Be an Ethical Entrepreneur, Marketer, and Business Builder

This is how Netflix should have handled a 60% rate increase

Since my readers run small businesses, how Netflix handles their customers might seem a bit removed from your desk. However, most of you run businesses with recurring revenue and how you handle rate increases is crucial!

Why did Netflix increase rates 60%?

At some point Netflix decided that DVD’s are dying and that the real money is in streaming content. To really keep to their “Netflix” USP, they ultimately want to sell off the DVD shipping business (which they now call Qwikster) and rely solely on web-based streaming of videos. OK, I can understand that. That sounds like a very reasonable business plan to me…

One hurdle in doing that is splitting up their billing since, at the time, there was a single rate for Unlimited Streaming and DVD’s.

On July 12th, Netflix sent me an email announcing that their most common plan of $9.99/month for Unlimited Streaming video and Unlimited 1-at a time DVD’s was being separated into $7.99 for Unlimited Streaming and $7.99 for Unlimited 1-at a time DVD’s. That’s a 60% price increase.

The email started with:

Dear Bryan,

We are separating unlimited DVDs by mail and unlimited streaming into two separate plans to better reflect the costs of each. Now our members have a choice: a streaming only plan, a DVD only plan, or both.

At least they were nice enough to acknowledge my name. They then explain the new pricing structure and conclude with:

You can easily change or cancel your unlimited streaming plan, unlimited DVD plan, or both, by going to the Plan Change page in Your Account.

We realize you have many choices for home entertainment, and we thank you for your business. As always, if you have questions, please feel free to call us at 1-888-357-1516.

–The Netflix Team

Huh? You increase my rates by 60% and don’t even bother to explain why or give me a single reason to remain a customer??? Well I canceled my DVD shipping plan and apparently I wasn’t the only one miffed as that act resulted in a loss of 600,000 of the 23.6 million accounts they had according to their 10K filing for the second quarter of 2011.

My first question is, well, was the price increase worth it for Netflix???

Based on information from their 2nd quarter 10k, the average customer spent $10.15/month, which means they lost $6.1 million dollars in monthly revenue from the 600,000 who canceled service. In the second quarter revenue was $718 million so a loss of $18.3 million per quarter in revenue only represents a 2.5% drop. Yet they increased rates by up to 60%. That’s a pretty big gap between a 2.5% loss in revenue due to cancellations and up to a 60% increase in revenue by rate increases. Uh, yeah, the price increase was definitely worth it.

Hmmm…. So why has their been a massive sell-off in Netflix shares in the last 2 weeks when they should be in a much more profitable position now than before the rate increase? Who cares? We work in the real world of small business not Wall Street.

What did Netflix teach us about price increases?

  1. Do them! – That’s the most important lesson for small business. Many small business owners are afraid to increase prices, but what could be more discretionary than a movie subscription? And Netflix is, now more than ever, feeling competitive pressure from Redbox, BlockBuster,  and Hulu.com. Yet Netflix is going to come out on top after their poorly handled rate increase. If you provide a valuable service, you will too.
  2. Handle them differently – Below I’ll outline a few mistakes and how your small business can avoid them.

Here’s how you can handle a rate increase differently:

  1. Target a smaller percentage over time. As a general rule of thumb, most people won’t even notice a 10% rate increase. If your cable, cell phone, or internet service went up a few bucks per month and you were happy with the service, would you waste time finding a new provider over $3/month? 60% is extremely aggressive. I would have probably never had the guts to do that. If I did, it would have probably been over a few months or even quarters.
  2. Build value. When Netflix announced the rate increase they should have included a chart in the announcement email outlining how Netflix is still a better value and more convenient than any other option.
  3. Make it harder to cancel. To cancel service with Sirius or XM satellite radio you have to call. You can’t do it online. The result of that is that both times I’ve called them to cancel service they’ve been able to retain me as a customer. In Netflix’ situation, they don’t have enough customer service people available to handle those requests so I would still make the cancellation possible online. However, when someone went to cancel I would display my value building chart once again AND provide an explanation of the necessity for the rate increase because of increased licensing costs. If people have to call your business to cancel service, you better have trained representatives able to get to the bottom of the cancellation reason and then some offers available to try to retain the account.
  4. Apologize if you screw up. Which Netflix’s co-founder, Reed Hastings, actually did in an email I received on 9/19/11. It was the right thing to do. However, he should have offered some incentive to retain accounts that quit with a coupon at the end of the email to show his sincerity. It’s easy to say your sorry but it looks even better when you’re willing to endure some expense to make it better.
  5. Contact the people who have canceled. In Netflix’s situation, I would definitely do that via email apologizing for the poor communication, reiterating the great value Netflix presents, and then offering 2-months free service to make up for the mistake. Since I didn’t cancel the Unlimited Streaming service, I’m not sure if they did something like that, but I haven’t been able to find any information indicating that they did.

The bottom line is that you need to have regular rate increases in your business… Just make sure you do it correctly.

To your success, Bryan

Only the top 1% of small business owners do this every week…

They look at a Weekly Action Snapshot of their entire business.

In 1 single page of information, they can see a quick Snapshot that tells them, with military precision, where they need to take Action.

