Let’s talk for a minute about some of the biggest problems businesses have, and how I can help them grow.
Very few businesses start out as major corporations. Most start-ups are one or two person ventures, or at best, a small group of people that have an idea that they think people will want and will be willing to pay for. And they have a limited budget to promote it. And consequently, statistics show that sixteen out of every seventeen start-up businesses in the U.S. will fail… and most of those failures will occur in the business’s first two years. I think you’ll admit that those are pretty staggering figures. And when you consider that the owners of those businesses will likely lose everything they’ve invested in their businesses, and in many cases, end up flat broke and deep in debt, it’s really sad.
So here we are… in America. In a time and a land that provides the greatest opportunities for success the world has ever known. And a person, or a group of people… very well-meaning people, I might add… have an idea… and again, it may be a very good idea… an idea they’re excited about… they’re passionate about… and that they’ve borrowed to the hilt to develop and get on the market… and within two years, sixteen out of every seventeen of them will be gone. Now, why is that? Well, in some cases, the idea just wasn’t sound. The product or the service that was being offered just wasn’t good enough, or there was no demand for it. And in other situations, the product or the service may be great… it’s exactly what the market wants or needs. But the owners and managers of the business don’t know anything about running a business. They may know how to create, how to develop, how to acquire, and even how to sell and service the thing they’re offering, but when it comes to effectively marketing it, and then running the business with maximum efficiency, they just simply don’t have it.
So, what can someone in that situation do to correct that situation or to keep it from happening in the first place?
The first thing that has to happen is they have to realize and then admit that they’re in trouble… that they have limitations. All of us do… no matter what business we’re in. In today’s complex world of business, there’s no way anyone can know and be proficient in every phase or aspect of running a business. There are just too many specialized things that have to be done. The second thing they need to do is to put their pride aside and find someone who can help them in the areas in which they lack certain competencies. If they’re weak in accounting practices, payroll, taxes, human resources, marketing… whatever…there are people out there who are experts in those areas that can help them. And yes, it may cost them a little money, but the time and the headaches they’ll avoid by having it done right… not to mention the money they’ll no longer be wasting… will come back to them in spades.
In order to grow, businesses need to focus on the things they know and do best, and sub-out things that someone else can do better or less expensively.
Not only will their operational efficiency and effectiveness improve, but their bottom line profits will take a giant leap forward, as well.
So what are some of the biggest problems or worries… things that keep business owners awake at night?
There are really four complaints or concerns that we hear over and over from business owners. First, they say that they don’t have enough customers, clients, or sales. Next, their profit margins are being squeezed. Third, they tell us that they have too much competition. And the fourth major concern they have, it that they’re not getting the rewards they want from their business for the time and financial investment they’re making in it.
Any one of those areas by themselves can be major.
And there are some very specific things that can be done to not only eliminate them, but to actually keep them from happening in the first place. One of the major problems with a lot of businesses is that they try to go head to head with their competition. And what they don’t realize is that they’re letting other business owners… people who may not be any sharper than they are… people who may not even have a clue how to run a business… they’re letting them dictate how they will run their businesses, and that’s a huge mistake. They would be much better off defining exactly who their market is and what their biggest unsolved problems are. What is it that that market needs or wants more than anything?
Next, how can the products or services you sell help them solve, satisfy, or eliminate those problems? Now, you may sell the same type of products, or offer the same or very similar services as your competition, so you can’t really compete on a products and services level. So you’ve got to change the buying criteria, redefine the way the game is played, and create a new playing field. You’ve got to stack the odds in your favor. And the way you do that is by de-focusing on what the products and services do, and re-focusing on what you, your company, your support… your entire organization can do for your clients.
You’ve got to determine what makes you different from your competition.
What are the advantages, the benefits, the things that can’t be gotten from anyone else, regardless of price… because they’re unique to you… you created them, and you’re the only one that can offer or provide them. In other words, you’ve got to quantify exactly, in very certain terms, why your prospects and customers should buy from or do business with you and your organization, rather than from your competitors. You see, if you do these things… you’re not playing by anyone else’s rules. You’re setting the buying criteria, you’re effectively eliminating the competition, and you’re in control.
