Embedded Files
By Bob Fifer
Anyone who cares about the profits of his or her business should read this book summary.
Profit = Revenue – Cost = You need to increase revenue and decrease cost wherever and whenever possible.
Part I - Creating the Culture
The driving goal of any organization should be one simple thing: to be the best.
We're here to make a profit. We're here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. Profits measure how much our customers value the products and services we deliver, and how efficiently we can organize and operate to deliver that value to our customers. Profits benefit all of us - profits provide cash for shareholders, for managers' and employees' compensation, and for investment which creates growth, which in turn creates rewarding career path opportunities. When the profits slow down, we all suffer.
Never apologize for maximizing profits because if you're unapologetically excited about profits, your employees will be too!
Strategic costs clearly bring in business and improve bottom line, such as salespeople, advertising that works, and commercializable R&D.
Non-strategic costs are all the other costs, such as admin, managers, clerical, rent, consultants, lawyers, accountants, computers, office supplies, etc.
Great organizations will outspend competitors on strategic costs (as % of revenue) in good times and bad times. This requires intelligence and judgement.
Great organizations will ruthlessly cut non-strategic costs to the bone and require the burden of proof to justify costs. This requires an unwavering suspicion of every single non-strategic cost.
This simple concept, applied with commitment and unwavering resolve, is the most powerful profit-maximizer.
No business ever made a penny on a forecast. Optimizing profits is what the business is here for, not predicting them. Eliminate 80% of the people resources dedicated to forecasting and number-crunching and spend that time on making money, not counting it.
Trick from Harvard professor: Any time you are faced with a decision and can't make up your mind, do the following - give yourself 2 seconds to decide. Not later, right now. Hurry. Your 2 seconds are up. Okay, you decided. Now go away and do all your homework and number-crunching and come back with your real decision. 10/10 times the "2 second" and the "heavily researched" answers are the same.
It's better to be approximately right than exactly wrong.
Don't over-delegate and don't under-delegate. Empowerment is great if you are empowering your people who have the skill and organizational means to focus on profits.
Maximizing customer satisfaction leads to bankruptcy. Provide elements of differentiation that the customer is willing to pay for and NOT differentiations that they’re not willing to pay.
Strategic time is defined as anything you do that produces profits.
Non-strategic time is defined as that which is "busy" and succumbs to the requirements of "processes," but which does not contribute to profits.
Change the way you manage your own time and encourage those around you to do the same. How do you act, how focused are you on results, how much of a hurry are you in, how intolerant are you of wasteful, time-consuming parts of the day? Be intolerant of wasteful parts of the day.
Message of a superb leader to his or her organization:
We are a great company, an incredibly exciting place to be
We are here to make a profit
We have so much more yet to accomplish, and so much uncaptured opportunity
Every ounce, every fiber, every dollar, every minute of our organization will focus on realizing our potential and making a profit - and we will ruthlessly pursue anything that contributes to that end
Every other non-strategic dollar and every other non-strategic minute will be ruthlessly stamped out. What is it employees want anyway? To work for a great company or to merely punch a time clock? When you bring in a new customer or eliminate an unnecessary cost you are helping make a great company. When you sit in a meeting or fill out a form or crunch numbers or fiddle with technology no one will buy you are helping sink the company and yourself into mediocrity.
How to start each work day - divide everything you have to do into 3 lists:
First list includes anything that brings in new business (i.e., raises revenue) or eliminates costs because these are the only two ways you can create profit because profit = revenue - cost
Second list includes things I have to do to "maintain" existing business or keep an existing internal operating system running
Third list includes all the things that someone expects or wants me to do, but which really adds no value to the bottom line
You never start on your second list until you've done everything on the first list, and never start the third list until you've done everything on the second list. You have to make sure that the most important things are completed with the most urgency. Always set near term, quick deadlines.
The author's philosophy is to always keep resources very scarce because that is the only way to force people to soul-search about which tasks are truly value-producing and which are not.
Never call a meeting to discuss - only call a meeting to decide.
Create and maintain a strong sense of urgency in your business because everyone admires "doers."
Your goal is to be small in terms of employees (costs) and large in terms of revenue.
