Selling
Profitability through Operational Efficiency
In my last post, I discussed the importance of proper pricing for profitability and success. As most people know, you increase profitability by increasing revenue and/or decreasing costs. However, cost reduction does not necessarily mean slashing headcount, wages, benefits, or other factors that often negatively affect morale and cascade negatively on quality and customer satisfaction. There is often a better way.
The best businesses generally focus on repeatability and reliability, realizing that the more you do something – the better you should get at doing it well. You develop a compelling selling story based on past successes, develop a solid reference base, and have identified the sweet spot from a pricing perspective. People keep buying what you are selling, and if your pricing is right, money is available at the end of the month to fund organic growth and operational efficiency efforts.
Finding ways to increase operational efficiency is the ideal way to reduce costs, but it takes time and effort. Sometimes this is realized through increases in experience and skill. But, often optimization occurs through standardization and automation. Developing a system that works well, consistently applying it, measuring and analyzing the results, and then making changes to improve the process. An added benefit is that this approach increases quality, making your offering even more attractive.
Metrics should be collected at a “work package” level or lower (e.g., task level), which means they are related tasks at the lowest level that produce a discrete deliverable. This project management concept works whether you are manufacturing something (although a Bill of Materials may be a better analogy in this segment), building something, or creating something. This allows you to accurately create and validate cost and time estimates. When analyzing work at this level of detail, it becomes easier to identify ways to simplify or automate the process.
When I had my company, we leveraged this approach to win more business with competitive fixed-price project bids that provided healthy profit margins for us while minimizing risk for our clients. Bigger profit margins allowed us to invest in our own growth and success by funding ongoing employee training and education, innovation efforts, and international expansion, as well as experimenting with new things (products, technology, methodology, etc.) that were fun and often taught us something valuable.
Those growth activities were only possible because we focused on doing everything as efficiently and effectively as possible, learning from everything we did – good and bad, and having a tangible way to measure and prove that we were constantly improving.
Think like a CEO, act like a COO, and measure like a CFO. Do this and make a real difference in your own business!
The Importance of Proper Pricing
Pricing is one of those things that can make or break a company. Doing it right takes an understanding of your business (cost structure and growth / profitability goals), the market, your competition, and more. Doing it wrong can mean the death of your business (fast or slow), the inability to attract and retain the best talent, as well as creating a situation where you will no longer have the opportunity to reach your full potential.
These problems apply to companies of all sizes – although large organizations are often better positioned to absorb the impact of bad pricing decisions or sustain an unprofitable business unit. Understanding all possible outcomes is an important aspect of pricing related to risk and risk tolerance.
When I started my consulting company in 1999, we planned to win business by pricing our services 10%-15% lower than the competition. It was a bad plan that didn’t work. Unfortunately, this approach is something you see all too often in businesses today.
We only began to grow after increasing our prices (about 10% more than the competition) and focused on justifying that with our expertise and the value provided. We were (correctly) perceived as a premium alternative, and that positioning helped us grow.
Several years ago, I had a management consulting engagement with a small software company. The business owner told me they were “an overnight success 10 years in the making.” His concern was that they might not be able to capitalize on recent successes, so he was looking for an outside opinion.
I analyzed his business, product, customers, and competition. His largest competitor is the industry leader in this space, and products from both companies were evenly matched from a feature perspective. My client’s product even had a few key features that were better for management and compliance in Healthcare and Union environments that his larger and more popular competitor lacked. So, why weren’t they growing faster?
I found that competition was priced 400% higher for the base product. When I asked the owner, he told me their goal was to be priced 75% – 80% less than the competition. He could not explain why he did this other than to state that he believed that his customers would be unwilling to pay any more than that. His lack of confidence in his product became evident to companies interested in his solution.
He often lost head-to-head competition against that competitor, but almost never on features. Areas of concern were generally the size and profitability of the company and the risk created by each for prospects considering his product.
I shared the graph (below) with this person, explaining how proper pricing would increase their profitability and annual revenue and how both of those items would help provide customers and prospects with confidence. Moreover, this would allow the company to grow, eliminate single points of failure in key areas (Engineering and Customer Support), add features, and even spend money on marketing. Success breeds success!
In another example, I worked with the Product Manager of a large software company responsible for producing quarterly product package distributions. This work was outsourced, and each build cost approximately $50K. I asked, “What is the break-even point for each distribution?” That person replied, “There really isn’t a good way to tell.”
By the end of the day, I provided a Cost-Volume-Profit (CVP) analysis spreadsheet that showed the break-even point. Even more important, it showed the contribution margin and demonstrated there was very little operating leverage provided these products (i.e., they weren’t very profitable even if you sold many of them).
