Please bear with the lengthy prologue to this blog. I promise, I have saved the best part for last.
As you may know, I was an early entrepreneur. My first business starting at age 14 was running concession stands at rural Kansas ballparks. I didn’t know anything about business when I started, so I talked to a lot of business owners that I knew around town. They basically told me two things: work hard and focus on the profit margin. That seemed like good advice.
Based on that advice, my criteria for hiring the 30 or so people I eventually needed to run those concession stands consisted of two questions: Will you work hard and are you good at math? That way I figured I could teach them how to be profitable as I was taught.
One day I was giving a new employee my profit margin speech, and she asked me: “Well, what’s the most profitable thing you sell?” I thought a minute, but the answer was obvious: Snow cones. They’re made of ice and a tiny bit of syrup, and come in a small paper cup. Which meant that what we sold them for was close to pure profit.
So we set out to sell more snow cones. First, I created a marketing and advertising strategy. We would post ads on the scoreboards at the ballparks promoting snow cones, figuring if folks knew we sold them, they’d be more likely to buy them. Result? Nothing; no increase in snow cone sales.
Next, we came out with a new product strategy, a “rainbow” snow cone consisting of all four flavors we offered. That gave sales a bit of boost, but we couldn’t deliver the new product quickly enough, because it takes twice as long to create a rainbow snow cone as it does to create single-flavor snow cones. (Interesting stuff, right?)
I went on implementing new strategy after strategy which employed variations on our marketing, sales and advertising campaigns and new product strategies. Nothing produced a great enough result to say we were successful at selling more snow cones.
Frustrated, I went back to one of my business owner mentors and explained our problem. He listened for a minute and then said: “You’re approaching the problem too logically. There is nothing logical about running a business.” I didn’t get what he was saying. Of course, I didn’t. It’s not logical.
Then he asked, “When people didn’t buy snow cones what did they buy?”
The answer was Coke.
“And what was the price of Coke vs. snow cones?” he asked.
We sold them for the same $0.75 (this was back in the day).
He then said: “You don’t need any fancy strategy. Coke is the problem. Coke is competing with snow cones on price.”
We doubled the cost of the lower-margin Coke to $1.50. Our snow cone sales tripled and we doubled our profit margin.
As silly as this story sounds, I often think of snow cones when I am working with independent advisory firm owners. The mistake we were making as kids is one that business owners make all the time: They assume that they know what the problem is and rush to solve it.
I’ve come to believe that the reason we all make this mistake is two-fold. First, it’s comforting to think that we “know” what the problem is, and consequently we have it “under control.” (Of course, we have it under control; the solution is logical.)
Second, it’s unsettling when there’s a problem with something important in life, such as our business. So we want to get it back on track as quickly as possible: Which means jumping into action rather than taking the time to try to figure out what the real problem is. As you might imagine, more often than not, this “need to act” does not solve the “problem.” Instead, jumping into action wastes time and resources at the least or, at worst, makes the problem worse or creates other problems.
Here’s a common example. Owner-advisors often have problems with their growth. Nine times out of ten, the owner blames marketing—and wants to “solve” the problem by implementing a marketing strategy. But in the vast majority of cases, when we talk to these owners, they tell us that they don’t know where the business is going and they haven’t seen any leads for a while.
Upon hearing this (assuming we can talk him/her down from investing any money in marketing anyway), what do you think the firm owner wants to do next? Invariably, it’s to create a strategic play, set some goals, and write a detailed growth plan. Don’t get me wrong: those plans are useful. But they are useless if they aren’t tied to specific actions to be taken—and of course, they don’t solve the immediate problem of growth.
The better course of action is to either solve or identify the problem. In this case, we’d suggest looking at ratios. What is the close rate? What is the gross margin? What is the client retention rate? What is the pricing structure to profit?
If we see problems in these ratios, we fix those things first. Low close rate? We fix the sales process. High gross margin? We fix the employee productivity problems or the organizational chart. Low retention rate? We fix the service model. Low profit margin? We fix the pricing structure.
Just like our snow cones, the key is to take action that both identifies the problem and moves toward the “right” solution. The problems are not identified by “intuition” or the need to “act.”
I’ve saved the best for last. When I am working with financial advisory firms who have growth problems (particularly slower growth than they want), the vast majority of time, we rarely ever implement a marketing plan or a sales plan or a strategic plan or create a new service model.
To jump-start growth, we change prices of financial planning services. Often the very problem with growth is that you are offering too many services (financial planning, life planning, asset management, 401(k) plans, tax returns, etc.) that compete with what you really want to sell.
I will talk about pricing in my next blog, but now, I’m off to buy a snow cone.