How Does Your Company Make Money?

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.


The Analysis Paralysis Conundrum

In business, we have more information at our fingertips than ever before in today’s connected world.  The vast array of analytical tools, spreadsheets, databases, customer surveys, consumer polls, point of sale systems etc. give us more data than we could ever need to make the basic of business decisions.  Should we turn left?  Should we move straight?  Do we sell X?  Do we charge Y?  What is our next move? 

Yet, with so much analysis at hand, why do so many smart business people sink in their own quantitative assessments?  You see it every day in businesses across the country; big, small, hi-tech, low-tech, industrial, commercial etc.  It does not matter.  When the decision is not obvious or easy to make, fear sets in and we analyze again, and again, and again…

I have seen the smartest and sharpest leaders scared straight by the lack of an obvious, “no brainer”  decision when the analysis showed nothing.  DO IT AGAIN!  That is the strategy.  We test again, recalculate again, let the “pilot” continue longer and never “pull the trigger.”  Making business decisions are far clearer when analysis is not viewed as THE answer, but a means to get to it.  One must break it down every situation by its core components; people, process, technology.  Analysis will almost always reveal that one of these is the leading edge of the right answer. 

Do I get closer to my customers by implementing a CRM solution? (Technology)  

Do I reduce costs by consolidating duplication of work? (Process)

Do I fire my customers who cost me money and reallocate my resources around ones who do? (People)

Do I build my Client Services team around my clients who make me money? (People | Process | Technology)

Often, the right answers require a little analysis and a lot of focus on what is important.