My recommendations included increasing prices (which could negatively impact sales), investing in fewer releases per year, or finding a more cost-effective way of releasing those products. Without this analysis their “business as usual” approach would have likely continued for several years.
Companies are in business to make money – pure and simple. Everything you do as a business owner or leader needs to be focused on growth. Growth is the result of a combination of factors, such as the uniqueness of the product or services provided, quality, reputation, efficiency, and repeatability. Many of these are the same factors that also drive profitability. Proper pricing can help predictably drive profitability, and having excess profits to invest can significantly impact growth.
Some customers and prospects will do everything possible to whittle your profit margins down to nothing. They are focused on their own short-term gain and not on the long-term risk created for their suppliers. Those same “frugal” companies expect to profit from their own business, so it is unreasonable to expect anything less from their suppliers.
My feeling is that “Not all business is good business,” so it is better to walk away from bad business in order to focus on the business that helps your company grow and be successful.
One of the best books on pricing I’ve ever found is “The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making” by Thomas T. Nagle and Reed K. Holden. I recommend this extremely comprehensive and practical book to anyone responsible for pricing or with P&L responsibility within an organization. It addresses the many complexities of pricing and is truly an invaluable reference.
In a future post, I will write about the metrics I use to understand efficiency and profitability. Metrics can be your best friend when optimizing pricing and maximizing profitability. This can help you create a systematic approach to business that increases efficiency, consistency, and quality.
At my company we developed a system where we know how long common tasks would take to complete, and had efficiency factors for each consultant. This allowed us to create estimates based on the type of work and the people most likely to work on the task and fix-bid the work. Our bids were competitive, and even when we were the highest-priced bid we often won because we would be the only (or one of the few) companies to guarantee prices and results. Our level of effort estimates were +/- 4%, and that helped us maintain a 40%+ minimum gross margin for every project. This analytical approach helped our business double in revenue without doubling in size.
There are many causes of poor pricing, including a lack of understanding of cost structure; Lack of understanding of the value provided by a product or service; Lack of understanding of the level of effort to create, maintain, deliver, and improve a product or service; and Lack of concern for profitability (e.g., salespeople who are paid on the size of the deal, and not on margins or profitability).
But, with a little understanding and effort, you can make small adjustments to your pricing approach and models that can have a huge impact on your business’s bottom line.
Doing it like Mike
My son is playing basketball this year (previously, he played football and soccer), and recently we went shopping for new shoes. Each store had pictures of Michael Jordan. I used to love watching MJ play with the Chicago Bulls. He was the epitome of skill and professionalism. To this day, he inspires me.
Some people are naturally talented but must still work hard to achieve their full potential. Hard work is an important aspect of being the best at anything, but it takes more than that. It takes doing things in a manner that allows you to continuously improve, as well as a positive mindset and a commitment to success. Once people reach that high-performance level, their jobs look easy, and they may even appear to be a “natural” – just like Mike. But that is just the tip of the iceberg.
Most of my career changes have been unplanned. Opportunities presented themselves, the job seemed interesting, and before I knew it, I was fully immersed in something related but different. The potential reward outweighed the real risk.
Many of these things have not come naturally to me. Each time I focused on understanding the requirements for doing the job well, then looked for examples of exceptional performance, and finally created a systematic approach that allowed me to measure performance and identify areas of improvement on an ongoing basis. From then on it was analyzing my results, thinking daily about even the smallest improvements, and then trying to do even better the next day.
Good enough was never good enough. Introspection can be challenging, so one thing that I have done is to take time to celebrate wins and intentionally focus on remembering how that feels. Those memories can be motivational in times of stress or frustration and help you get back on track quickly.
Sales have been a large part of my consulting management jobs since the mid-1990s, but it wasn’t until I owned my own company that this became a true priority. I ran across a good book, The Accidental Salesperson, by Chris Lytle. Back then, Chris Lytle had “MAX Training,” and a large part of their focus was increasing your “level” with regard to Prospect and Client relationships. The training was good and was complementary to systems like Miller Heiman.
What each of these systems do is help you prepare, plan, and execute to the best of your ability. And just like basketball, it takes practice to master. With mastery comes success and the illusion that something is easy (or you are lucky). The Seneca quote, “Luck is what happens when preparation meets opportunity,” is so true.
Regardless of the system used, what is most important is that you are trying to be the best at is to look at both positive and negative examples to see what you can learn from them. There are lessons to be learned everywhere! Understanding what makes it good or bad helps you improve as part of an ongoing improvement process.