Infinite feedback loop of culture + action + results + culture + action + results + culture + action + results + ...
Part II - Cutting Costs
The first step towards reducing costs is to see every cost as, at best, a necessary evil. Day-to-day manifestation of this policy is that every cost is "up for grabs." Ask yourself and your team, "if we eliminated this cost, would we really lose revenue or profits? How and where?"
Cut costs first. Ask questions later. Let's not keep spending Cost A unless we're sure we need that cost. When in doubt, cut more and spend less. The comforting thing about cutting costs is that, if you do make a mistake, somebody will always tell you and you can add the cost back.
Set arbitrarily, judgmental, non-negotiable, very tough budgets, and then leave it up to the leader of that function/business unit to figure out how to stay within the budget.
Here's a highly effective means to achieve sure-fire cost reduction: announce that anyone wanting to spend money in that area has to contact you first and ask you personally for your permission. Some employees write concise, convincing arguments for why they need the money, and you can approve those requests. It turns out that everyone loves to spend money in anonymity, and no one wants to be singled out and have to go to the boss to ask for money, unless his or her case is a worthy one.
Never spend money by accident or routine. Always make the spending of money a difficult process that must jump through several hoops to prove its worthiness. No cost is too small to worry about. Scrutinize every cost and be consistent.
Toughness + Competence = Respect
Toughness + Incompetence = Resentment
Employees are much more adaptable than you realize, and they can quickly adapt to each new level of expectation.
Start cutting costs in the most painless place - suppliers. You can aggressively manage the prices paid to suppliers for goods and services from the procurement/purchasing department. Ask managers: "If you were offered a $1,000,000 bonus if you could raise your margin by two points by the end of this year, and no bonus if you do not, where are you most sure to get the two points - by making customers to pay more or by getting suppliers to charge less?" They always answer suppliers.
Never let your purchasing person negotiate the price because the worst person in the world to negotiate price with your suppliers is your purchasing person. This person has a personal bond with the supplier. You need some exogenous shock to the relationship that forces the supplier to aggressively lower its price. You need someone to be the "heavy." You can appoint a "cut-purchasing-costs czar." You must have a bad guy, whose role it is to scrutinize the cost of each purchased item. Your employee can say "I can't help it, Mr. Supplier, but Czar says this is the top price I can pay. I don't think it's fair, but I can't help it any more than you can. Do you want our business at this new price or don't you?"
First rule of negotiating is to tie your negotiator's hands. Empower the negotiator to accept concessions, but not to give them. Apply this rule to your purchasing function.
Send a letter to all your suppliers stating that times are tough and henceforth (or for the next 12 or 18 months) you will accept no price increases, so don't even bother sending them along. Advanced option: send the same letter, but instead of declaring a freeze, declare an across-the-board 3% reduction! Make sure the letter comes from the CEO. You'll be amazed at how many of your suppliers roll back prices 3%. For those who don't, when the bill comes have your purchasing agent deduct 3% from the bill and say "Didn't you read the letter from my CEO? What are you trying to do, get me fired?" Another group of suppliers will give in at this point.
For the largest (i.e., most dollars) 50 items you buy, when was the last time you put each out to competitive bid? You can tell your suppliers that every price increase triggers an automatic, serious competitive bid.
"No" from a supplier rarely means "no way," it just means "I'd rather not." They want to make the sale, and care less about the price. Make them truly believe that the sale depends upon lowering the price, and the price will come tumbling down.
Budget 15% savings for purchased products and 30% savings for purchased services.
Find out who your competitors buy from and how much they pay. Then use that data to cut your costs.
Ask your R&D people to divide all their projects and expenses into 5 categories:
Pure, basic R&D
New product R&D
Improvements to existing products
Process R&D (i.e., R&D to lower the cost of your manufacturing or operations)
Customer R&D (i.e., work your engineers do with the customer to tailor products to the customer's needs and applications)
The best, most profitable companies spend a lot more than their competitors on #5 Customer R&D and #4 Process R&D and a lot less on #1 basic R&D.
