Do you know how your company makes money?
A few years ago, I found a small book publishing business for sale. The author had written and published numerous books and now wanted to sell his business so he could concentrate only on writing. Having no experience in this business prompted me to meet him and learn more. So, I dove into his financials and discovered a world of publishing exepenses, stocking fees, inventory costs and even “payola” with the large booksellers. However, what I really found out was how he made money.
He thought he sold books through retail channels. In actuality, he made money creating small “quotable” books for large private institutions, organizations and universities for distribution to members and alumni. Forget the books he sold at Borders or Barnes & Noble. He made his money, 75% of gross revenue, on one simple product that accounted for less than 20% of his overall expenses. The majority of his overhead, costs and debt were tied up in a retail distribution model that lost money.
Most businesses begin with a narrow and deep focus; deliver a specific service, sell a simple product, create a singular customer experience that stands out from the crowd and provides value. It brings them success, growth and profit….and somewhere down the line, they forget where they make money. They acquire customers who want things customized. They offer new services that have nothing to do with their core competencies. They sell new products their customers do not want and they dilute the customer experience with too much complexity. All of this requires added resources; more space, more infrastructure, more people and more co$t.
This is usually the point where the new CFO comes in and pulls the curtain down and shows everyone that 80% of revenue STILL comes from the original service, product and customer experience which accounts for 40% of expenses. Sometimes it is more obvious; 80% of revenues come from the top 20% of customers. All of the other customers and “stuff” add no value and often, destroy it. So, they shrink; fire customers who cost more than they bring in, “de-layer” organizational structure (i.e. layoffs,) shutter products and sell non-performing assets…only to start over again.
High-performing businesses rarely take their “eye off the ball.” They align every individual, resource and activity together and focus them all on that one key notion; where do we make our money.