There are a lot of “me-too” businesses out there, and they’re all selling the same things, the same way, to the same people.
And when you get sucked into that situation… when you try to compete by selling the same products to the same people, many times the only advantage you can offer is a lower price. And when you start playing the price game, you’re on your way out of business.
But a lot of businesses do exactly that. I mean, you can’t pick up the newspaper or go by a store without noticing that someone is having a sale of some sort… they’re cutting their prices. Let’s talk about that for a minute.
This one of my favorite subjects, and one that nearly every business falls prey to at one time or another. When business slows down… when there are not enough customers coming in, not enough sales being made, or not enough income being generated, the typical response is for the business to cut prices… to have a “sale.” They think they can make up any loss of revenues with an increase in volume. In other words, if we sell more units, we’ll make up the difference in what we lose on individual sales.
But in real life, it doesn’t work that way. The truth is, cutting prices is not only one of the worst things you can do, but it it’s a form of business suicide. Let’s say that your business operates at a 40 percent profit margin. And for illustration’s sake, we’ll say that you sell 100 units of a particular product for $100 each. Your gross sales, then, will be $4,000 (that’s $100 x 40 percent, or $40. Multiply the $40 times 100 units… and you get $4,000).
Now, if you cut your price by just 10 percent, your margin is now just 30 percent. So, take your $100 sale times 30 percent, and you have $30 per sale. Multiply that $30 sale times 100 units and you end up with $3,000 in total sales… or $1,000 less than if you hadn’t cut your prices. So if you cut your prices by just 10 percent, you’ll have to sell 33.3 percent more… a third more units in order to make the same money as you would have if you hadn’t cut prices.
Now I’ve used the term “Units” to describe what we’re selling. “Units” can be the number of products you sell, or it can refer to the number of customers who buy from you. In other words, for every 100 products you sell, if you cut your prices by just 10 percent, you’ll have to sell a third more products at the same margin, or you’ll have to sell to a third more customers just to make the same money.
Now let’s take this a step further. No one knows you’re having a sale or that you’ve cut your prices unless you tell them. And in business, the way you tell people is by advertising or in some way promoting the event. And as I’m sure you’re aware, advertising costs money, which adds additional expenses and subtracts from the profitability of the promotion. And if you need to add additional people to handle the increased sales, the stocking, the packaging, delivery, service, or accounting processes, you’ve again increased the underlying costs, and the numbers of additional products or people you need to sell to increases again.
Now let’s consider another factor that most business owners overlook. In fact, most of them have never even heard of this concept.
Every business has a base of Relationship Buyers…
These are people who are loyal and who stay with that business through good times and bad time, high prices and low price, plentiful inventory, and scarcity. They’re loyal. They’re faithful. And relationships are everything to them. And, every business has their share of what are called Transactional Buyers… those buyers who move from company to company whenever there is a sale or some other advantage for them. Loyalty and relationships are non-existent to them.
Now think about it for a minute… when you advertise that you’re having a sale… which type of customers do you think you’ll have a greater chance of attracting… Relationship Buyers, or Transactional Buyers? Of course, the answer has to be Transactional Buyers. After all, they respond to advertisements for sales, low prices, and deals.
One of the big problems with Transactional Buyers is that they’re often one-time buyers. And when you calculate the cost of attracting them as prospects and then converting into buying customers… and keep in mind that that’s happening at a reduced price because they’re buying from you because you’re having a “sale”, and then you factor in that there’s very often no, or very little loyalty that would translate into repeat sales and referrals… Transactional Buyers often cost you more to sell to than they produce for you in profits.
So when you get right down to it, and you calculate what the real costs of having a sale are… cutting your prices in order to attract more buyers and stimulate more profits can drive you right out of business if you’re not careful.
