ActionCoach Team Sage: Blog

Well, let's look at the good news and the bad news.

The Bad First

Let's look at the bad news first. (Take note, this is not one of the business growth strategies recommended for any company.)

Many companies are making a major mistake. They are working with the model of planning being a top-down activity. The managers come up with an idea and tell their employees what to do. Simple. Straightforward.

Now, top-down planning has its advantages. With this type of style, everyone has a clear role. The employees do not worry about being upstaged by another employee of the same rank. They know not to make suggestions to managers since it would have no impact. Managers don't need to deal with employees giving them feedback when they don't want to deal with it.

Of course there is a down-side to this strategy. With top-down planning, employee morale is bad. Employees, who may be creative and innovative, are told they have no voice in the situation. It demoralizes innovation and initiative. In fact, employers will not see the talent available in their employee ranks. Employees with potential will get so dissatisfied with this situation, they will leave for another job when the opportunity arises.

Sounds like a nightmare in the making. There is good news though. You do not have embrace top-down planning in your organization.

The Good News

One of the strongest business growth strategies to embrace is the idea of implementing bottom-up planning. This type of environment encourages employees to come up with ideas and to figure out better ways to do things. Now, that does not mean that an owner or manager will not come up with ideas and implement them. The difference though is that they engage their team in the conversation.

What are the advantages to the bottom-up approach when it comes to management ideas?

• Your idea can become better with input from the people on the front lines. Think about it. Your people are the ones that deal with the everyday work. They know what is working and what is not. When you have an idea, they can tell you if it will work or not. They can come up with suggestions on how to make your idea even better.
• Bringing your idea to your employees first also gives them a voice in how to implement it. They may suggest things you never considered. They may give you comments that will lower costs and make the implementation easier.
• People who have a say are more likely to step-up and take more responsibility without being asked. They feel they have a part of the idea and want to be an intimate part of its implementation. That sense of ownership is vital for successful idea adoption.
• You are gaining employees' buy-in to the idea. And that is more important than just about anything. Many managers have faced a situation where they are trying to make a change but do not have employee buy-in. Without cooperation from the front lines, even the greatest ideas can fail.

These are just a few of the advantages of bringing your employees into the discussion when it comes to ideas and their implementation. You will find your organization transforms when you start doing this. That is what makes this one of the smartest business growth strategies to implement in your business.

So, do you know what your real business is? You may say selling product X or providing service Y.

In reality, your business is acquiring customers and keeping them happy. No matter what product or service your company provides you must have customers interested and buying what you have to offer. The efforts you put into marketing your company and brand is money spent towards acquiring a customer. You are buying your customer with those efforts and that investment is your customer acquisition cost.

What is Your Cost of Acquisition?

Customers come with a cost attached. Before someone becomes a customer, you spend money in marketing efforts to bring that person to your company. This is true of a store front operation as much as for a completely online business.

How do you calculate this cost of acquisition? There are various ways to do it. But, a simple method is to divide the monthly cost of your marketing efforts, website maintenance, and other customer outreach efforts, by the number of new clients you get in a month. For example, if you brought in 100 new customers last month, and all the marketing costs for the same period came to $1200, your cost of customer acquisition is $1200/100, or $12 per new client.

If you track how clients come into your business, you can track customer acquisition costs by channel. For example, if someone comes in through your website, you can calculate that cost based on your web marketing efforts. If someone else comes in to your retail space due to a sales flyer, you can calculate that cost based on your traditional marketing efforts.

Are You Paying the Right Price for Your Customers?

There are two approaches to this: Allowable Acquisition Cost and Investment Acquisition Cost.

• Allowable Acquisition Cost - This is what you can easily allow for when buying a customer. Usually, this is the profit of the first sale. If your average profit on a first sale is $10, you do not want an acquisition cost more than $10.
• Investment Acquisition Cost - In some businesses, the cost of acquisition is higher than the profit margin of the first sale. The money invested in a client is based on getting them to make multiple purchases to cover that acquisition cost. You can recoup the cost on the third purchase or the tenth, depending on the investment.

Ideally, you can work under the Allowable Acquisition Cost model. However, you may find that your first acquisitions are based on the Investment Acquisition Cost model. As you increase your lead generation and conversion efforts, you should see your acquisition costs going down.