As an avid runner, I’ve become somewhat obsessed with a website called RunKeeper.com. It tracks your running time, distance, and even your route on Google maps. Heck it can even be tied into your GPS-enabled, heart-rate-monitoring, super-spy watch to help you track your performance. In other words, it helps me track, and therefore improve, my vital numbers for running:

  1. Distance
  2. Pace
  3. Elevation Changes
  4. Heart Rate

If only it could track temperature, humidity, and my diet I’m pretty sure it would be the ultimate training tool.

In business we also have crucial numbers. No matter if you’re training for a marathon or a 5k, the numbers you watch don’t change but the values of the numbers certainly do. Business works the same way. For the most part, we all need to track the same numbers… However, the actual value of those numbers can vary significantly.

Let’s get this out of the way right now, when you’re bragging to your buddies or when it’s time to actually sell your business, the revenue and profits are important numbers… While you’re actively improving your business, they are secondary.

However there are numbers that every business needs to include as part of your Weekly Action Snapshot report (WacSnap).

Keep in mind, if you’re not looking at the right numbers, everything you do in your business from marketing, to incentive plans, to scheduling, to hiring a new employee is a BIG guess. Imagine training for a marathon without ever tracking how far you ran or how long it took you. On race day, how would you even know if you could finish?

To make it simple, categorize your numbers based on department:

  1. Sales – # of new leads, # of outstanding leads, conversion rate (i.e. # of new customers divided by the # of new leads)
  2. Marketing – # of leads per marketing project, $$ in revenue generated per $$ in marketing spent
  3. Service/Operations – completed work orders, unfinished work orders, on a monthly basis track your profit per person (or per sq. ft. for a retail environment)
  4. Finance/Administration – past due invoices, accounts receivable aging, total payables, cash in the bank
  5. Big Picture – YTD Revenue compared with previous year, your P&L should be reviewed monthly; depending on your overall goals, there can be completely different Big Picture numbers. For instant a cell phone retailer might look at the number of service contracts compared with last year or the number of cancellations you saved in the last week.

That’s a lot of numbers; 14 to be precise.

Don’t start tracking all of them at once. If you’re having cashflow issues start with #4. Otherwise, start with #1 and work your way down.

The number of new leads, where those leads are coming from, and the % of leads you convert to customers are your MOST IMPORTANT numbers.

When you go to sell your business, if you can tell people those 3 numbers, the buyer will be extremely impressed and pay more because of it.

The simplest way to have these numbers available each week is by utilizing some industry-specific software.

Brad Sugars developed a Business Chassis, that you can read about on his blog to point out exactly which numbers are key to your sales performance.

You can also read more about tracking the important numbers of your business and the crucial numbers you need to hold your Ad Agency accountable.

To your success,
Bryan Trilli

P.S. If you’re a runner, cyclist, skier or enjoy some other form of aerobic activity, join my Street Team on RunKeeper.com. I find it’s a great motivating factor knowing others are “tracking” my performance. The same is true in business. The only thing better than reviewing your WacSnap each week is sharing it with peers to help you see areas for improvement that you might otherwise miss.

How to create General Ledger codes for your small business’ Profit & Loss statement

Creating income and expense codes to setup a useful P&L for your business sounds about as exciting as sweeping the floors in your shop… Better left to your accountant, right? Wrong! Unless your accountant is quite business-savvy that’s a mistake because accountants aren’t necessarily trained in business… They’re trained in accounting… And there’s a big difference between the 2.

If your accountant did setup your GL codes now’s a good time to review them to see if they’re providing you valuable information at a glance. Here are a few quick rules to setup a useful, valuable Profit & Loss statement that will actually provide you with the information you need to make important business decisions. First of all, let’s lay out the goal for your P&L. The goal of a small business P&L is to quickly show you which departments (or revenue streams) in your business are making money and which are not. The secondary goal, for when you go to sell your business, is to provide you with a cashflow value of the business utilizing EBIDTA or Seller’s Discretionary Earnings. The third use of your P&L is of course taxes. For this article, let’s focus on your month-to-month use of a profit and loss statement, not just it’s utility at the time of sale or for paying your tax bill.