The real money is made on Relationship Buyers… those people who stick with you. Those who are loyal, and who love doing business with you, and they do it for reasons other than price. Relationship Buyers know you, they like you, they trust you, and they’ve had real-world experience with you. And oftentimes, all it takes is a simple phone call or email to get them to come in for a special sale or event. You don’t have to convince them. They already know of your character, your integrity and the value you bring to them.
On the other hand, Transactional Buyers have to be convinced, and that takes either repeated, and repeated, and repeated exposure (which translated means, “spend money”), or it takes having a “sale” (translated? “lose money”). Do you see the difference?
Which would you rather have, customers that you can get into your place of business for little expense and who will buy from you over and over again, and will refer others to do business with you? Or customers that buy from you one time and that you will never see again, and that you lose money on every time you attract them?
The bottom line to all of this is that cutting prices is one of the quickest ways to business failure there is. Yet, nearly every business owner you talk to thinks that’s the way to get more business and generate more income. A wise man once said, “If you can buy the customer, so can anyone else.”
When I work with a company, I spend a lot of time on this issue of pricing, because it’s so important, and most business owners are so unaware of the impact small adjustments… either increases or decreases… can have on their business, and their ability to remain a viable force in the marketplace.
So if cutting prices… having a “sale” isn’t the thing to do, what are some alternatives?
There are several things you can do. First of all, it’s important to understand that there are only three ways to grow the profits of a business… and they’re not what most people think.
The first way is to increase the number of customers or clients you have… in other words, bring in new money… money from outside your existing customer base.
Second, you can generate more income from your existing customers or clients.
And third? You can improve the efficiency of your business, increase your margins, and reduce the cost of doing business.
Now, each of these three categories can be broken down into several subcategories, and each of them has enormous potential to dramatically affect your bottom line profits. For instance, to increase the number of customers or clients you have, you can design and run better ads and promotions that will enable you to acquire more leads. Or you can increase your conversion ratio… or the number of prospects that you convert into paying customers.
Let’s say you sell two out of every ten people who walk in your door, or that you get two out of every ten people who call you to come in to your place of business. Now with a little analysis of what your salespeople are saying when they greet their prospects, you can probably find some ways to improve the number of sales they make, or the number of people your receptionist gets to come in.
Now if you only get one more out of those ten… in other words, if you sell three out of ten, rather than two out of ten, you’ve just increased your bottom line profits by fifty percent. Now how much did it cost and how long did it take you to get that fifty percent increase? Well, it didn’t cost anything, because all you did is make a change to the salesperson’s greeting. And you did it in a matter of minutes.
Another way to increase your client base is to reduce client defections… or the number of clients that either stop using the products or services you sell altogether, or that slip away to do business with your competitors.
And a fourth, and a very cost-effective way to increase the number of clients you have, is to implement effective, proactive referral-generating systems. In other words, systems that produce a predictable and measurable number of referrals each and every time you use them.
Now, if you want to generate more income from your current customers or clients… the second way to grow your business… then you can implement strategies and procedures that will extract more dollars out of each sales transaction. You can do that by selling more products and services to each customer by bumping or up-selling, by cross-selling, or by bundling complimentary products or services together and offering them as a package for a lower price. You can increase the number of products and services you offer, so your customers have more choices and a wider selection. You can increase the number of times your clients buy from you in a given period of time… in other words, their buying frequency. And… you can also increase the buying lifetime of your clients… or the number of years they do business with you.
Now here’s something else to consider. Remember earlier, when I used the example of a business that operates on a 40 percent margin and they cut their prices by 10 percent… how much more they’d have to sell in order to make the same money? Well, let’s turn things around for a minute. Let’s use that same business on a 40 percent margin, and let’s increase your prices by just 2 percent. Now you can sell 5 percent fewer units, or deal with 5 percent fewer customers and still generate the same profits. Now how much buyer-resistance do you think you’d get if you raised your prices 2 percent? Probably, not much. In fact, most people would not even notice the increase.
