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Why we’re excited to make less money right now.

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Less Can Be More!

In 2006, we worked hard to become profitable within the first 18 months of building Crankset Group. And the profits went up each year until 2010. Then they started going down and that’s when we got excited. It was a very good sign.

In every business there are cycles of numbers that we should focus on. It’s never neat and tidy, but in general, we followed different numbers at different stages in our business.

The Cycle of Numbers:

Startup? Watch Revenue most.
Don’t bother going through a lot of profitability scenarios until you find out if you can actually sell your widget. Nothing else matters at startup except revenue. Everything else is voodoo and fortune telling. Go sell something. If it doesn’t sell, forget all the rest of the numbers. Our services started selling regularly, so we moved to a new focus:

Early Stage Business? Watch Profitability most.
As soon as you figure out you can sell something, figure out if you can actually be profitable selling it at that price. The polish sausage vendor buys them for $1.00 and sells them for $.95, but thinks he’ll make it up in volume. He’ll just lose more money. Get a good accountant at this stage who can tell you how many widgets you will have to sell per month to be profitable. Then focus on getting there.

Finding Break Even? Focus on Profit
Profitability is theoretical. You’re just making sure you aren’t wasting your time building a business that won’t make it. But Profit is “real”. Figure out your profitability, then focus on nothing but getting to real profit. A good accountant should be able to tell you how long it will take based on selling x widgets/mth at $x per month. Once you break even and start making a profit, the fun begins.

Growing a real business? Focus on Cashflow.
When you finally start making a regular profit, that is a very dangerous stage. Why? Because it is the first time you have something to protect – profit – and you will tend to hunker down and protect it.

Don’t.

If you stop at simple profit based on your own production, you will never grow a real business. Instead of siphoning off the profits and buying a hot tub, it’s time to reinvest them in growing the business to where it can make money while you’re regularly on vacation, or bigger if that is your preference. The problem is that when you decide to grow your business, the profits you worked so hard to realize, will go down or even disappear for a time.

Growth will kill your profit – for a short time
Even though our business has grown 392% in the last four years, our personal income has gone down every year for the last three years. But rather than be concerned, we’re very excited because we understand the principle of growth: growth decreases profit and cash flow. The faster you grow, the less profit you will have right now, but a lot more later.

If you are making less profit because your revenues are bad or your margins are too low, that’s a big problem. But if your profits are low because you are growing quickly, get happy about it. Just watch your cash flow – fast growth can put you out of business if you don’t have enough cash on hand to pay your bills.

Growth slowing down? Watch your expenses
The final cycle – If you decide to stop growing (we plan to keep growing internationally), your profit and your cash flow will return, and if you’ve done it right, you’ll have a lot more of both than when you first starting seeing profit. At this stage, tweaking your expenses will only make you more money.

Make decisions based on where you want to be, not on where you are
Too many business owners focus on expenses early in their business and say this to themselves, “I can’t afford to hire that sales person, buy that truck, install that software, etc.” The problem is that you are looking at an investment (money that comes back in spades) vs. an expense (money that never comes back). When you make decisions based on where you are, you shouldn’t be surprised that you’ll be there again next year.

One final thought – watch cash flow during every number cycle – it can put you out of business at any time.

So don’t be afraid of the growth stage! Give up the profit for a time and grow. You’ll have a lot more of it later.

Growth Can Kill Your Startup…

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And Profit Can Kill Your Growth

Huh? Aren’t profit and growth both good? Only in the right sequence. Focus on the wrong one at the wrong time and either one of them can drive you out of business.

At Startup, It’s All About Profit
Startups make the mistake of thinking what they need right away is growth. We measure growth in a number of ways, and all of them are largely unhelpful to an early stage business:
1) Revenue (is not profit!)
2) Market Share (lots of new customers)
3) Operational scalability (lots of new people, machines or square footage).
4) More investors (lots of cash being invested early on)

Problem: The ONLY thing that matters in the very early stages is finding something that can and will make us profitable for the life of the company. Why? Amar Bhide says 93% of all businesses leave their prime objective to become profitable. I think it’s even higher. If you focus on growth first, you’re almost certain to grow something that won’t be your long-term profit center, and backing out of it could be disastrous.

In 2006 we started Crankset Group believing our main profit center was something we stopped doing two and a half years later, and will never do again. It took us longer than normal to find our profit center, and I’m very thankful we didn’t invest a lot in making it go. Committing a lot of resources to it early on might have us mucking along trying to keep it alive just because we were too vested to move on.

An emphasis on growth before you’re 100% convinced you’ve found your long-term profit center will drain your resources and drive you out of business, by chasing an idea or a product that hasn’t been tested by your customer’s checkbooks (the only true focus group). Find your REAL prime objective, the one that will create long-term profitability, first. It almost certainly isn’t what you planned.