No matter what model you use though, you need to keep customers coming back for the most profitability. Providing excellent customer service, quality products/services, and competitive pricing is very important to make this happen.

Something to Remember

Your acquisition cost is affected by how much "stock" you have on hand and how fast you turn that stock over. In the business of acquiring customers, your "stock" is your leads. 

Remember, leads are perishable. Leads will buy from another company or lose interest in your company. If you do not turn those leads into paying customers in a timely manner, you need to invest more money into generating more leads. And that will make your acquisition costs go higher.

What do you take from this? Know how much you are paying for acquiring your customers. Seek ways to bring those costs down. One way to do that is to increase your efforts to convert leads into paying customers before the leads go stale.

Are you selling yourself out of business? You may think that is a silly question. You have plenty of sales. You are seeing a steady growth in your sales numbers. Of course you are not selling yourself out of business. Or are you?

In reality, you may be doing it and not really realizing it.

Let's put it this way. What is your gross margin? Is it enough to pay your fixed expenses? What is the gap between when you pay for goods and when you get paid for those same goods by customers? If these numbers are off, you are literally selling yourself out of business. 

Let's break it down.

What is Gross Margin?

Gross margin is the difference between the selling price of your goods and the cost of the goods sold. So, if you made $1000 in sales, but it cost $500 to buy the goods from your suppliers and sell them to customers, your gross margin is $500. That is the amount of money you have to pay fixed expenses with.

Why is the gross margin so important? You need to calculate how much you have to sell to cover all your fixed expenses. That gross margin tells you that critical number.

Variable Expenses vs. Fixed Expenses

You need to know the differences between variable and fixed expenses. They allow you to track the costs you can control and the ones that will vary depending on your sales figures.

• "Variable Expenses" are the ones that will change based on the amount of sales you're doing.  Another term for this is "Cost of Goods." This number covers all the costs associated in producing a product or service. This includes the cost of materials and direct labor, along with shipping costs and sales commissions. One way to think about these costs is "Would I have incurred this cost if I did not make a sale today?"

·         If you are a wholesaler, your purchase cost is your variable expenses as well as shipping costs and sales commissions.

·         If you are a manufacturer, the costs of raw materials and labor to make the product is in the variable expenses, along with shipping expenses and sales commissions.

·         For a service provider, the wages of those directly providing the service as well as the cost of supplies are part of the variable expenses.

• "Fixed Expenses" are the ones that do not change based on sales. A term you might hear used with this is "Overheads." Some examples of fixed expenses include rent or mortgage payments, utility bills, wages to administrative employees, and office furniture.

Cash Gap

The "Cash Gap" is the time between when you pay for goods and when the customer pays for the same goods. For example, you paid for widget X on January 1. You sell widget X on July 1 for cash. Your cash gap in this case is 6 months. This is a very simple example, but gives you the idea. 

Why is this important? You have tied up part of your cash in the purchase of inventory. You will not see that cash released until you receive payment from a customer's purchase of that inventory. If you tie too much of your cash into inventory and do not get cash flowing from sales, or you don't take into account that each time you sell your products you have to reinvest in additional product, you will see your operating funds dry up in front of your eyes.

What Does All of This Mean?

To be profitable, you need to generate enough sales to cover both variable and fixed expenses. Even more important than immediate profitability is cash flow. You need to sell enough to keep the cash flowing through your business.

How can you free up your cash flow and improve your gross margins?

Most of us are out chasing customers down.

Picture yourself running through fields of flowers chasing down a butterfly with a net. You bringing it back to the house. You go back out to the fields to capture another one. In the meantime, what are you doing back at home to keep that first butterfly happy? If that butterfly is not happy, it will leave. Then, you are back to having no butterflies at home. You play an endless game of capturing butterflies and trying to keep them happy while going back out to capture more.

When a customer is chasing you, it is a completely different picture.

Instead of running around the meadow trying to capture one butterfly at a time, you create a butterfly garden at home. The butterflies find your garden and start visiting it regularly. They start telling the other butterflies about your garden. More and more arrive as word spread. If one butterfly leaves, one or more seem to replace that one. As your garden grows, so your population of butterflies that you have visiting increases. Instead of just one species of butterfly, you may see multiple showing up.