Incorporating new tools and techniques into what has already been proven to work will help you improve your game. Returning to the sports analogy, this could be part of what made Michael Jordon so good. He would see something interesting, improve it, and then make it his own.
For example, I get many horrible sales calls and emails. The people have obviously not done any preparation, do not know anything about me or the company I work for, and often remind me of why I stopped listening to them by referring to the number of times they have tried contacting me. On the other hand, some talented sales professionals have done their homework, understand their products and the competition, and understand why what they are selling should matter to me – and can articulate that quickly and confidently. I will speak with them and occasionally buy from them. And in either case I provide my team with real-life examples of good and bad sales techniques.
So, think of the best example of whatever it is you do, and see what you can do to become more like them. This isn’t about imitation but rather about uncovering the secrets of their success and learning from them. And have some fun doing it!
Connecting the Dots Faster
When I started consulting, an experienced consultant told me, “The best Consultants are experts at becoming Experts.” I started my consulting career with that goal in mind. After a few years realized that “Good consults are people who can learn enough quickly to ask intelligent questions and then connect the dots faster.” This is a great skill for anyone, regardless of the industry or business.
It’s impossible to be an expert at everything. I believe having great depth in a few areas (true expertise) and breadth of knowledge in many areas (enhancing context and insight) is important. Both types of knowledge alone are valuable, but combined, they add a dimension that allows a person to be far more effective and potentially much more valuable because it leads to the ability to pick up on the dependencies and nuances that others miss.
Just think – How much more effective is a salesperson who understands technology and project management concepts when working to demonstrate fit and create a sense of urgency? Or, an Attorney who understands the complexity of service offerings and delivery – enhancing their ability to construct agreements that are highly protective yet not overly complex or onerous. Or a programmer who thinks beyond the requirements and looks for ways to improve or simplify the process. Extra knowledge helps with the big picture understanding, and that often leads to providing more value by “thinking outside the box.” Additional knowledge and skills almost always help us become more effective, regardless of what we may be doing.
Increased knowledge and a desire to do amazing things create opportunities to make a huge and immediate impact. Sometimes it is because you are asking the questions that others may be thinking but simply cannot articulate in a clear manner. It helps you see the gaps and holes that others miss. And most importantly, it helps you “connect the dots” before others do (often many months before something obvious to you becomes obvious to others). A large consultancy once used the phrase “seeing around corners” to make this concept tangible.
So, if you buy into the concept that knowledge is good, the next question is usually, “What is the best way to learn?” People learn in different ways, so there really is no one single best way to learn. Understanding how you learn best will help you learn faster.
I’m a fan of reading. A good book may reinforce ideas you already know, introduce you to a few concepts or ideas that seem like they could help (giving you something to test), and often present many ideas that you know or feel just won’t work. Just don’t become one of those people who changes their beliefs and approach with every book they read (or what I refer to as “The book of the month club manager.“)
I’m also a fan of hands-on learning. The experience of doing something the first time is important. Keeping detailed notes (what works, what doesn’t make sense, what you did to figure it out, workarounds, etc.) enhances the value of that experience. It’s amazing what you can learn when you “get your hands dirty.”
What about formal education? I’ve never been a fan of the person who wants to get a degree in order to get a promotion. There are certainly some professions where education is critical to success (often through legitimacy as much as anything else). My advice to people is to work towards a specific degree because it is important as a personal goal and because it could possibly help you get a different or better job in the future. I will never criticize anyone for learning, going to school, or getting another certification or degree.
I believe the best way to get ahead is to learn the position, innovate, optimize, and deliver incredible results. You won’t “knock it out of the park” every time, but those “base hits” will help you score and ultimately win.
This is not to say that formal education is bad; I don’t believe that at all. I was working on my MBA at the same time I was expanding my consulting business from the US to the UK. I had a concentration in International Business, so I could apply many things I was learning right away. This bit of serendipity both enhanced my learning experience and helped me make better decisions that had real implications for my business. The funny thing was that I was working on that degree to raise the bar for my children, so this was just a bonus for me.
There are also other great ways to learn – ways that only require an investment of your time. There are many good free online courses. If you are interested in learning something or need to know more about it, there is almost always a place to find free or low-cost training. These are great investments in yourself and your future, and may help you learn to connect those dots faster.
Below are links to a few good free learning websites. Do yourself a favor and check them out. And, if you know of others, leave a comment and recommend them to others. Enjoy!