Everyday expense items to cut include first-class travel, other travel, spot check expense reports, furniture, copiers, office equipment, maintenance contracts, subscriptions, telephones, and "contracts" with suppliers.
Every company can comfortably withstand a 40% reduction in its office supplies budget. Just do it.
Office space - choose a lower-cost suburban location. Double or triple people up whenever possible. Eliminate unused "airy" central space. Office size should be functional, not luxurious. If you're not in the real estate business, don't pretend that you are.
Nothing will make it clearer to your employees and to yourself that you are serious about maximizing profits than giving up your own office.
"Sign" all the checks yourself, so you get your eyes on every bill the company pays.
Capital Expenditures - Capital = plant, property, and equipment = costs real money. The numbers are big, so scrutinize your capital budget intensely, and you'll add millions of dollars to your true bottom line.
One easy way to lower your costs this year (although it only works once) is to extend your payables. Keep extending your payables to 45 days, then 60, then 90, then 180 days. Never pay a bill until the supplier asks for it at least twice.
Before reordering an item, make sure your inventory is running as low as it possibly can. If you extend your payables by 30 days and reduce your inventory 15 days, then you've just reduced this year's costs for goods and services by 12% = (30+15) / 365!
If you never fire an employee, you can't have an excellent business. Meritocracy is rewarding people differentially, based on performance. Plan to fire 3% or more of employees because 0% is the wrong number.
Keep human resources scarce. When someone asks to hire a new team member, say no 3 times until they are practically screaming for a new hire. A truly busy employee is forced to prioritize (3 lists from before) and do only the truly worthwhile things. Parkinson said, "Work expands to fill the time available." with the corollary that "Work expands to occupy all the people available."
Setting salaries requires a generous balance:
For groups or levels of employees who have a direct impact on your company's bottom line performance, average pay should be far more generous than for similar positions at other companies. These are the employees whose presence and enthusiasm you must retain at all costs.
For other groups of employees, you should be more generous than most other companies, but don't need to be "off the map."
Within any level or group of employees there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.
Above average people will love working in this culture, and those are precisely the people you want to attract and retain.
Never give "regular" bonuses. Create a clear relationship between performance and irregular/ad hoc rewards.
Titles are cheap. Distribute them generously. If you don't want to give someone a raise, give them a fancier title.
You are motivating employees by:
Driving your business to be the best, and highly profitable
Clearly communicating what performance and behaviors are desired
Rewarding in a way that is consistent with that communication
Rewarding highly differentially across employees, based on differences in performance
Paying very well, when it is deserved
Working hard to train your employees, both explicitly and by exposing them by example to the management and life lessons you have to offer
Saying, "Stick with me and you'll learn a lot and be paid generously. What I ask in return is that you strive to be the best, and to help the business achieve its objectives."
Cut costs by eliminating most of your "administrators" and "managers." Focus your team on salespeople, client account managers, workers, and doers - who manage a little on the side.
The vast majority of business decisions are made based on instinct, judgement, and rough numbers. You need "actionable" level of accuracy. If you're not sure whether a number is 10 or 12, then ask yourself, "would I do anything differently if I knew it was 10 or 12?" If the answer is no, then call it 11 and go on to your next decision.
Reduce the paper flow/inbox overloading by decreasing the number of cc'ed people.
Streamline your meetings. Make your decisions with as few people in the room as possible. Keep your meetings very short. 5 minutes is long enough for most decisions and 30 minutes almost always is. Never call a meeting to discuss - only call a meeting to decide. Make decisions, call customers, cut costs, and take action all day long.
Cost-cutting and profit maximization is not rocket science. It's determined resolve.
Part III - Increasing Sales
The first law of superb selling, if you sell to commercial accounts, industrial accounts, distributors, or retailers and not directly to consumers, is that there is no such thing as companies, only people. You sell to a human, emotional, somewhat irrational person, who makes the decision by applying the issues of ego, personality, and irrationality.
When you walk into a prospective client's office, first thing is look at the pictures, usually of spouse and children, and ask the client about these people. Use clues in the pictures (i.e., little Johnny's basketball). When you become a father or mother, you also become a much better salesperson because you can empathize with the joys and anxieties that many clients feel as parents, and can form a better bond with them in that initial conversation when you walk in the room. Look for mementos or symbols of things which occupy a special place in our heart, and which we like to talk about.
