The financial goal of a startup should be simple: profit in the least time with the least effort. Not more customers, not more revenue, not more offices or more employees… more PROFIT.
Based on Tim Ferriss’ interviews with high-performing CEOs in more than a dozen countries, here are the 11 basic tenets of the “Margin Manifesto”… a return-to-basics call that gives permission to do the uncommon to achieve the uncommon: consistent profitability (or doubling of it) in 3 months or less.
1. Niche is the New Big- The Lavish Dwarf Entertainment Rule: Several years ago, an investment banker was jailed for trade violations. He was caught partly due to his lavish parties on yachts, often featuring hired dwarves. The owner of the dwarf rental company, Danny Black, was quoted in the Wall Street Journal as saying: “Some people are just into lavish dwarf entertainment.” (Is that the quote of the year, or WHAT?!?!) Niche is the new big. But, here’s the secret… it’s possible to niche market and mass sell. iPod commercials don’t feature dancing 50-year olds, they feature hip and fit 20-30-somethings, but everyone and his grandmother wants to feel youthful and hip, so they strap on Nanos and call themselves Apple converts. Who you portray in your marketing isn’t necessarily the only demographics who buys your product. It’s often the demographic that most people want to identify with or belong to. The target isn’t the market. No one aspires to be the bland average, so don’t water down messaging to appeal to everyone… it will end up attracting no one.
2. Revisit Drucker- What Gets Measured Gets Managed: Measure compulsively. Useful metrics to track, besides the usual operational statistics, include CPO (“Cost-Per-Order,” which includes advertising, fulfillment and expected returns, chargebacks, and bad debt), ad allowable (the max you can spend on an advertisement and expect breakeven), MER (media efficiency ratio), and projected lifetime value (LV) given return rates and reorder percentages.
3. Pricing before Product- Plan Distribution First: Is your pricing scalable? Many companies will sell direct-to-consumer by necessity in early stages, only to realize that their margins can’t accommodate resellers and distributors when they come knocking. If you have a 40% profit margin and a distributor needs a 70% discount to sell into wholesale accounts, you’re forever limited to direct-to-consumer… unless you increase your pricing and margins. Look for hidden costs by interviewing those who have done it: will you need to pay for co-op advertising, offer rebates for bulk purchases, or pay for shelfspace or featured placement?
4. Less is MORE- Limiting Distribution to Increase Profit: Is more distribution automatically better? No. Uncontrolled distribution leads to all manner of headache and profit-bleeding, most often related to rogue discounters. Reseller A lowers pricing to compete with online discounter B, and the price cutting continues until neither is making sufficient profit on the product and both stops reordering. This requires YOU to launch a new product as price erosion is almost always irreversible. Avoid this scenario and consider partnering with one or two key distributors instead, using that exclusivity to negotiate better terms. From iPods to Rolex to Estee Lauder, sustainable high-profit brands usually begin with controlled distribution. Remember, more customers isn’t the goal; more profit is.
5. Net-0… Create Demand vs. Offering Terms: Focus on creating end-user demand so you can dictate terms. Often one trade publication advertisement, bought at discount remnant rates, will be enough to provide this leverage. Offering terms is the most consistent ingredient in startup failure, so cite startup economics and the ever-so-useful “company policy” as reasons for prepayment and apologize, but don’t make exceptions. Net-30 becomes net-60, which quickly becomes net-120… and then you’re out of biz. Time is the most expensive asset a startup has, and chasing delinquent accounts will prevent you from generating more sales.
Remaining six to come tomorrow… STAY TUNED!
originally by Tim Ferris, www.fourhourworkweek.com/blog
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