Now, what if you increased your prices by 10 percent, what would happen? You could actually sell 20 percent fewer units or lose 20 percent of your customers and still make the same profits. And if you reduce the number of customers you deal with, it stands to reason that you may also be able to reduce the number of employees you have and other operational expenses, thereby adding additional profit dollars to your bottom line.
But… and this is an important point… nothing is written in stone that says that you have to lose customers when you raise your prices. Think about some of the things you can do to enhance the value – both the real value your customers get from doing business with you, and the perceived value (the value that they think they’re getting). Now let me be very clear here.
I’m not suggesting that any business runs out and raises its prices without considering all the ramifications. There are many considerations that you need to be aware of. For instance, you may generate additional profits with fewer customers to deal with, but you’ll also have fewer people who can send you referrals.
Customer referrals are the easiest, least expensive, most cost-efficient way to grow your business.
And with fewer referral sources, you may have to depend on traditional advertising or other costly and labor-intensive methods to attract new customers. Now in this short discussion we don’t have time to go into all the details, but it’s an area I focus heavily on when I work with my clients.
The point is, just knowing this information can give you a tremendous advantage over your competition. Now the third way to grow your business? It’s to increase the efficiency of your business and the profitability of your margins.
Now, there are a number of things you can do here. For instance, you can eliminate, reduce, or otherwise control your expenses… the amount of money it costs you to do business. You can increase your margins, or the amount of money you realize on each sale. You can manage your time more effectively, so you spend less time on things you can delegate to others who can do them for less money, and then prioritize your activities so you focus on high-payoff activities, thereby freeing up your time to do things that are far more profitable. You can put systems in place that will increase your staff and employee’s knowledge, their competence, their effectiveness, and their efficiency… so they’ll be working more profitably for you. And you can promote a synergistic, teamwork-type of work environment, so that everyone’s working together, getting along, and working for the overall good of the company.
As I mentioned before, too many business owners are spending way too much of their time, their money and their effort focusing on just one aspect of the first way to grow their business… attempting to attract new clients. And that’s the most costly, the most time-consuming, and the most inefficient way there is.
When you consider the costs of running ads… then what it costs to qualify your prospects (either in person, by phone or by email), as well as the entire sales process, the salaries, commissions and bonuses you pay your staff… and then calculate in your overhead, and all the other attendant expenses, it’s easy to see why…
It costs up to six to eight times more to get a new customer or client than it does to sell to an existing one.
It’s 16 times easier to sell to an existing customer than to a new one.
In fact, most business owners don’t even get enough new customers from their ads to break even, let alone make a profit on the products they sell from those ads.
The simple truth is, as important as getting new customers or clients is and as expensive as that activity is, it’s only the second most costly thing you can do to grow your business.
The real money-sapper…
The single most expensive thing you can do in your business – is to lose a customer…
…and the easiest person to sell to is an existing customer. With those facts in mind, let’s look what would happen if you completely forgot about running better ads… forgot about increasing your selling skills… forgot about getting more new customers, improving your profit margins, operating your business more efficiently, and all the other things you could do to improve your business… and you just focused on one thing – your current customers – those people who are currently buying from you.
As important and as profitable as all those other areas are… for now, let’s just concentrate our focus on three areas pertaining to your current customers or clients:
One… Reducing client attrition (the number of clients you lose in a year).
Two… Increasing the lifetime profit value of each client (how much money you make on each client over their lifetime of doing business with you).
And three… Getting more referrals from each of your current clients.
Now each one of these areas is directly related to your existing clients, and is in your direct control, whether you own or manage a business, if you’re an employee working for someone else, or if you’re in business as an independent operator, a franchisee or an entrepreneur.
Just for example’s sake, let’s say that you were able to reduce the number of customers you lose every year by half, and at the same time you double the number of referrals you get, and then increase the annual profit value of each client by just 10 percent. And to keep it very simple, let’s say that you run a very small business. And let’s assume that you have a base of just 1,000 clients that you work with throughout the year.