  1. Income and expense codes should be departmentalized. – This is crucial because it’s the only way for us to tell where the money is coming from and where the money is going. As an example if you own a powersports dealership, you should have separate income codes for motorcycle sales, ATV sales, jet-ski sales, dirt-bike sales, motorcycle parts, ATV parts, jet-ski parts, dirt-bike parts, and service. Breaking out service according to each isn’t really necessary since your labor costs are generally the same regardless of whether you’re working on a jet-ski or motorcycle. Though it’s not necessary on your P&L, you should also be able to tell which type of bikes are selling best and with the best margins and which are not (i.e. cruisers vs sport-bikes, Harley vs Can-am).
  2. Income codes should have a matching expense code. – From the example above each of those income codes should have a corresponding expense code such as Cost – Motorcycles, Cost – ATV’s, Cost – motorcycle parts and so on. Why? Because that’s what tells us quickly if each of our items are priced at a profit (or not). This is actually a rather common problem in small businesses. Costs go up over time and owner’s don’t increase sale prices to match because they aren’t ordering or reviewing each statement so they just don’t notice. When your P&L does that work for you, it’s easy every month to review and catch any drastic changes in margins. Granted, to really keep on top of your margins for everything you sell, a detailed parts and equipment list that is CONSTANTLY updated is vital.
  3. Cost of Goods Sold codes should only be codes that are affected by fluctuations in sales.– This is just a rule of thumb for determining if an expense should be COGS or an Operating Expense. If sales going up or down doesn’t change the expense  in question, it should be considered an Operating Expense.
  4. Wages should be departmentalized (and segregated between COGS and Operating Expenses). – Sales commissions and service department wages are a Cost of Goods Sold.  Office staff, accounting, customer service, and managers (outside of sales and service managers) are an overhead and should go in your Operating Expenses along with the corresponding payroll taxes and benefits.
  5. Insurance should be broken-down. – By this I simply mean just because you get a single bill from your commercial service provider for General Liability, Vehicles, Buildings, and Inventory you shouldn’t just put in a single line-item on your P&L for Insurance. Each of those items should be listed individually under your Operating Expenses.
  6. Royalties are a COGS. – In most franchises royalties are levied as a percentage of revenue and should be listed as a Cost of Goods Sold, not an Operating Expense. Additionally, royalties should be considered a marketing expense since, in exchange for paying those royalties, you get to use your franchiser’s name and the goodwill and value they’ve invested in that name.

That’s it. Making an effective P&L for your business can be done in an afternoon and once setup in your billing and accounting software should easily provide you with the vital information you need for years with very little ongoing maintenance. Take the time to update your P&L and start making better business decisions today.

To your accounting success, Bryan

How to fix your business FAST – Part 2 – Know your numbers!

The world lives and dies by numbers. Granted I am an engineer by education so I may be a little bias…

Even more importantly, the world gets answers to questions by the correct numbers. If you’re looking at the wrong numbers, you’re never getting answers to your questions. Let me give you a quick analogy. In the world of internal combustion engine building we’re all looking for a few major numbers – namely horsepower and torque. So we hook an engine up to a dynamometer (a device that measures the power output of an engine) and now we know the horsepower and torque numbers. So what? How do I improve those? Well to do that you have to look at a lot of other numbers such as bore and stroke, number of cylinders, 2 or 4-strokes per cycle, manifold pressure, air-to-fuel ratios, cam lift and duration, ignition timing… And the list goes on and on and on… Without knowing how that engine is currently configured, I can’t possibly tell you what to “fix” to help it make more power.

Your business has 3 “big” numbers, they are # of customers, revenue and profit.  Those are your horsepower and torque. All they tell you is where you’re at right at this moment. They don’t tell me how we got there or how we’re going to make more power (profit) the next time around. Even if you don’t know a single thing about engines, I’m hoping that analogy makes sense. The bottom line is, you have to know your numbers and they have to be the CORRECT numbers.

Let’s break your numbers down into a few basic categories (you’ll notice these are the same as I reference when talking about the 3 leaders every business needs):

  1. Finance/Accounting
  2. Sales/Marketing
  3. Service/Operations

Finance/Accounting – These are the numbers you get from your bookkeeper.

  1. Profit & Loss
  2. Balance Sheet
  3. Current Receivables (along with the aging)
  4. Current Payables (along with the aging)
  5. Cash in the bank

These are the numbers that provide questions, but no answers. Your bookkeeper only knows enough to start asking a few questions. Things like,

  • “I see you spent $40,000 last year on marketing, what was your return on that?”
  • “Your cell phone bills average $115/person, have you shopped around for a cheaper plan?”
  • “You have $6,000/year in Meals & Entertainment, is that necessary or can that be cut back?”
  • “It appears that sales are down 20% but costs are only down 10%, why is that?”
  • “15% of your receivables are more than 60 days past due, what are you doing to collect money?”

As you can see, none of the reports under Finance/Accounting provide any answers except maybe to the question, “Do we have enough money to cover next payroll?” That doesn’t mean we don’t look at these numbers because this is where we measure the results. If we add a turbocharger to an engine, ultimately we want to see that reflected in higher horsepower and torque. The same is true for your business.

To start answering the questions about why your business has less customers, less revenues, and less profits, you need to use Brad Sugar’s business chassis. Buy his book Instant Cashflow, learn the chassis, and use it. You can also learn about the business chassis on Brad’s blog.

Sales/Marketing – Now we’re getting into the fun stuff. Here’s a quick list of the numbers you should know in this realm:

  1. Number of New Leads (daily or weekly, though some establishments will even look at this by the hour of day)
  2. Conversion Rate (i.e. the % of leads who become customers)
  3. Number of New Customers (how many people have bought from you?)
  4. Average Dollar Sale (revenue/total # of transactions)
  5. Average # of Times a Customer Purchases from you Each Year (total # of transactions/total number of customers)
  6. Cost per Lead (for each marketing project)
  7. Cost per Sale (for each marketing project)

Do you see where we’re going with this? If our sales are down, now I can pinpoint if it’s because we’re getting less leads, converting less leads to customers, selling a lower dollar amount per transaction, and/or because our customers aren’t coming back as often. Now we’re getting somewhere! With these numbers you’ll even be able to pinpoint that you’re getting less leads because that radio ad you started 6 months ago is no longer making the phone ring. In the next few blogs, when I get to the step about Improving Marketing and Sales, we’ll look at specific ways to improve each of the numbers above.

