How to Make Employees Work for You!

So, yes I hope it is a funny title and that would help you click on this article.  But this is a serious topic as most companies spend about 70% of their Operating Expenses directly related to headcount.  That means getting the most out of your employees is an utmost priority for businesses.  To that end, people expend a lot of time thinking about leadership, morale, and retention.  The one thing that they don’t articulate is:  “How do I know if an employee is successful?”

To be very specific here, I am talking about objective measures of performance.  This is well-known within at least one area, and that is Sales.  Salespeople either meet their quota or they don’t.  The productivity of a Salesperson is determined by at least that result.  There are other measures that can be applied like Gross Margin or Product Mix.  All of these measures are designed to make the Business obtain their goals.  If everyone in Sales meets quota, then the company should meet its Business Plan.  If it does not, this is a failure of Planning not a failure of the employees.

The problem comes in for non-Sales employees.  Most people have a much more subjective way of judging employee performance.  They judge people that fit in with the company culture and do not cause issues.  What they don’t do is think through how the work of any given employee relates to the bottom line.  I felt that pain myself when I was the CTO at AFC.  I was asked to show how my work related to the finances of the company.  I spent the vast bulk of my time in those days working on Corporate and Technology Planning.  I found it really hard to create that set of metrics.  We eventually came up with 3 “metrics”:  Return on New Product Development, Cost Per Port Analysis, and Number of Speaking Engagements.

Of those 3, the Return on New Product Development was the most challenging to measure.  Some things were done to maintain a large customer with little direct revenue.  The thing is that even then, there is a need to minimize upfront costs in those examples.  If you are not going to sell many of the items, then Development Cost ends up being more important than Product Cost.  As these activities get added in with everything else, it is just part of an ongoing average.  Even a long-term planner can demonstrate a direct financial impact.

Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

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The Expense Problem

We have talked quite a bit about the Revenue Side of a Business Plan.  I want to cover part of the expense side of a business today and that is the Operational Expense or OPEX.  OPEX generally represents the fixed cost of a business.  This means all the costs that a business would have if it did not sell anything (NOTE:  I am using this as a simplification, because yes this is not the precise definition but works very well for small businesses).  This would include rent, utilities, most salaries, insurance, and similar items.  Cost of Goods Sold (COGS) is the other kind of expense and that is generally reserved for the costs associated with delivering services or the costs of making products.  There can be some tricky overlaps, but things will be okay if you are consistent with the way you are accounting for these costs.

The first problem is inflation.  Every year the costs to run a business tend to go up.  This might be the cost of advertising or health insurance.  But these costs can be just about anything.  When I was at AFC, we estimated these costs to go up about 7% a year.  This leads to a loss of profit year-over-year without some changes.  The easiest change is to increase revenue to cover these cost increases.  However, there may be other ways that can be used to lower these costs.  These will be covered in a separate post but become many of the initiatives that happen within a company.

The second problem is one of accounting.  As I said about the challenges with defining OPEX and COGS above, there are other problems in evaluating costs in the small business.  The one that is most likely is the personal costs that are run through the business.  Some of these are widespread.  An example would be the expense of the family’s cell phone plan as an expense to the business.  There are more difficult problems as well.  For example, I was evaluating a company in southern California where the owner ran a $190K “Tennant Improvement” for his “Home Office” through his business.  Because of this (and other expenses), the owner can dramatically underpay himself.  All of this is good for tax purposes but can make an objective analysis of the business difficult.

So, we will be spending time looking at expenses and how they can be looked at separately and together with the Revenue side of the business.

Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Other Revenue Growth Mechanisms

We have looked at some mechanisms to understand Marketing and understanding the finances of attracting customers.  Now we want to look at the other part of the equation or the Life Value of a Customer (LVC).  We want to look at increasing the value of a customer by increasing Revenue through increased average Sales or increase the frequency of Sales.

To do this, I want to focus first on a Hair Salon as an example.  One of my first clients was a Salon and one thing that I found was that the Salon made its real money from Color Treatments.  This leads to a periodic visit by customers to the Salon.  One thing that can directly impact Revenue is the rebooking of appointments at 4 weeks instead of 6 weeks.  There are several ways to impact this.  For example, the cashier function can ask to book appointments at the exit and suggest a 4-week interval.  There is also the choice of a “Cut of a Month Club”.  This is a discount card that can be used to encourage use on a more regular basis.