Found Your Profit Center? Forget Profit!
The game shifts radically once you’ve found what will make you profitable in the long run. Most business owners miss this one. I worked for a company that became profitable, decided to stop investing, and three years later, profited and saved their way right into bankruptcy.

Most small business owners do the same thing. As soon as they become profitable, they have something to protect (profit), and they’ll protect and defend that profit so fiercely that they either never hire anyone else to build the chair (I can do it cheaper myself) and never get off the treadmill, or their business becomes obsolete and just fades away. This is where Ray Kroc’s (founder of McDonalds) terse warning applies, “If you don’t want to take a risk, get the hell out of business.”

After finding your profit center, if you are worried about profit, you will likely never grow.

Growth means one of two things – you grow enough to build a true business that can make money while you’re on vacation. Or if you want to be Giant Corporation, Inc., then growth means figuring out how to capture the most market share. Most business owners will never want to be Giant Corporation, Inc., but all of us should grow our businesses to the point where we are no longer hostages, but can very regularly get away and enjoy the fruit of our business. To do that, focus on profit first, than be willing to take the risk to focus on growth, even at the risk of short-term profit.

It’s Worth the Risk
If you take the risk to grow, you’ll make a lot more money in a lot less time, for a lot longer than if you focus solely on profit.

Revenue is Not Your Friend – Pricing For Profit

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The Sausage Vendor said he bought his sausages for a buck, and sells them for $.95. When challenged as to how he would make money, he said, “No problem, I’ll make it up in volume.”

Business owners focus on Revenue when they should be focused on Profit. If they focused on Profit, they would raise their prices more often.

(This is Part One – The Mind Games of Pricing. Next week we’ll do Part Two – The Mechanics of Pricing)

The old saw is wrong – “If you worrying about sales, profits will take care of themselves”.
Neither Revenue nor Sales are a good place to focus financially – we need to focus on profit (actually cash flow, but that’s another blog.)

What barriers do you encounter in communicating your pricing to potential clients?
Competition, market conditions, aging industry, complex service, fear, not understanding how to price? Probably a little of most of the above.

When we aren’t sold on our pricing, what does that communicate to the potential client? It communicates that all of the above (competition, market, fear, etc.) are all good reasons not to buy my product or service from me. The best way to create pricing problems is to not believe in our own pricing.

A caterer friend gave his “best, lowest” price to a potential client, skimmed of any “excess” profit, and the client’s response was “Is there any way you can go lower?”. When we aren’t confident in our prices, we mentally set up shop in a place that attracts bottom-feeders like the guy above. Getting a lot of pushback on your prices? It’s possible its because your prices are too low!

Joel Spolsky is the co-founder and CEO of Fog Creek Software, said “I often meet people at parties and conferences who are starting companies, and they will invariably ask me, “Say, Joel, do you have any advice for start-ups? Since I know next to nothing about these people or their businesses, or even their industries, I usually just say, “Yes! You should raise all your prices!”

And we both have a good laugh, bwa ha ha, then the founder ignores me. But my advice was most likely right. That’s because almost every start-up I have ever seen has set its prices too low.

Of the three business owner Profiles – Market Focused, Systems Focused, and Product Focused, the Market Focused entrepreneur is most likely to have good pricing, and the Product Focused craftsperson will have the worst. The problem – the overwhelming number of businesses are started by Product Focused craftspeople. (The Systems Focused manager loves accounting-driven pricing that ignores all market conditions; they also start the fewest businesses.)

What makes for the most profitable company? One that focuses on providing VALUE, not COST! Lower prices is not value, it is simply lower prices (and may communicate less value).

FIND VALUE OUTSIDE OF PRICE!

If relationships are equal, there are only two other buying questions – 1) How much does it cost? (price question), or 2) Can you do it? (value question). If you’re getting the “How uch does it cost?” question too often, you’re not focused on adding value or you’re not confident in the extra value you’re delivering. Either one will lose you clients much more than your pricing itself.

What does having slightly higher prices communicate to the customer? We are confident in how our product performs.

How do we get confidence?

  1. Understand the value to your clients. Ask them – why do you buy from me? What are you buying that you don’t think I even know I’m selling? It’s the best question you’ll ever ask them.
  2. Stop thinking about how YOU think you perform (internal/craftsmen view), start pricing based on how you benefit them (see #1 above.)
  3. Get some support – have somebody hold your feet to the fire on WHEN you will raise your prices.

Raising your prices is usually the fastest way to create new PROFIT. If you’re already covering all your costs, then every penny of higher prices falls directly to the bottom line. Want to make more money in less time? This is one of the best ways to do it.

Next week we’ll cover the actual mechanics of how to set and stick with a good price.