Service/Operations – This is your back-end. Once you’ve sold a product, this is how you deliver it, service it, restock inventory, order more inventory, schedule service, and everything else that’s in essence “behind the scenes”. The important numbers for Service/Operations can vary quite a bit from industry to industry however the concepts are the same so make the proper adjustments for your industry.

  1. Profit per income generating person – this could be per plumber, electrician, waitress, sales associate, barista or anything else. If a person on your team has the ability to generate income, you need to know this number.
  2. Income per income generating person – this is important because often these individuals have more control over the income they generate than the costs they incur. That doesn’t mean their choices don’t affect the costs of the business, I’m just saying that a plumber can’t much affect the cost of gas or the distance to his job or the markup for parts or the hourly rate.
  3. Turn-over – how long does it take between buying something for inventory and selling it. Car dealerships look at “average days on lot”, retail stores look at “average day on shelves”, service-based businesses might look at “number of days from inquiry to finished service.”
  4. Profit-margins – In other words, the mark-up of each product or service. If you’re a service-based business you need to determine the cost/hour for your billable people to determine your profit-margins.
  5. Customer Complaints – You might be surprised how close your customer complaints as a % of customers served mimics your net profits.
  6. Uncompleted Work – For retail or restaurant style businesses you don’t really have an equivalent for this. People walk into your business, they buy something, you provide it immediately, and your work is done. For service-based businesses, however, this information is crucial. If work isn’t getting done, or you’re getting behind, or customers aren’t being notified of delays, you’re going to have problems. You need to know how many outstanding work orders, quotes, and return phone calls are out there so they don’t ever slip through the cracks.
  7. Free Work – This means you screwed up an order and gave someone a free meal, or a free hour of labor, or a free part, or a free legal consultation, or you had to go back to their home or business to fix a problem you didn’t fix the first time. You screwed up and had to make amends and the cheapest way to do so was to do it for free.
  8. Daily, Weekly, and Monthly Break-Even – In other words, do you know exactly how much you need to sell today, this week, and this month to break-even. Some businesses will even break this down to per shift if there are multiple shifts within a day.
  9. Lost Customers – Since my blogs have talked quite a bit about recurring revenue, you need to have a very close watch over your recurring revenue customers. If one of them calls to cancel services, you better have someone trained to try and save that account. This is almost impossible to track if you have a retail style business.

Those are your numbers. Obviously there can be more, however those are the most universal and the ones I’d look at for just about every business from a law firm to a candy store to a hospital.

To your “number-knowing” success, Bryan

P.S. If you’re wondering how you track all of these numbers, the simple answer is with industry-specific software. If you don’t have any, make it a priority to purchase or lease some right away.

Scientific Advertising

I finally finished Scientific Advertising by Claude C. Hopkins this past weekend and HIGHLY recommend it. The whole book is around 75 pages and can easily be read in a little over an hour.

There are 2 primary concepts that literally jumped out at me as I was reading. The first blindingly simple, yet profound, teaching of Claude C. Hopkins is simply:

“Your object in all advertising is to BUY new customers at a price which pays a profit.”

Did you hear that?

Just like when you go out to buy a car, or parts, or insurance or anything else for your business you expect (even demand) to get something in return for your money, your marketing is no different.

If you’re not verifying that your marketing is cost-effectively buying you new customers, then you are most likely just throwing money away.

The second point that Claude makes is really just a further clarification of the above statement. On the last page he highlights the fact that pretty soon all advertising agencies will only get paid based on the results they deliver.

Is that how you pay your advertising agency?

“The time is fast coming when men who spend money are going to know what they get. (hahaha, if only that were true in marketing today) Good business and efficiency will be applied to advertising. Men and methods will be measured by the known returns, and only competent men can survive… Enormous advertising is being done along scientific lines… We (advertising agencies) shall be prouder of it (advertising) when we are judged on merit.”

Does that describe your advertising agency?

Now it may be fair to assume that with the advent of new tracking methods such as Pay-Per-Click, Click-Thru-Rates, custom 800 numbers for each direct mail piece, etc. etc. that advertising agencies are indeed moving in that direction.

I would tend to agree, except… Scientific Advertising was published in 1932!

Now do you see why it’s so important to understand the concepts of “Scientific Advertising” that he promotes? For 80 years we’ve been able to track the results of our advertising dollars in terms of the cost/lead and cost/sale and yet we still aren’t demanding that from our advertising agencies (or from ourselves if we handle our own marketing).

It seems to me, however, that times may be changing.

Yesterday I was speaking with a gentleman who does sets primarily for TV commercials. He’s done it for over 30 years and has done sets for commercials, movies, TV shows, and music videos and so seems to have quite a range of experience.

In his personal opinion, TV advertising rates have dropped off so much over the last few years he imagines it will nearly disappear entirely within the next few.

Obviously I questioned him on that, but he insisted that, whether it’s simply a byproduct of the economy or not has not been proven yet, but if not, TV commercials are on the way out. Could that be because businesses are finally demanding results from their marketing or dropping it altogether?