This can be enhanced by looking at the sizing of the products that are sold.  Since Product Sales are a great upside, the Salon wants clients to purchase each time.  The idea here is to stock sizes of products that are about one month’s worth of product.  Running out of products can provide a prompting to book another hair appointment.  There are other reminders that can be done by E-mail, Telephone, or Direct Mail.  All of these ways can be used to decrease the time between appointments.

Here is one last idea for this example.  The most important thing is to get new clients to become repeat clients.  They are the most important prospects for becoming new repeat clients.  The question is what the Salon does to cultivate this new relationship?  If there was ever a time for a Salon to give a discount, it is to that first-time visitor.  But there are many ways to cultivate the client.  For example, send a hand-written note to them thanking them for their visit.  Any personalized touch can be an excellent way of improving turning that one-time client to a repeat client.

Now, why did I focus on creating repeat clients?  Prospects that have already done business with you have the highest conversion rate.  These prospects are better than referrals.  Think long and hard about how to convert customers into repeat customers.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

How does Customer Count Impacts a Business?

Last time, I posted about the number of Customers that you need to have a successful Business.  This week I want to show how this greatly impacts a couple of parts of a company. As I have said, most any type of company can be made to work.  The question is what you must do is think about how to make it work.

The first metric to think about in this mode is the “Cost of Customer Acquisition” (COCA).  The way to figure this out is to divide the spend on Sales and Marketing by the number of new clients.  If you spend, $10,000 on Sales and Marketing and have 100 Customers, then your COCA is $100.  This number is important because it defines how much value each customer costs you incrementally.  If you are selling a haircut for $20, then $100 COCA is a bad number.  If you are selling Luxury Yachts, $100 is an awesome Cost of Customer Acquisition.  A good COCA is very dependent on the business.  But think about it.  If you need lots of customers, then COCA needs to be very efficient.  Many customers mean that you will be acquiring them often.  Processes that are repeated regularly, the more efficient the better.

Another aspect of customer count is Billing.  The more customers the more important that is.  Many businesses use Merchant Banks to accept Credit Cards as the primary form of payment.  For example, a Hair Salon may have 100 customers per styling station per month.  With an average spend of (for example) $100, that means that there could $10,000 of transactions.  Each 1% of Merchant banking fees is $100 in this example.  Credit Cards make is simple to receive cash quickly and can isolate businesses from many payment issues.  However, Credit Cards are a relatively expensive way of collecting payments.  There is a tradeoff between the number of invoices to issue, the timing of payments, and the method of payment.  All of this depends on the number of customers that a business has.

These are two of several processes inside a business that are impacted by customer count.  All these processes need to be accounted for in the Business Plan as it is developed.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

How Many Customers do You Need?

Last time I post about who your Customers are.  This time I want to get into a bit more of the blocking and tackling of Business Plan development and ask about the number of Customers Your Business needs.  Most small business owners and startups give me a blank stare when I ask about this.  There is a lot involved in this question.  Brian Tracy (the Founder of FocalPoint) has a concept called “The Customer Formula” as part of his Way to Wealth system.  This formula looks like this:

Number of Customers x Average Revenue Per Customer x Number of Purchases = Revenue

Note that Revenue is a Result of having Customers buy.  I get two pushbacks regularly.

First, I am always told that there is no average customer.  True.  But it does not matter for this kind of calculation.  At AFC, we quoted to investors that we had 800 customers.  This was a true statement.  However, not all of them were active in any given year.  We had some large customers that accounted for the 50% of the revenue (call it Top 5 customers) and they remained constant.  We had active customers that were doing significant projects.  They accounted for about 30% of the revenue and several of them changed each year.  Then we had customers that were just buying upgrades or nothing at all for any given year.  But we still had an average of about $500K per year per customer.  Landing a large customer was hard and we did not get new ones often.  Most of the time we were talking about landing new smaller customers.  Over any time horizon they would generally average about $400K per year in spending.  The rest was compensated for by the large customers.

Second, they don’t have an idea of the Number of Purchases. This number is highly dependent upon the kind of business that you are in.  If you are an Auto Dealership, it is unlikely that you will get more than 1 purchase per year (except for fleets).  If you are a Hair Salon, you should expect 6 – 12 purchases per year for your ongoing customers.  Every business is different, but each of them have an average.  For AFC, generally purchases were done on a location by location basis.  So, transaction count was all about the number of locations per year.  After that, we had many small orders to add additional capacity to any location.