Flattery works. Don't forget to flatter whomever or whatever is the object of their affection (and therefore you flatter the client by implication).
Always remember you are selling to a person, not a company. Always get them to tell you the real reason they want to buy the product or service.
During the discovery phase, probe deeper. Why do you think XYZ? Why are you ABC? Why not? What's stopping you? Who is the obstacle? Define the real problem.
Never leave the prospect meeting, never stop asking questions, until you get his or her real, personal agenda. People's true agendas could include seeking a promotion, avoid being fired, something bigger, educate others, sleep better at night, or other personal reasons.
Let your prospect know you will stand in front of a truck for him or her. Make them feel like you are absolutely dedicated to meeting their needs by applying all of your skill and energy single-mindedly to support them. "If you hire me, you will have the most dedicated, energetic, loyal support person you've ever had. I will be even more driven to meet your needs than you are yourself. I'll stand in front of a truck for you if that's what it takes."
Bob Fifer's 5 Ingredients for Completing a Sale
You must show your competence. Your product is good, you're reasonably smart and a nice person, you'll provide good service. Most basic ingredient.
You must show you empathize with the customer personally (see above)
You must convince them you'll stand in front of a truck for them (see above)
You must make it clear that you don't need them. To say it another way, you sell by making yourself scarce.
Use "guilt" to transform your personal interest in him into his personal obligation to you
Almost all people on the planet think of themselves as fair and ethical. As a salesperson, you need to hold them to that fairness standard. If you're going to go out on a limb for them, the least they can do is give you a fair (monetary) return for your efforts. That's the real reason, ultimately, for establishing the personal connection and standing in front of a truck for a customer. Because once you've done that, you can turn around, look them in the eye and say, "By all fairness, here's how much money your company should pay me. I've been with you every step of the way and more, I've gone the extra mile for you, now it's time for you to go the extra mile for me."
Think about these five ingredients to completing a sale. Sleep on them. Internalize them. Make them second nature.
Products are ultimately purchased by the "consumer," and the purchase is always irrational. No one ever went broke underestimating the intelligence of the American public. The power of brand image in consumer products is huge.
There's only one thing you ever need to know about marketing - you're selling the customer a 3/8 hole, not a 3/8 drill. Customers don't buy products. Customers buy the satisfaction of their needs. At one level, their needs are tangible - the hole they need. At a deeper, more fundamental level, their needs are psychic - I want my friends to see me driving an Audi. Smoking Marlboro makes me feel like I'm out West with the Marlboro man. Taking my kids to a baseball game reminds me of when my dad took me.
Sell the hole, not the drill.
No two customers are alike, so tailor your offering and your sales pitch. Leverage your individualization strength. You can tailor the terms of the sale, the level of service, the way you interact with each customer/type/group.
Knowing customers is more important than knowing computers. Think about how to sell to different channels, what channels you offer their customers to choose from, different ways to pay for products and earn discounts, or how to segment the product itself. Maximizing your profit means creatively and energetically tailoring that good idea to every possible (and profitable) segment of the market.
Selling is an explicit science. Think about: What makes your customer tick? What did I do in this sales call that worked? What didn't? What can I do better next time? Why do people buy the things they buy? What can I learn from reflecting on my purchases? A key to maximizing sales is to see sales as an explicit, complicated process that offers infinite, never-ending opportunity for you to get even better. Look at role models all around you to study them, learn, borrow, and steal ideas/tactics/strategy from them. Never make the same mistake twice, and you're maximizing your own ability and your business's success.
You must convey to customers in every way possible that you are CERTAIN, BEYOND A SHADOW OF A DOUBT that if they buy from your organization, they will wind up not only satisfied, but THRILLED. You convey this with your words, your tone of voice, your body language, your written communications, and more. Convey 100% confidence. Show no doubt.
Tell prospects at the end of emails: I am certain that we will more than meet your needs.
When a prospective customer asks you if your company can meet such-and-such a need, the only correct response is "It's all we ever do."