In practical terms, this is how you hold your advertising agency’s feet to the fire.

  1. Track the following:
    1. Cost of advertisement
    2. Number of people who inquired because of it
    3. Number of people who purchased because of it
    4. Lifetime value of each customer
    5. Profit Margins
  2. Calculate the following:
    1. Cost of advertisement/number of people who purchased because of it – This gives you your “cost/sale”
    2. Lifetime value of customer x Profit Margins – This gives you the profit you’ll make off of each customer or “profit/customer”
  3. Compare the following: your “cost/sale” to “profit/customer” – If the “cost/sale” is higher than “profit/customer” drop that marketing project or figure out a way to improve it in a jiffy.

Let’s throw in a few numbers to make the point clearer.

  • Cost of advertisement: $1000
  • Number of people who inquired because of it: 10
  • Number of people who purchased because of it: 4
  • Lifetime value of customer: $2000
  • Profit Margings: 15%
  • Cost/Lead = $1000/10 or $100
  • Cost/Sale = $1000/4 or $250
  • Profit/Customer = $2000x.15 or $300
  • Our Profit/Customer ($300) is greater than our Cost/Sale ($250) so we keep the marketing

Keep in mind that you should always be improving your marketing to be more cost-effective.

In other words, even though we’ll make $50 profit on that advertising program, if we can improve our marketing or sales process to increase the number of people who purchased based on the same advertisement to 5 (an increase of 25%) our profit would double (increase of 100%) to $100 per customer.

To get some practical ideas on how you can better track your lead sources to determine your cost/lead and cost/sale be sure to check out my blog about why Asking your customer “how did you hear about us?” is a waste of time and what to do about it…

To your Scientific Advertising success, Bryan

The quickest way to $1,000,000 – Stock Market? Real Estate? Business?

Unless you’re a doctor, lawyer, or work on wall street most people will never be able to become millionaires without one or more of the above methods for generating wealth. As a matter of fact, less than 12% of millionaires get that way by virtue of their “jobs” according to The Millionaire Next Door. So what’s the easiest/best path to becoming a millionaire? Keep in mind, that we’re not talking about a get-rich-quick scheme, but instead the old fashioned way to make $1,000,000 as I blogged about before.

The most important concept to understand is leverage. The goal is always to do more with less. Whether that’s make more money with less invested or more money with less time, the more you can leverage your current assets the more quickly you’ll be able to acheive millionaire status. Now which option – stocks, real estate, or small business provide the greatest leverage?

In reverse order:

  1. Stock market – Once you acheive $1,000,000 in your bank account you can put that into a CD at your local bank for 5% and live comfortably off of your $50,000 per year in interest. Also, once you acheive a net worth of over a million with income of over $250,000 your stock broker can get you access to buying public shares at wholesale prices. In other words, the more money you have to invest the cheaper your per share investment will be. The problem with stocks is that you have to have money to leverage the stock market. Unless of course you can convince a bunch of other people to invest with you in which case you can leverage their money. However if you did that you would no longer be an investor you’d be in business. 😉 Typically a stock market investment prior to becoming a millionaire might look something like this. You invest $5,000 after doing your thorough research on EBB LLC and after a year manage a 20% return. That’s a VERY ideal situation but if you did that you’d cash out in a year with $6,000 or $1,000 profit. Not bad but not a whole lot of leverage there. If instead you invested $20,000 and you’re the next Warren Buffet who can sustain a 20% annual return for 21.5 years you’d be a millionaire. That’s before taxes of course.
  2. Real Estate – If you’ve been around real estate at all you’ve heard the often touted “statistic” that “real estate makes more people millionaires than anything else.” I say “statistic” because I’ve never seen hard evidence to back this up and even if someone produced it, I believe they’d be showing that people are paper millionaires. In other words, on paper their real estate is worth $1,000,000 if they sold it for a $1,000,000 but they don’t exactly have a million smackers in the bank. Real estate is beneficial however in that it gives you much greater leveraging power than the stock market. For instance if you buy a $100,000 property with $5,000 down (which would be tough these days) you would then have around a $600/month mortgage. If you then rent the property to someone else for $1000/month you now have a positive monthly cashflow of $400. Now here’s where the leverage comes in, if the property appreciates 5% in one year and then you sell it (by yourself of course since a realtor would take your profits), you would cash out with $14,800. Let’s say after insurance, maintenance, taxes and other expenses you actually walk away with $10,000. You invested $5k to begin with so you made $5,000 or a 100% return on your investment. Obviously this is an ideal situation however I’ve personally done nearly 100% in less than 22 months so it is definitely possible. If you were able to maintain a 50% return on your real estate investments every year by acquiring positive cashflow rental properties (with the first one worth $200,000) that appreciate at 5% annually you’d be a millionaire in a little less than 10 years. As a matter of fact, in Robert G. Allen’s book Nothing Down for the 2000s, he proposes just such a strategy to help you become a millionaire within 10 years. It’s actually a very good book that I personally credit for inspiring me to buy my first rental property at 21 while enrolled in engineering school. Obviously real estate offers quite a bit more leverage…
  3. Small Business – Here’s the bottom line, with around $5,000 out of pocket I’ve structured a business purchase that has yielded me in perks and compensation more than a 14 fold return on my investment within 12 months. That’s right, a 1400% increase on my initial investment in less than 12 months. Keep in mind, that’s on my very first business purchase and that’s without even selling the business yet. Since I’ve nearly doubled the profits in the business in my first 12 months, I would tend to think that my ROI will actually be well in excess of a 20 fold increase on my money. To make the math a little simpler, a 20 fold increase would be like investing $5,000 and getting back $100,000.