Which picture do you want for your business?

How Can You Create a Business that Customers Chase?

You have to create a customer garden. This virtual garden attracts customers, keeps them happy, and grows your customer base, all at the same time.

Okay, let's take the gardening analogy to the next level, here are four stages to building that garden:

• Enrich your soil - You need to create an environment on your website that encourages people to stay once they arrive. You need to do this before you really launch your marketing efforts so you will not waste time in losing leads before they convert. This means building a site that has quality content. It means having systems in place to get people to become leads. For example, you need a lead conversion plan in place.
• Plant the seeds - Routinely adding more SEO-targeted content to your website will keep the search engines coming back. That will raise your search engine ranking. Once you have a few leads coming in, you need to start sending out emails targeted to those consumers. You are planting seeds and getting new sprouts coming up all the time. The customers are starting to take notice. You may even start to see word of mouth growing.
• Tend your garden - When you have leads, you need to nurture them. You need to keep offer quality incentives to get them further into the sales funnel. You are also adding more SEO-targeted content to keep the garden rich and the leads flowing in. You are also converting leads into paying customers. You must thank those customers and keep them coming back with targeted incentives. You also need to weed out the marketing incentives that are not working so you can put more efforts into those that are working.
• Expand your garden - Once you have a steady flow of leads and customers, the next step is to expand your efforts. This may be to target a larger audience for your core product. It may involve adding new products or services. You are offering more to your leads and customers.

Now, you have an idea of how to get customers chasing your company instead of you chasing them down. The best thing about having your own customer garden is the fact that the work you put in at the beginning will have long-term effects. 

What can you do today to get your customer garden growing?

What if you could actually work WITH the other companies in your industry to grow your business?

Wait, what? Why would you work with your competition? In the traditional world of capitalistic business, this is a foreign concept.

Actually, you can see it happening all the time. Look at attorneys, for example. Many attorneys handle a range of cases. They may handle business law, tax law, and even family law, all at the same time. However, you will see attorneys referring cases to other law offices all the time, even when they could handle the case themselves. Why? They may be too busy at that time to take on new cases. They may know of an attorney especially suited to a particular case. This is active cooperation with their competition.

This concept is known as Co-opetition.

What is Co-opetition?

This business strategy works on the concept that competitors can benefit from each other if they work together. They know that there is plenty of business out there for everyone to share in. By cooperating with each other, they are benefiting their companies and their industry at the same time.

Another way to think about Co-opetition is from the view-point of abundance versus scarcity.

Traditional business works on the scarcity model. This thinking says there is only so much to go around and the business must focus on taking everything. That means using business practices that not only boost your business but put down the competition. It means not working with competitors in any way shape or form.

Those that believe in the abundance model realize that there is plenty of business for everyone. By cooperating with each other, they are improving their own business while remaining competitive with each other.

Examples for Clarity

Do you need a couple of examples of co-opetition?

• Antique Mall

In the traditional scarcity model, each antique dealer would need their own business space, their own advertising budget, and their own operating expenses. The concept of an antique mall goes against the scarcity model. It offers a single place for antique lovers to visit to see multiple antique dealers. 

By cooperating with each other the dealers have more people coming to their stalls. They share a space and the operating expenses of that space. They use common advertising to bring people to the mall. Yet, they compete with each other because they are vying for the antique lover's purchase.

• Computer Manufacturers

PC companies are in competition against each other. They want you to choose their company for your next desktop, laptop, or tablet. Yet, if you look under the covers, you will see a good deal of cooperation between the companies. 

PC companies use the same architecture in their computers. They have industry standards they cooperatively develop and follow. This keeps research costs down and offers multiple suppliers of PC parts. While each company has its own standards, by cooperating on common standards, they are improving the marketplace for PC companies overall. It drives costs down which increases the profitability for everyone.

The abundance viewpoint realizes that by cooperating with competitors, you are not only boosting your company, you are boosting your industry. That can increase innovation, bring down operating costs, and make everyone more competitive in the marketplace. Lower costs bring in more buyers.

How can you move your company from the competition stance to co-opetition stance?