Now all of this depends on the amount of Revenue that you need.  Revenue is not the be all or end all of a business.  Profitability is more important.  But this analysis can help you figure out what you need.  Do you need 10 customers?  100 customers?  1000 customers?  There are businesses that can be built with any of those customer counts.  Each of them is built VERY differently.  That is why this is probably the most constructive financial question to answer first.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Who are Your Customers and What do They Want?

These are the quintessential Marketing questions.  We have talked about us and what we want (as a Business) through our Vision, Mission, and Values (VMV).  What we want to do now is to connect the VMV to our customers.  To be able to do so, we need to closely define who these people are.  That is what we are going to talk about here.

This is not a passing exercise and one that needs to be considered with some importance.  What is most important to consider is what makes you special to your customer base.  This means that we look at what the Value that they place on the business relationship with you actually is.  To do this, we need to explore the customer and the problems that you are solving for them.

The important part here is the alignment between what you view as your Mission Statement and the Customer view of their Problem Statement.  If it is not your Mission to solve their Problem, then in the long term they will no longer be Customers.  This is why your Unique Value Proposition (UVP) is so important to your Marketing.  The goal is to articulate the range of problems that you solve.  The biggest single problem is that most business owners want to embrace a large set of problems that they can solve.  By being broad, they reason that they will get more customers.  The truth is that they are likely to attract more prospects that are not great customers for them.

Suppose you move to a new town and need to get your car fixed.  Let us add that this car is an older Volkswagen.  You do a search for Volkswagen Auto Repair, you might be surprised.  In my local search, I found VW dealers and local shops that specialize in VW repairs.  I also found several websites that recommend VW repair shops.  This happens in all businesses.  By having a very broad message, there are times when this works (for example Grocery Stores).  But most businesses, actually specialize.  If you do not tell people what you are particularly good at, then they will likely select someone who specializes in fixing their Problem.

Because that is what customers do, they fix their problem.  The look for solutions to what they want.  They do not look for what you want to sell.

Have a great weekend!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

How do You Want to be Known?

I have posted about the Vision statement which defines a point in the future for the business to be.  I have posted about the Mission statement which is all about defining the uniqueness of the business.  Today I will post about Values.  These three subjects:  Vision, Mission, and Values are at the core of the start of a Business Plan.

What are Values?  They are adjectives that you want people to use to describe the way that you do business.  This can overlap some with the Mission statement but is intended to be distinct.  For example, if I use the BMW tagline – “The Ultimate Driving Machine”, this tells you a lot about the vehicle but not much about what it is like to do business with BMW.  There are other makers of performance cars (Porsche and Ferrari come to mind) and they compete on both a vehicle level as well as a business level.

That may not be as clear to many readers, so I will return to myself and talk about 3 adjectives that apply to my business.  I want these adjectives to be the way people think about my business.  These three adjectives are Trusted, Knowledgeable, and Visionary.  I will explain how this is intended to align with my Mission statement and my value proposition.

Trusted:  The best way for my customers to use me is as a Trusted Advisor.  I want them to succeed and they need to know that this is true.  As a balance, I cannot just be a cheerleader for them.  I must provide constructive feedback to them.  This is not just about what they are doing wrong, but how they can learn from the past.  Unless I can challenge them, they cannot Trust my advice.

Knowledgeable:  As a Trusted Advisor, I want my customers to be able to accept my work as valuable from an experience and learning standpoint.  This is a challenge because many prospects conflate industry knowledge for business knowledge.  I must demonstrate my ability to transfer business acumen from other industries and situations to be applicable to their situation.

Visionary:  Most people originally engage me to solve a current problem in their business that they are unable to solve themselves.  This is a reasonable way to hire me, but I can provide much higher value.  This value is in my ability to look outward and forward in their business to build it to avoid trouble areas in the future.  We can at the same time identify opportunities to grow and build the organization to capitalize on them as they happen.

So, when people work with me, I need to act in accordance with those 3 adjectives on an ongoing basis.  I cannot violate Trust.  I need to employ experts in places where I am not as skilled.  I need to have a 360-degree view of the business and business environment.  If I do this every time, then customers will understand my Values.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!