Now to make the comparison more accurate we need to take into account 2 more crucial pieces:

  1. Time
  2. Taxes

The only time I ever made money in the stock market required me to invest a lot of time in research before investing. Once I make those investments I should just be able to stick with them for years and so very little “maintenance” is needed. However that’s the get-rich-slowly method since we have little to no leverage of our money. So if your time is very limited this may be what’s best for you. However with capital gains around 35% your actual profits will be much smaller since when you cash in your stocks you’ll be taxed around 35% on the profits. There are creative ways to reduce that number but in the interest of simplicity we’ll leave it as-is.

When I had my rental property while studying engineering I was able to sufficiently manage my house, classes (while averaging over 21 credits per term), and racing so, though the time investment was constant and sometimes unexpected (like the time when the toilet exploded when I was a state away), it shouldn’t take over your life. Once you get 10-15 properties that’s a different story. As for taxes, real estate actually can be a great tax shelter however if you’re making money and your properties are appreciating you’re probably looking at close to 30% in taxes. I say that because capital gains on your profit will still be 35% however you have more deductions and, if you run it like a business, you can give yourself perks like business travel, laptops, mileage reimbursement, etc.

My business nearly consumes all of my time. Ironically, at the same time, I have more freedom now than I’ve ever had before as either a student or under the employ of someone else. In other words, I may have to trade a Saturday this weekend for skipping out next Friday for a long weekend but I don’t have to ask permission to do so. Overall my business is a full-time job that could still afford me the time for stock market investing and real estate speculation, but could not afford me (at this point) time for a normal full-time job. With 1-3 rental homes it’s very possible to have a normal full time job. The tax benefits of a business are so many and varied that I pay less than 20% of total income in income taxes.

If we take all of those into account here’s how our returns actually look:

  1. Stock Market – (after taxes and assuming a normal full-time job) $650 or 13%
  2. Real Estate – (after taxes and assuming a normal full-time job) $3,500 or 70%
  3. Small Business – (after taxes and deducting the salary I’ve been offered as an engineer) – $18,000 or 420%

So even after taking into account both my time investment (which wouldn’t be nearly as flexible working for someone else as an engineer) and tax consequences, investing in a Small Business as your first step to generating wealth is the best one because it offers by far the greatest leverage. Don’t forget that my ROI for Small Business still assumes that I make absolutely no additional profit when I sell the business. Obviously I don’t plan on that happening. 😉

To your wealth generating success, Bryan

P.S. My original out of pocket expenses for my business purchase were all lawyers fees that were reimbursed by my new business shortly after buying it which meant my inital cash investment was tied up for maybe 90 days versus the entire year for both stocks and real estate.

Shopping yourself – The best way to improve your business' conversion rate?

By shopping yourself, I simply mean determine exactly what your customers experience, record it, and review it to determine areas for improvement.

Paco Underhill actually wrote a great book titled, Why We Buy: The Science of Shopping, that talks about much of what he has learned through his Mystery Shopper business. His book and experiences are all geared toward improving retail closing ratios or conversion rates. In other words, he wants to figure out how to get the highest percentage of people to buy the most often. He doesn’t help with marketing or lead-generating in the sense that he helps get people into the stores, his business simply specializes in converting those people who have made a trek to your store into customers (or repeat customers).

Why do you NEED to invest so much time and money into your conversion rate? Because leads are expensive! In my business, leads cost around $78. In other words, to get someone to call me and be interested enough in our products to provide their name and contact information costs me $78 per call ($159 per call for Yellow Page contacts).  To convert those to sales costs me around $268. So right now I’m converting 1 out of every 3.5 prospects who call me into customers. As you’ll learn, these numbers are never perfect and this doesn’t include people who call me for service of existing equipment or to purchase ancillary products. This is simply the people who don’t have anything I offer right now and want it.

Now what do I stand to gain from increasing our conversion rate? Potentially thousands of dollars in revenue and profit. Since some of my new customers are rentals (or equipment leases) and some are sales it’s hard to get an exact “average dollar sale” of my new customers however here’s how it breaks down for new customers in 2009:

  1. Average new sale – $3798
  2. Average new monthly rental/lease – $52.78

Roughly 24% of new customers are rental/leases but let’s ignore that for a minute to keep the math simple. If I can increase my conversion rate for sales by 10% so that 1 customer buys for every 3.15 people who call (instead of every 3.5) that would have added about $32,283 to my business this year. In addition, though my cost per lead would remain the same at $78, my cost per sale would drop to $249 ($241 if I assume a 10% increase for both sales and rental/leases). To say that an even simpler way, increaseing my conversion rate by 10% results in a direct increase in gross profit of 10% on all of my sales. Not bad. And don’t forget we just increased our top line revenue at the same time so my actual Net Profits just increase by much more than 10%.

