Will you be "rooned, before the year is out?"

Some of you will remember the old Australian poem which had that ‘astute' observer, Hanrahan predicting doom from every possible seasonal event "We'll all be rooned, said, Hanrahan, before the year is out". Whether the season was good or bad, out rang Hanrahan's refrain on doom. And just to prove tough times have been seen before there's a line in the poem about the banks.

"For never since the banks went broke
Has seasons been so bad."

And we are not at that stage, not by a long way, as the Australian politicians keep reminding us. A good thing too, from what I'm hearing of some of the reactions overseas where credit is being cut off, not because businesses aren't creditworthy, but seemingly because of fear itself.

It was Franklin D. Roosevelt who said "the only thing we have to fear is fear itself" and that was at his inaugural address as President in 1933 at the height of the Great Depression.

I bring this up not to spread gloom and doom but in fact to suggest otherwise. What's your first reaction to the gloom we hear? Is it to batten down the hatches, to cut back on everything you can, to retreat rather than attack? For some reason when we fear we seem to lose all ability to think, to reason and act.

When businesses cut back, for some reason one of the first thing they cut back on is marketing.

If times are likely to be tougher than they have been in recent times then as a business owner or manager you should be trying to increase cash flow, not decrease it.

And you increase cash flow by winning more customers and encouraging those you have to stay longer and spend more. In other words it is precisely at this time you should be increasing your marketing efforts, not decreasing them.

Now that doesn't mean just to go out and spend a fortune on advertising. It means clever, targeted marketing, marketing from which you can measure the return on investment from your marketing efforts, and not just shotgun spending.

Have you worked out who are your most profitable customers, and your best potential prospects, what they need, what problem can you solve for them. Have you worked out who your less profitable customers are, and what they are not buying that your most profitable customers are?

Have you worked out how you can most effectively reach those customers? It may be through advertising, or it may be through more specific, direct methods such as personalised sales letters or e-mails, setting up meetings, or putting on small functions.

How long since you have analysed your sales message, and its applicability and effectiveness?

The last thing you can do is to fall back on the sign above your business, just open the doors and wait, because you will be waiting a long time for some decent cash flow. And you will be rooned, before the year is out.

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You don't want to be different from your competition, do you?

Maybe you are quite happy with the level of sales you are winning. You have no worries about where tomorrow's sales are coming from, or even next year's sales. Life is a certainty after all.

But maybe you're not. Maybe the world is not as certain a place as you had thought it to be. Just maybe you need to look at whether you could be missing out on sales which are otherwise there for the taking.

Maybe you are missing out on those sales because you are into ‘me too' marketing.

Not sure that you are? Here's how to check. The easiest way to do this is set up a table in your computer, but you can use Paper Mark 1. Take your list of all your competitors (you do keep a list don't you), then make a list of the marketing material they are using, and the message they are putting out.

So this list will include any Yellow Pages ads, newspaper ads, radio and TV, website, flyers or whatever. Identify the message. What are they claiming to be able to do? Does their promo material identify their target markets? Do they claim a point of difference and, if so, what is it?

Then do the same exercise for your own business. What promotional materials are you using, and what is your message? What are you claiming to be able to do? And what point of difference are your promoting?

Now that's the issue. Is there any difference between what you are doing to promote your business, and what your competitors are doing? Do you copy what ALL the other competitors are doing and model your ads and promotions after theirs. WHY?

Do you assume that if your competitors are investing that money in their promotions every month or every year - it MUST be working ... right? WHY?

Why don't you want to be different? Don't want to be seen as different from your peers?

If your promotions, and your products or services are apparently no different from the competition, then the sales you are getting are random and you have only one thing left to compete with, and that is price. If you are reduced to competing on price, then the first thing you can say goodbye to is profits,

But if you want to stand out, be the ‘go to' person in your market niche, you certainly won't achieve it by being the same as everyone else - "me too". You need to stand out from the crowd. Dare to be different - and your marketing methods and materials are the leading edge of that approach.

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Some businesses offer specials to make a sale. Good businesses offer specials to gain a customer.

Have you ever stopped to ask yourself what a new customer is worth to you? Too often, when we ask business owners what a new customer is worth, they don't know. It's all rather sad, isn't it?

There is a corollary to the question of course, and that is, "over what period of time?"

It is often said a first time customer actually costs you money. Think of the specials you offer, promotional efforts you make, the advertisements you may place such as Yellow Pages, sponsorships, brochures and all the other marketing collateral.
Sure, such collateral has a role to remind existing customers that you are still around, but their primary role is to attract new leads, and give you the opportunity to convert those leads into sales. So you measure the cost of that promotion against the new customers you win.

If you just leave it there, the net gain from a new customer is very little, if anything. But keep that customer, and then it's a different story.