Now let’s say that you don’t add any new clients during the year, and that 10 percent of your existing clients leave you for one reason another. Either they move away, they find someone else to patronize, they no longer need or use your services, they may have a relative that has gone into the business, they get upset with you or a staff member, they don’t like what you did for them, or they die. Whatever the reason, they just stop doing business with you.
Now, on average, let’s say that each of your clients spends $300 a year with you for the products you sell and the services you provide them. Some will spend more, some less. But for now, we’re working with averages. Now remember, you’re starting with a base of 1,000 clients.
After losing 10 percent of those clients, and without adding anyone new, you end up with 900 clients spending $300 each, which nets you $270,000 in income for the year. Now, let’s say that just 10 percent of those 900 clients (that’s 90) refer another person to you during the year. That brings in another $27,000, which brings your total earnings up to $297,000. Not a bad year.
But let’s say that you made a few changes in your operation. Nothing big. Just a few simple changes in the way you do things. For instance, let’s begin with the same 1,000 clients. And let’s say that with some extra attention, more regular contact with them, a little more service, some genuine interest in your client and the things they do and what is important to them, that you can cut your losses by 50 percent. That means you only lose 50 clients during the year, instead of 100. That’s very realistic and it’s easily doable.
Next, you increase the average amount of profits you realize from each client by just 10 percent. With $300 in annual sales, that’s only $30 for the year, or just $2.50 per month. There are a number of ways you can do that, such as upgrading the services your clients receive, selling additional products, getting them to come back more often, negotiating better prices on the products you get from your vendors, and a host of other very easy to do things. So far, your income has increased from $270,000 to $313,500, or $43,500. That’s more than16 percent! And you’ve done it with some very small changes in just two areas.
Now, what if you were to begin asking more of your clients for referrals? What if you put together a system that included actual word tracks that you knew would produce positive, measurable and predictable results? What if you gave your existing customers some incentives or rewards to bring others to you? What if, instead of sitting back and waiting for someone to refer another person on their own, you took an active role, and put together a proactive system that would practically make it impossible for your clients to not refer others to you? What kind of effect do you think that would have on your business?
Well, if 10 percent of your clients (95) are giving you referrals now without any proactive effort on your part, if you made the referral process attractive, beneficial, profitable, and nearly irresistible for them, it wouldn’t be unreasonable to double the amount of referrals you get. In other words, instead of just 10 percent of your clients referring others to you, now you have 20 percent giving you just one referral. Now your income from referrals jumps from $27,000 to $62,700… an increase of $35,700, or more than 132 percent! Now we’re making some progress!
So, what happens to your total income for the year? Well, remember that we started with an income of $297,000. So if we add the income from your clients ($313,500) to the income from your referrals ($62,700), you now have a healthy $376,200, which gives you an increase of $79,200, or a 27 percent overall increase!
Now I think you’ll agree that that kind of increase in income in one year isn’t bad – especially without bringing any new staff or employees on board, without adding any new clients, without spending any more on advertising or marketing campaigns, and without making any significant changes in your business operation!
Now I’m aware that the figures I used in this illustration may or may not apply exactly to everyone’s individual business operation. One business might be a neighborhood sole proprietor “mom and pop” type of business that sells to people who live around the corner, and they’re making enough to just get by.
Another business may sell to hundreds, thousands, or even millions of customers and generate millions of dollars in annual revenues. It really makes no difference.
The point is, and what the illustration demonstrates, is that even if you don’t add any new clients to your business…
You can still grow your business – and grow it very significantly by doing a few simple things…
Like keeping in contact with, and taking care of your existing clients and creating additional value, benefits and reasons for them to do business with you. And you can do it so much more cost effectively than you could if you were attempting to create that $79,200 increase by going after raw new prospects.
You see, even if you only did half as well as the illustration shows you’ve still netted an additional $39,600 extra in your pocket! But what if you only did half of that? It would make a difference of $19,800 in extra income for the year!
Now if you really want to see how this applies to you, go back over the example I used and plug in your own figures. See what would happen to your own business if you were to make just a few simple changes or improvements in a couple of areas.