In the past I’ve reviewed how to increase your conversion rate. Since I’m always looking for new ways to do that, I’ve bumped into Paco Underhill’s book and into a company called teleXpertise. teleXpertise does the same thing that Mr. Underhill’s company does except they do it over the phone. They’re phone mystery shoppers and I must say they’re very good. Their recorded calls with your sales people will tell you a whole lot about the efficiency of your sales process. My business model requires onsite inspections before quoting prices so our process can be quite lengthy from the first call to a closed deal. Keep in mind that every interaction with the customer is a potential step where they can be lost forever however each step does not result in a sale… So each and every step has to be improved. To clarify what I mean by “steps” you’ll want to check out my blog on increasing your conversion rate.

Let’s talk a bit more about how they can help you increase your conversion rate by evaluating what I’ve learned. Keep in mind that I have my sales phone calls scripted and have gone over individual training with all of my team members on how to handle sales inquiries and the following still came up:

  1. Answering questions that we didn’t know the answer to. (though we thought we did)
  2. Not asking for the caller’s name or contact information (including email).
  3. Answering questions that we shouldn’t (because they’re based on what information we gather from an onsite inspection)
  4. Quoting exact prices over the phone
  5. Not using proper NLP techniques
  6. Didn’t always ask about what prompted them to call us

And what we did right:

  1. Cross-sold products (i.e. they called asking about X and we told them about Y)
  2. Tried to set the appointment with the customer (several times)
  3. Returned the customer’s inquiry within minutes (our lead catchers don’t set appointments our sales people call the customer back to set the appointment)
  4. Upsold products (i.e. they called about a service we didn’t offer and we suggested a better alternative)
  5. Differentiated ourselves from our competitors

So you can look at this information in 2 ways.

  1. After all that training we still did more things incorrectly than correctly so we suck (me in particular as the Team Leader).
  2. After all that training we still did more things incorrectly than correctly so just look at how much more money we could make if we always did things correctly!

Obviously I focus on the latter. It’s one thing to do the right thing by training and scripting, but it’s just as important to constantly train and improve. What was most surprising to me was I didn’t tell a single person on our team that we were using mystery shoppers until after they were done.  When I did tell them their conversations were being recorded they weren’t at all mad about it, they were actually excited to hear themselves. This may be partially because I set the bar for myself to constantly improve so I’m not asking them to do anything they haven’t seen me do over and over again and I stressed that before I told them what was going on. I also let them know how much we pay for leads so they can get a grasp of just how valuable each and every call is. The best part, however, was that they were very receptive to improvements and looked forward to doing better next time. That’s right, I assured them their would be a next time… 😉

To your increased conversion rate success, Bryan

P.S. As an additional note, if you’re buying a business you should definitely Mystery Shop the business ahead of time. If they did more right than wrong you may want to look for a different business. If they have a LOT of room to improve that might be the perfect business for you. Keep in mind that you prefer to buy businesses that just need to tweak the front end.

Buying a business – Step 2 – The Broker

When buying a business for the first or even second or third time there are a few things to keep in mind to help you a long the way…

The first step is obviously finding a business. I’ve blogged before how I’ve found several offers to buy or otherwise acquire businesses in a short amount of time and even blogged about finding a business for little to no money down. In addition to those few examples, I mentioned 2 other great resources are:

Bizbuysell.com

Bizquest.com

Both have some easy to use tools to find the exact business you’re looking for. Keep in mind that the best businesses have a great Cashflow to Asking Price ratio. In other words, if a business has a cashflow of $100,000 you should want to pay as close to $100,000 (or less) as possible. Ideally you’ll pay less than 1 times Cashflow plus assets. So in our example with $100,000 in cashflow if they also have $200,000 in assets a price less than $300,000 would be quite a deal. 🙂  Convincing the seller and a business broker of that might be a little more tricky so be prepared to justify your valuation. Keep in mind that business valuations can be quite subjective. In my experience, a broker can either be your best friend or worst enemy. If you are able to convince him you’re the man for the job, he’ll do his best to convince the seller you’re price should be accepted. Even though he represents the seller, he only gets paid if someone actually buys a business. It’s important to keep that in mind and use it to your advantage. Now how do you do that?

The game plan is rather simple. The trick (like usual) lies in how well you’re able to communicate it. 😉