Once you have that customer and keep them, then all sorts of profit improvers kick in. When a customer decides they trust you they keep on coming back for more. So there is frequency of sales. And if they trust you they are likely to increase the value of their purchases over time, not to mention the referrals they may make.

Unless you are an abject discounter you will only use discounts as a one-off special to win new customers, another reason why new customers can cost you money. So repeat customers will largely pay ‘normal' prices, thus further improving your profits, all of which adds to the value keeping customers.

Now you can start to answer the question, and knowing you will have answered it I'll ask another. "What is it worth paying to acquire a repeat customer?

Once you are thinking longer term about your business and have a figure in mind as to the value of that customer you can start to evaluate the return on investment ((ROI) of any particular promotional strategy or means you may be considering to acquire that customer.

That would be a pretty useful thing to do, would it not? This email address is being protected from spambots. You need JavaScript enabled to view it. if you need a hand.

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The one to provide "the right advice"

What do you do when you want something fixed or repaired, or when you need to acquire a new piece of equipment for your business? Maybe it is advice or guidance you require. Whenever this occurs, unless you have the specific knowledge required to make the best decision for your business you face at least three problems:
  • Making the right decision requires expertise, knowledge or a skill in the area you are seeking to procure;
  • As a business owner or manager I would be willing to bet you don't have a lot of free time. Time is usually even more scarce than capital.
  • In most areas there is an ever expanding sea of choices.

So what do you usually do?

For most of us the natural thing to do when we are faced with making a decision of some significance to our business is to go and find the specialist, the expert in that particular field. You could go to a generalist. A generalist will have some knowledge in a lot of areas. The expert will have in-depth knowledge in a specific area.

Experts don't become expert overnight. They become expert because of the time they have spent working in that particular area.

And because of the time they have spent in that area, they have found all the tricks and traps. They have probably made all the mistakes, and learnt from them, the mistakes that you are likely to make venturing into the area for the first time.

When you have a specific need, who are you more likely to go to? If it is a simple problem it is quite likely that the generalist can help. But if your requirement is complex and/or expensive then the specialist, the expert is the one you will turn to.

There is another factor to consider here. As the range of choices you face expands, businesses start to specialise more and more in specific areas to give themselves an advantage. Niches get narrower and narrower as people seek that point of difference that will make them stand out as the expert, as the ‘ones to go to".

Which leads me to my final point. What does this mean to you? Have you established recognition as the specialist, the expert, the business to turn to in your market? And if not, why not, and what do you have to do to become so?

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Is YOUR break-even broken?

Break even is one of those useful tools of which most businesses don't make sufficient use. At its simplest knowing how much you need to bring in as income each week or month gives you a good guide as to the sales levels you need to target.

And if you set the target then you might just decide to think through how you will achieve that target. Well, that's better than veging out and just letting it happen, isn't it? Of course you can be a little more sophisticated than that and make your averages subject to the seasonal variations of your industry.

But break even is a much more useful tool than that.

As we said in an article we posted last year ("What is break even and why is it so important?") you can use break even analysis to test:

  • Pricing
  • Quoting
  • New Investment
  • Cost justification
  • Setting sales objectives
  • Product Line analysis
  • Profit planning

It is both a management tool and a marketing weapon.

Easy to say and in fact, as the above article points out, it's not too hard to use. But what if the costs on which you base your calculations are wrong?

This is why the issues raised in the last few blogs about misallocation of costs and not knowing your real costs are so important.

Put simply, if the figures on which you base your analysis, whether it be for marketing or for management purposes, are wrong, then your analysis will be meaningless, if not misleading.

For example:

  • Misallocating variable costs (cost of sales) to overheads will lift the fixed cost level you need to recover before you break even. And if your pricing is based upon a margin above costs, then you will have also reduced the actual margin available to recover those fixed costs; a double whammy.
  • Not knowing your real hourly cost rate - As we said, if you don't know your costs, then you don't know your profit margin. And if you don't know your margin you don't know how much profit you could, or should be making. .

In neither case will you know how much business you have to do for the year before you start to make a profit for the year.

And if you don't know that, then you can't develop a soundly based strategy to improve profitability for the year.

That's an awful lot of "don't knows". And no way to run a business!

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You could be in for a nasty surprise!

Problems can arise when you don't know your cost of sales as discussed a couple of blogs ago. If you don't know your costs, then you don't know your profit margin. And if you don't know your margin you don't know how much profit you could, or should be making.

I suggested that if you were in this situation then it is quite likely that your business is leaking profits without knowing it. It's a little like the children's game of pinning the tail on the donkey while blindfolded.

The main example I gave was the incorrect allocation of costs. If an item which is truly a cost of sale is not allocated to that sale, whether it is left languishing in overheads or not picked up at all then you won't recover that cost against the sale that incurred it: truly a profit leak.

Can it get worse? Unfortunately it can, as a client recently found only too well.