The selling process is your best chance to show the customer what you can do. Send written response or proposal out the same day or the next day at the latest. Respond very quickly. Respond very professionally. Make sure every communication which the customer receives during the selling process is of very high quality. Communicate in a variety of ways your flexibility and your willingness to do whatever it takes to meet the customer's needs.
Re-selling starts the moment you make the sale. "Deliver the goods" in such a way that compels the next sale. Radiate confidence, competence, and a can-do attitude. The confident salesperson starts the next sale the moment the first sale is complete, and in selling, confidence is a self-fulfilling prophecy.
Selling is the attraction business. Each of us buys things from people we like, are attracted to, or at least intrigued by in some way. Part of a successful sales process is to project attractiveness (broadly defined) to the prospective customer. Attractiveness means charisma, manners, likeable personality, sense of humor, interest in current world events, good listener, easy to talk to, dressed well and appropriately, in good shape, and properly groomed. Attractiveness all by itself won't do it for you, but it's absence will definitely hurt you.
People who ask for more get more. Just ask for it charmingly and persistently enough. The simplest sales rule of all is to ask for more: More than you've gotten before, more than the customer's talking about, more than your insecure self thinks you deserve. Often, they'll give you more rather than try to overcome their own insecurities. Rule of thumb: Ask for 5 to get 2. Ask for 5 referrals to get 2 referrals.
The key to making the mental leap to "asking for more" is to overcome your fear of failure or rejection. The key to overcoming your fear of failure is to redefine the task and therefore redefine what constitutes failure. You must broaden the definition of each "battle" to five battles, or ten battles, or a month, or a year. Track your salespeople's sales on a twelve-month moving average = person's average monthly sales over the past 12 months. This time period is sufficiently long to get people to focus on their overall track record, not each sales call.
Think of each ten calls as one call. Did one of the last ten calls succeed? If so, then your last "unit of salesmanship" (ten calls) was a success.
Pricing - you're leaving money on the table - make sure you're charging every customer the most that customer is willing to pay.
Exercise: list your top 20 customers. For each customer ask yourself, "if I raised my price by 2% would I truly lose the customer? If no, then try 5%, 8%, 12%, and 15%. You need to price maximize because no one else will do it for you. Your goal is not a perfectly happy customer, but a profit-maximized customer!
Determine price, then product/service, not the other way around. The first and most important thing to do is figure out the maximum the customer is willing to pay. Then, scope the product or service appropriate for that level of expenditure.
Ask them what price they want to pay. Approach 1 is to state ranges and let the customer respond like "I've seen a project like this done for $50,000, $100,000, and $200,000, depending on level of detail. So as not to waste my time or yours, give me some sense of what level fits your budget." Approach 2 is consistent with the teaming mentality like "It doesn't make sense for me to 'guess' at a price and then scope a product to that price. If I'm too high, we won't do business together, and we both lose. If I'm too low, you're getting less product than you really want and need. We're on the same side here, and need to work together. The more straightforward approach is for you to tell me how much you want to spend, and then I'll scope to that price. We can make any adjustments as necessary." Get comfortable asking your customer to name the price, and learn to avoid pricing your product/service yourself.
Human behavior observations: Never underestimate the power of a direct question. If you ask someone something directly and in a determined voice, the majority of people will feel compelled to answer and answer honestly. Silence can be an enormously powerful negotiating tool because once the price is named, whoever speaks next loses the negotiation. When you ask for a price, just stay quiet. Avoid your temptation to help the customer out of an awkward situation. Don't say a word. Your silence demonstrates your confidence and resolve. Silence is a voice that has to be filled. If you stay quiet, the customer will eventually get around to naming a price.
To capture the consumer surplus for mass-market products, price discriminate. Ask yourself, "How do I create relatively small but highly visible differences in the various offerings within my product line, so that I can capture the most each group of customers is willing to pay (i.e., capture the consumer surplus)?"
Price discrimination is to the mass market or B2C what "asking what they want to pay" is to the commercial or B2B market. For both, the goal is to get each customer to pay the most he or she will pay. The profit leverage is enormous.