  1. Make sure he likes you. – This is important because he’s the gate keeper. Heck, he may even be “screening” potential buyers ahead of time. Without his blessing, you don’t see a Non-Disclosure Agreement or ever meet with the sellers. Be comfortable but confident in your discussions and if you find common ground, certainly use that to build rapport. If you get along well with most people and can speak coherently (even under pressure) this becomes second nature and not a step that even requires planning. Check out How to Win Friends and Influence People and Persuasion: The Art of Getting What You Want for more details.
  2. Make sure he thinks you can do the job. -If he doesn’t think you have the ability to run the business being sold you’re not going to make it very far. Be prepared for questions like “Do you have any experience in this type of business?” (he’s making sure you can actually get the job done), “Are you looking at any other types of businesses for purchase” (he’s determining your commitment and passion to this field), and “Do you have management experience?” (he’s assessing whether you can take over and lead a team effectively especially with the nuances of a new owner/leader). I’ve spoken with enough of these guys that I generally have preplanned stories in mind to respond. Always remember that stories that illustrate your capabilities are the best way to get your point across. If this is your first business purchase and you want to sound like an expert, read my blog, the Best 6 books to teach you how to generate wealth, and practice “interviewing” a few business owners to learn how they implement “book lessons” in the real world. Explanations for leadership styles based on books generally do pretty well with business brokers since they’re in effect consultants themselves. They get to look at and evaluate businesses every day without getting involved with what’s needed day-to-day so the perfect answers that you read in books are what they want to hear. For instance, when a broker asked me if I had any management experience I explained my philosophy on being a Team Leader instead of General Manager. He immediately interrupted me and said it sounded like I was a big fan of the Deming philosophy and Six Sigma and I had a great leadership philosophy. Now that he was on my side I shot back “So do you think my style would work well in this business?” – obviously looking for additional details that could help me in my negotiating.  His response was that for liability reasons he couldn’t respond specifically about how my philosophy would work however “it’s a proven philosophy that would do well in any business.” You think he liked me and thought I could do the job after that? 😉
  3. Make sure he agrees with your valuation. – You always save this step for absolutely last. If the broker and owner trust you, thinks you’re capable, and you’ve done your preliminary due diligence and you still want to proceed you start working on explaining why you think the business is worth less than they do. This is possibly the toughest part, but it doesn’t have to be. In one business I was evaluating the owner didn’t have any cashflow or even profit and loss statements. For that reason it was very hard for me to value the business. Obviously it made it even harder for the broker to value the business which was something that rather annoyed him. So he recommended to myself and the seller that this should be an asset only transaction. The transaction never materialized however it was kinda nice to not have to do much negotiating that time since my goal would have been an asset only purchase as well. 🙂  You won’t always get that lucky, so you need to spend a bit of time educating yourself on proper business valuation models so you can “talk-the-talk”. Check out my blog on why banks don’t know what your business is worth and my other one on EBITDA for more information. Simply low-balling with no justification or explanation is a bad idea. If you’re dealing with an individual who is selling on their own, chances are they have no idea how to truly value a business and so will be more apt to agree with you if you know what you’re talking about. Beyond that, one broker told me there are about 12 valuation models that are “commonly accepted”. With 12 valuation models, do you think they all work out to the business being worth the same amount? Of course not. The bottom line is cashflow and assets so make sure you stick to that. Business growth potential aren’t worth anything and should never be something you pay for.

That’s your quick overview of dealing with a broker (or even seller without a broker) on a business purchase.

To your business buying success, Bryan

A few more ways to get tax-free money from your business…

As I’ve pointed out before, when dealing with customers, team members, suppliers and even the tax man I’m not at all a fan of doing anything “under-the-table” or unethical. So keeping that in mind, here are a few ways to get tax free money from your business.

  1. Credit Card Rebates – This would be the ever popular cashback, rewards, points, and travel credit cards. The IRS currently has no provisions for rebates of any kind so this can easily add hundreds (if not thousands) of dollars in cash, gifts, or travel expenses into your pocket tax-free. I personally have 3 rebate cards. One from American Express, one CapitalOne visa, and a Discover card. The rebates range from 1-5% and in about 8 months of random purchases (both personal and corporate) I accumulated over $500 in rebates. My personal preference is to receive cash rebates so I can spend the money wherever I want however I’m looking into travel rebates since I tend to travel a lot.
  2. Purchase Rebates – These are the rebates you find at large retailers where you buy a fax machine and can receive a $50 mail-in-rebate. Guess what? The total expense is deductible and when the rebate comes in the money is yours. Check with your accountant (cause I’m definitely not one).
  3. Marketing – This is one of my favorites. A few weeks ago I sat down with my accountant and asked about my business sponsoring a race car at the local track. Turns out it’s 100% deductible. The racecar (or motorcycle), repairs, gas to get there, parts, etc. etc. can all be written-off as marketing expenses. If you are always racing something like me, then you really shouldn’t let this tax-free racing budget pass you by. Of course your race vehicle needs to advertise your business.
  4. Personal Development/Training – My accountant just educated me on this one recently. Currently I have 2 businesses that are about 4 hours apart with a total territory that would take me about 12 hours to circle by driving. Add to that the possibility of another business about 4 hours away in a different direction and the benefits of flying become quite obvious. So I’m working on getting my personal pilot’s license so I can fly myself around for business and also a bit just for fun. Just like with a company car, you need to figure out how much of your time is truly business and how much is personal and allocate the proper amount of your flight instruction and flying lessons through your business. Of course that would be a direct, pre-tax, business expense.
  5. Gifts – Not sure if this varies by state or is just for federal however my accountant informed me that a performance based incentive of up to $400 can be awarded to all employees without claiming it as taxable income each year. This can be in the form of a gift or simply cash. Hopefully you’ve performed well enough in your business to earn such an award. 🙂

It seems like I’m learning new, creative, legitimate ways to benefit from owning a business on a weekly basis so as I learn more I’ll post them. If you have any great ways to lessen your tax burden legally please let me know!

To your success, Bryan

P.S. I’m not an accountant and everyone’s situation is different, so make sure you check with your accountant before starting any of this. 🙂