If you are in a trade related business what is usually the largest element of your cost of sales? For most of you it will be your labour cost. And if you really don't know your labour cost you probably have not even got the tail, let along be able to pin it on the donkey.

Unfortunately many small businesses do not sit down and make the simple calculation to determine their real cost of labour. By that I mean working how much time they have available to charge out for each employee clocking chargeable time after allowing for annual leave, sick days, holidays and of course, some allowance for efficiency.

To their salary has to be added the direct costs of employing these staff, (and these are Australian costs), allowing for superannuation and workers compensation insurance, which gives you the hourly cost of employing those staff.

That is not the end of the story of course. Each hour charged out needs to recover its proportion of overheads, and then of course, make a contribution to profits.

Okay, bring that together and what do you get? Unfortunately, as I mentioned, many small business owners and managers do not do this calculation. Instead they rely on using a charge out rate their mate down the road charges, thinking no doubt that he has worked out his costs.

He may or may not have, but his costs are not your costs.

Does it matter? Well in two recent examples it did. In the first example our client found out that the difference between the total cost per hour and the actual charge out rate, i.e. his profit margin, was so small that even a small overrun in time, or misallocation of costs, would result in a loss on that job. So he was not making his money there.

Even worse, in the second example, our client found that the actual man-hour cost rate was much higher than the charge out rate. In fact it was to the extent that the business was losing money on every hour it charged out. Although it hadn't known this, the company was relying on its mark-up on materials and sub-contracts to make a profit!

Is that a satisfactory situation? Should your business's profits come from the mark- up on purchases, or on the expertise and skills you bring to the job?

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© Copyright 1998 - 2009 Adam Gordon, Profits Leak Detective

And to where are you directing your marketing message?

Picture this: you see a mountain reaching up into the sky. It may be a gentle, rounded mountain or one of those jagged peaks. Running down from the mountain are the slopes, stretching down gradually to the plains below. And the plains slowly run on to the sea.

Your customer base will be something like that. There will be a group of customers who provide the majority of your sales and profits, they are the mountain, making up the bulk in dollar terms of your revenue.

Then there are those who buy less frequently, or in smaller amounts, but are still regular customers. They are slopes of your customer mountain.

And lastly there are the plains stretching out to the distant sea, that great mass of customers who may comprise the bulk of names on your customer base, but in fact buy very little and do so only occasionally. In marketing terms, particularly in these days of e-marketing, they are known as the marketing ‘tail'.

When you promote your products or service, to whom are you promoting? The whole landscape, (i.e. everybody), or to the mountain, the slopes or the plains.

Let me ask you which landscape is going to give you the best return on your promotional dollar? As a small business my assumption is that you do not have unlimited dollars for promotion. I guess the corollary question at this stage is whether you actually measure the return you are getting now from your promotion. But that is a question for another day.

If you spend $500 on a promotion from the mountain to the sea, your promotional message will be about everyone, and no-one. The first thing any potential buyer looks for in any promotion is WIIFM (what's in it for me). Because your ‘landscape' message will of necessity be general no-one will be able to say "that's me", and be enticed into your message.

On the other had if you target a particular part of your customer base, and direct your promotional message specifically to their needs, they will be much more likely to say "that's me". And if they can say "that's me", they will be much more likely to buy.

So now ask yourself: who is more likely to buy; those customers on the mountain who buy from you frequently, or those who may only do so occasionally, and for small amounts at that.

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© Copyright 1998 - 2008 Adam Gordon, Profits Leak Detective

 And pinned the tail on the donkey

Three times over the last three weeks clients have told me that they don't really know their costs.  They know their sales prices, and how much money they have in the bank, but they don't know the real costs of the products or services they are providing. 

If the truth be known, they did not appear to have thought about the issue at all.

It's a little like the old children's game of "Pin the Tail on the Donkey".  You remember the one, where a child is blindfolded, spun around three times, and asked to pin the tail on a picture of a (tailless) donkey.

They rarely get it right, and neither will you get it right with your prices if you don't know your real costs and allocate them correctly.  Now that is not to say your prices should be based on your costs alone, but that is another subject.

But if you don't know your cost of sales, I'll guarantee that you could do better, that you are leaking profits without knowing it.

What do I mean by that?  Well, if you don't know your costs, then you don't know your profit margin.  And if you don't know your margin you don't know how much profit you could, or should be making.

If you don't know, there is a fair chance that you are some costs are not being correctly allocated.  A good example would be leaving the freight associated with the supply of a particular service or job in your overheads, instead of allocating it to the job or goods which incurred the cost.  

And if it is not allocated to the job, then its cost will reduce your overall nett profit, rather than be recovered against the job or goods.

Which really leads to the conclusion that making your target profit is really like that blindfolded child who manages to pin the tail on the donkey in approximately the right place.  It is a purely accidental happening over which they had no real control.