Get the highest possible price, but don't lose any customers. When negotiating price directly with a customer, carefully balance to raise the price as high as you can, but don't issue any ultimatums that force the customer to say 'yes' or 'no.' Instead, selling and pricing questions should always be phrased so that the only two possible answers are 'yes' and 'yes, but at a lower price, please.' This ensures you don't lose any customers. For example, "Based on everything we've discussed, I think the price should be between $20,000 and $30,000. I'll do it for $20,000 if you really want because I want your business, but if I were you, I'd pay $30,000. The extra value will definitely be worth it." Several potential responses to this, but none of them are no. You've kept yourself alive, and you're getting the highest price you possibly can.
Be dignified about pricing. Don't mention price until the prospect mentions it. The single most valuable lesson the author has learned from the British is that discussing price is "beneath" the dignified businessperson. The attitude to take is a reluctant, professional, matter-of-fact one. "Oh by the way, here are some numbers about what it might cost, but what you and I really care about is the professional delivery of quality goods or services. We don't want to haggle like a couple of people at a bazaar, do we?" This works well paired with the "ask them what price they want to pay" method above. If you take the high road, then he or she will follow.
Remember. Price has nothing to do with cost. When you set your prices, you never look at cost. You price what the market will bear. The author states that no single lesson from Harvard has served him or his clients better than that one.
Marketing dollars are strategic, and strategic costs are the long-term lifeblood of the business. Outspend your competition in good times and bad times. You want to ruthlessly minimize non-strategic costs, so as to maximize profits and so as to free up money to spend on marketing and other strategic costs. You want to outspend your competition in marketing, either in absolute dollars or as a percentage of sales.
Good marketing often requires using a shotgun (i.e., 9/10 readers won't buy, but 1/10 is good enough to justify the marketing spend). Do the math for your business and figure out how wide a shotgun would pay for itself. Spread your marketing net wide, and worry only about the customers who buy, not those who don't buy.
Invest in your salesforce. No investment will yield a greater return. Salespeople sell. Every salesperson has a built-in and financially motivated need to sell. The best salespeople are coin operated. Salespeople meet with prospects, hustle, and generate sales.
Make sure you have enough salespeople.
Make sure the salespeople spend their time with the customer, and not doing administrative work or other things.
Hire enough relatively low-paid clerical people to support the salesforce. This frees up the salespeople to spend time with customers.
Compensate salespeople highly variably, as a function of profits, not sales. Gross-margin-based instead of sales-based
Hire salespeople who understand how to sell and how to make a profit, not people who 'know the product.' People who truly know how to sell are the rare and valuable ones. Anyone can learn the product line.
Invest in sales training, focused on true selling and profit-making skills, not just product facts.
Get a top salesperson at three companies you admire (in industries other than your own - it doesn't matter because selling is selling) to speak to your salesforce about the key areas to their success. Your salesforce is your most important asset, and investing in your salesforce is a strategic cost.
Part IV - Personal Advice
Be stubborn.
"I'm stubborn. I know what I want to achieve. I see a way to get there, and I believe in that way. And nothing or no one is going to stop me from getting there, no matter what they do or say." Believe that you are more determined than almost everyone else, and you are going to find a way to make money off of it.
Keep work in perspective. I recommend setting strict limits on when you are willing to work and when you are not, and then sticking to them. Your family, your friends, or your favorite recreational activities are more important than work. If you have other things in life that are more important than work, then you are in a positive frame of mind necessary to do well at work, and you have the proper sense of perspective and detachment necessary to see business as the game that it is, and to play it well.
You are playing an infinitely variable game of intuition based somewhat loosely on a large set of rules. Your job is to know when to apply which rule from this book and which tactic to which situation.
Stretch yourself, and have fun. The nice thing about business and the subject of this book - maximizing profit - is that the process is variable and subtle enough that it is impossible to ever get to the finish line. You can always do better!
See business as a game, with a healthy sense of detachment. Never completely settle in and always try to be better because that's what makes the game fun.
Profit = Revenue – Cost = You need to increase revenue and decrease cost wherever and whenever possible.
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