OpenCulture (directory with content from multiple sources)
Open Education Database (directory with content from multiple sources
Acting like an Owner – Does it matter?
One of the biggest changes to my professional perspective on business came when I started my own consulting business. Prior to that, I had worked as an employee for midsize to large companies for ten years and then as one of the first hires at a start-up technology company. I felt that doing hands-on work, managing, selling, and helping establish a start-up (where I did not have an equity stake) provided everything needed to start my own business.
Well, guess what? I was only partially correct. I was prepared for the activities of running the business but really was not prepared for the responsibility of running a business. While this seems like it should be obvious, I’ve seen many business owners whose primary focus is on growth/upside activities and not the day-to-day. That type of optimism is important for entrepreneurs – without it, they would not bother putting so much at risk.
People tend to adopt a different perspective when making decisions once they realize that every action and decision can impact the money moving into and out of their own wallets.
Even in a large business, you can usually spot the people who have taken these risks and run their own business. I was responsible for a Global Business Unit with $60+ million in annual sales and ran it like a “business within a business.” Having P&L responsibilities meant the decisions I made mattered to my success and the success of my business unit.
It’s more than just striking out on your own as a contractor or sole proprietor. I’m talking about the people who have had employees, invested in capital equipment and went all-in. These are the people thinking about the big picture and the future.
What do these people do differently than those without this type of experience?
One of the biggest things is they view business as “good business” and “bad business.” Not all business is good business, and not all customers are good customers. There needs to be a fair commercial exchange where both sides receive value, mutual respect, and open communication. You know this works when your customers treat you like a true partner (a real trusted advisor) instead of just a vendor, or at least do not try to take advantage of you (and vice-versa).
A business is in business to make money, so if your work is not profitable, you should not do it. And, if you are not delivering value to an organization, it is very likely that you would be better off spending your time elsewhere – building your reputation and reference base within an organization that was a better fit. While that may not be true for all business endeavors (think how long it took Amazon to become profitable and where they are now), it generally is true for employees at all levels.
“Bad” salespeople (who may very well regularly exceed their quotas) only care about the sale and their commission – not the fit, the customer’s satisfaction, or the effort required to support that customer. Selling products and services people don’t need, charging too little or too much, and making promises they know will not be met are typical signs of a person who does not think like an owner. Their focus is on the short-term and not on growing accounts. As an aside, their compensation plans generally only reward net new business and first-time sales, not ongoing customer satisfaction, so these actions may not be completely their fault.
How you view and treat employees is another big difference. Unfortunately, even business owners do not always get this right. I believe that employees are either viewed as Assets (to be managed for growth and long-term value) or Commodities (to be used up and replaced as needed – usually treated as fungible, as if they are easily replaceable). Your business is usually only as good as your employees, so treating them well and with respect creates loyalty and results in higher customer satisfaction.
Successful business owners usually look for the best person out there, not just the most affordable person who is “good enough” to do the job. On the flip side, you quickly need to weed out the people who are not a good fit. Making good decisions quickly and decisively is often a hallmark of a successful business owner. The saying about hiring slowly and firing quickly makes even more sense when you are running a lean operation that requires every person to contribute to the success of the company.
Successful business owners are generally more innovative. They are willing to experiment and take risks. They reward that behavior. They understand the need to find a niche where they can win and provide goods and/or services tailored to those specific needs.
Sometimes, this means specialization and customization, and sometimes, it means personalized attention and better support. Regardless of what is different, these people observe the small details, understand their target market, and are good at defining a message articulating those differences. These are the people who seem to be able to see around corners and anticipate both problems and opportunities. They do this out of necessity.
Former business owners are usually more conscientious about money, taking a “my money” perspective on sales and expenses. Every dollar in the business provides safety and opportunity for growth. These usually are not the people who routinely spend hundreds or thousands of dollars on business meals or who take unnecessary or questionable trips to nice places. Money saved on unnecessary expenses can be invested in new products, features, or marketing for the benefit of an organization.
While these are common traits of successful business owners, you can develop them even if you have never owned a business.
When selling, are you focused on delivering value, developing a positive reputation within that organization and with your customers, and profiting from long-term relationships? When delivering services, is your focus on delivering what has been contracted – and doing so on time and within budget? Are your projects used as examples of how things should be done within other organizations? Are you spending money on the right things – not wasteful or extravagant things?
These are things employees at all levels can do. They will make a difference and help you stand out. That opens the door to career growth and change. And it may get you thinking about starting the business you have always dreamed of. Awareness and understanding are the first steps towards change and improvement.
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Where Ideas, Experiences, and Lessons Learned Intersect 