domain overlap' between the firms.
  • The business climate needs to be right

And how to avoid the problems?
Co-opetition depends on frankness and trust. This can take a long time to build, and a very short term to destroy. Trust is destroyed when:

  • Partnership members moving into competition with one another when there is a partnership opportunity;
  • Deviation from the core business of the partnership;
  • Lack of a self-starting, motivated, seller
  • Business opportunities are not shared by partnership members
  • Lack of commitment to a group effort
  • One business behaves entrepreneurially at the expense of the others.

So to succeed partners need to do the reverse of this.

Committed co-opetition with your competitors can reap rich returns. Give it a try.

What do you think? You can comment by clicking on the button below.

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© Copyright 2009 Adam Gordon, Profits Leak Detective

4 ways to keep existing clients

Many years ago, in a different job, I was involved in letting a reasonably large contract. There were a couple of serious contenders. After awhile, with the aid of some background checking and our interaction with both it became apparent that one was more intent on winning the job than what they did with the contract afterwards.

Their A-team was tasked with winning the job. What the B-team did with it afterwards didn't seem to be as important. Needless to say they didn't win the contract. We were much more comfortable with the other company's more customer-centered approach

You will have often heard of sayings like:

  • The lifetime value of the customer;
  • The real cost of acquiring a customer is greater than the return from the first sale;
  • We're not here primarily to make a sale; we're here to get a customer.
  • The name of the game is repeat sales rather than one-shots. And to have that, you need a customer
Our A-team contender was interested in getting the sale, not in getting a customer.
Harvard Business School research has found that a 5% increase in customer loyalty can lead to 40% to 90% increases in the lifetime value of that customer relationship. Now surely that is more important than just getting the sale, and then having to turn around and get yet another sale.

All of which leads to the question, if the value is in retaining customers, how do you do so?

Here are four steps you can take:

1. Keep talking ... stay in touch and maintain a healthy dialogue. If you leave your customers alone after their first purchase, you will reduce their lifetime value to your business. Keep in contact with your customers; let them know of items of interest, when specials are coming, trends which may affect them? Use any excuse to keep in contact so that your business is in the front of their mind.

2. Maintain quality ... if you are providing your clients with anything less than the best, you will most likely lose them. One study found that "good is bad", retaining customer loyalty couldn't be guaranteed by merely satisfying them. They need to see you as "excellent".

3. Add value ... by really understanding your client's business and goals. Customers buy because they have a need to be met, a problem to be solved, a pain/frustration to be removed. The better you understand them and what they are seeking, the more likely you will move from being a "satisfactory" provider to an "excellent" provider.

4. Push your brand ... make sure you are maintaining your presence. When the need arises, it is of your brand that you want them to think.

Don't be like the A-team, win the customer, not the sale.

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© Copyright 2009 Adam Gordon, Profits Leak Detective
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