Removing the blindfold is a simple matter really.  You just have to understand where your costs are incurred and allocate them accordingly.  Then you will truly know your real profit margins, and have pinned the tail on donkey.

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© Copyright 1998 - 2008 Adam Gordon, Profits Leak Detective  

Or haven't you asked them? 

Customer surveys can tell you a lot.  In short, what you need to improve to gain and retain more customers.   And you will know that existing customers are far more profitable than new customers.

As I commented in a recent blog only a little while ago we completed a second survey for a client who, for convenience, we'll call Joe Blogg's Widgets Pty Ltd.  The first survey was undertaken five years ago.  It is the lesson from the customers that I would like to reinforce.

The survey results show some significant improvements in customer's perceptions of Joe Blogg's Widgets.

In the earlier survey there was little doubt that Joe Blogg's Widgets was meeting customer's needs and that the company had an excellent reputation amongst its client base.  However there were opportunities for improvement, particularly in relation to promptness in quotations, timeliness and the general appearance of the premises.  All are practical, realistic steps for the business to take.

As before, clients have identified the key benefits they seek when using a business such as Joe Blogg's Widgets are quality, service, promptness and reliability.  I doubt you would argue with any of those.

But the most significant change is seen in the reasons customers gave for using Joe Blogg's Widgets.

The overwhelming rationale customers now gave for using the company is the long term relationship between Joe Blogg's Widgets and the customer.  These customers have been using Joe Blogg's Widgets for a long time and, importantly, have no intention of going elsewhere.  Price is not the issue.

Reliability and the ‘relationship' developed between business and customer seems to be the strongest factor.  Relationships are a factor beyond price, quality and delivery.

This suggests that Joe Blogg's Widgets is consistently delivering value in the customer's eyes.   That value is not just seen in the quality of the work done and ability to meet customer's specific requirements.  It is also seen in the attitude of the staff. Continual references were made to the helpfulness and friendliness of staff members.

In a recent newsletter to our subscribers we argued that it is the "consistent quality of the relationship" that determines your business's the brand.  That is what Joe Blogg's Widgets has developed.  And it keeps their customers coming back again and again, regardless of price.

What do your customers tell you in your surveys?

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© Copyright 1998 - 2008 Adam Gordon, Profits Leak Detective

Or a sales tool to be used for your advantage?

So often when responding to a request for quotation or tender the detail the customer is asking for becomes a bureaucratic burden, particularly when the customer is a government agency.  So much unnecessary detail.  The form required, and it is so often a form, just seems to go on and on, requesting unnecessary and irrelevant information.

It all becomes a pain in the you know whatsit!  It is tempting to rush through the information requested, providing the minimum requested to get to the real requirement, which of course is your price.  And as a result, because you feel you have to comply, and it's a burden, you may well respond badly.  

Responding badly of course doesn't help your case.

There is another way of looking at this, a way that may help your chances of winning considerably.  

Take a step back from the quotation or tender.  What is stopping potential customers from buying from you in a non-tender situation?  Customers won't buy when they have possible objections in their mind, or when they feel there may be some risk in the deal. 

You need to overcome the objections, take away the risk and give them good reasons to choose you.

So what could some of those objections be?

  • You haven't done this type/size of job before?
  • Can anybody actually verify what you claim?
  • How do they know you know how to do the job?
  • Will you be able to finish the job on time?
On the other hand they will probably feel some comfort if the product or service you provide has worked for others.  
  • How have others found your service?
  • Would anyone be prepared to recommend you?
  • Can anyone reassure the buyer as to your capability?
The customer doesn't want to look a fool if something goes wrong.  So where are the risks?
  • Do you have systems and procedures?
  • Can you properly plan projects?
  • How do you overcome the unexpected?
In a world of choice, why should the customer choose you?  What makes you different?  For example:
  • Have you demonstrated particular and useful experience and expertise
  • Do you do things differently - innovate to improve your efficiency and effectiveness?

One way or another, you probably go through this process of reassuring the customer when making a sale.  It may be verbally, giving the prospective customer examples of the work you have done, the successes you have had, the customers who will give you a reference.  Or you may have a company profile which includes this sort of information.

Whichever way, you seek to make your potential customer as comfortable as possible in dealing with you.  A decision in your favour becomes a comfortable and logical next step.

Now step back to look at that bureaucratic burden you have been dealing with.  In most cases all that bureaucratic detail you have been cursing is doing much the same thing.  It is aimed at removing objections, reducing risk and enabling the customer to feel comfortable with you.

Turning that pain in the whatsit into a sales tool for you will not only give you a completely different perspective, it will also considerably improve your success rate.

If you would like to discuss this 'about face', please This email address is being protected from spambots. You need JavaScript enabled to view it.

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© Copyright 1998 - 2008 Adam Gordon, Profits Leak Detective

 

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