A Life In Numbers

You may have seen the Sequoia Capital slides doing the rounds amongst CEOs and Investors in the Private Equity world. They start with the bold statement “RIP Good Times” and take things downhill from there.

The overall conclusion is that there are some tough times ahead (no kidding!) and there are some fundamental actions that should be taken by companies to prepare for leaner markets. What struck me most about these actions is that the sensible companies have been taking these steps all along, whether times were good or bad.

The list including activities such as “perform situation analysis”. If you’ve not been figuring out where you are and what’s going on then it’s clear you may find the future a challenge. Another item was “adapt quickly”. Anyone in the SME world knows that this is essential in the early stages but it’s often forgotten as companies grow.

Other’s included were “become cashflow positive as soon as possible” and “spend every dollar as if it were your last”. These have long been the mantras for many successful entreprenuers.

The parts that many investors have latched onto are “make cuts” and “review salaries” and it’s always worth stepping back and looking objectively at the possibility for these. The challenge in this market is making sure that you cut in the right places and don’t harm your business more in the future.

If you haven’t been applying the rules listed in the action plan, then it’s likely you’ve been getting away with it due to the growth markets we’ve seen over the last 8 years. What you may now realise is that what you really need is the expertise to help you understand what you’re seeing and create a plan to make it better.

For many entrepreneurs, the apparent recession and crunch are just business as usual, facing the daily challenge of trying to find new customers in competitive markets and managing their cashflow as closely as possible. There are even opportunities in this type of market, as often competition can fall away and if you’re prepared and flexible new opportunities open up. It’s also possible to find new ways of doing things more effectively and efficiently.

There may be talk of this being a bigger, harder recession or downturn than we’ve had for a while, but these things all run on cycles. They’ve happened before and they’ll happen again. If you have any doubt then find yourself a copy of The Fourth Turning and see how many similarities you can spot in the current social, economic and financial markets. Other good cheery books for this market include The Great Crash by J K Galbraith and Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. They help put everything in perspective.

It is easy to get sucked into the bad news that the tv shows and newspapers like to promote. That’s their job and they’re very good at it. The worse it looks the more you tune in or read. By all means watch and read but you don’t have to believe it’s all true.

The key thing to remember is to step back occasionally and ask what’s really going on. Look past the doom and gloom and the same stories that get repeated over and over again to make things seem worse and seek out the opportunities. They’re there if you look for them and now’s the time when everyone else could be looking the other way. Join the few who can really prosper in this market. And prepare yourself for the good times that will inevitably rise again. And perhaps sooner than you think.

Seth Godin has written an interesting blog entry today (as ever) talking about the magic of low-hanging fruit. It takes aspects of the 80/20 Pareto Principle and looks at a business perspective of where you can get the most benefit quickly.

He intially puts it in terms of changing the fuel consumption for drivers and shows how focussing on the drivers with the greatest usage provide the more beneficial outcome. He then expands this to compare the benefit of selling more to your existing customer base than selling to new customers.

In economics it’s long been recognised that a slight increase in price to all customers can vastly outweigh a cut in price to try and generate new customers. Price elasticity aside, it can be shown in simple terms that it’s better to generate £1 more on a £100 item from 100,000 customers (giving an extra £100,000) than to reduce the price by £1 and have to generate an extra 2,020 new customers at the new £99 price to make up for the lost revenue on the existing base (100,000 *1) and the extra benefit wanted (£100,000/£99).

Of course, in reality it’s not always that simple and in a very price sensitive market a 1% increase could drive away a chunk of your customer base (back to the price elasticity). However, we do spend a lot of time trying to generate new customers when you could provide enhanced service to your existing base to encourage them to spend more.

It relates back to the 3 main ways to grow a business:-

1. Increase the number of customers
2. Increase the average purchase value
3. Increase the frequency of purchase

Increasing the number of customers is usually done through an advertising or promotion campaign, which is rarely a cheap option. So it will generally cost you money to grow this way.

To increase the average purchase you can simply suggest an additional item at the point of sale. This is the model used by McDonalds (”would you like fries with that?”; “do you want to go large?”), Starbucks (”would you like any pastries?”) and the Electronics retailers (”would you like an extended warranty?”). Online, you see it with Amazon’s recommendations and “other people who bought this also bought …”). There are also other very effective ways to do this for services and products. It’s a very low cost method of increasing business and the customers feel they are being given a choice.

Increasing the frequency of purchase is generally achieved through education of the customer from the simple “your toothbrush is more effective at preventing gum disease if you replace it every three months, and just to make it easy for you it’ll change colour when it needs replacing” and the ever reducing “use by” dates in supermarkets to the more sophisticated bundled package for carpet cleaning or car servicing where you get a lower average cost per event if you buy a set and use them in a set time period. If done correctly (which may be questionable with the product warranties) the customers can feel that they are being looked after and given better service.

Think about where you can use these ideas in your business. Is there more you can do for your existing customers or are you always seeking to chase the new ones? Are you looking for the low hanging fruit or are you off planting new trees?