The Margin Manifesto: 11 Tenets for Reaching (or Doubling) Profitability in 3 Months

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Profitability often requires better rules and speed, not more time. (Photo: Jetta Girl)

I wrote this “margin manifesto” several months ago and somehow neglected to post it. Your requests for more content on start-up economics and processes reminded me.

These are the principles I review whenever facing operational overwhelm or declining/stagnating profits. Hope you find them useful.

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The financial goal of a start-up should be simple: profit in the least time with the least effort. Not more customers, not more revenue, not more offices or more employees: more profit.

Based on my interviews with high-performing (using profit-per-employee metrics) CEOs in more than a dozen countries, here are the 11 basic tenets of the “Margin Manifesto”… a return-to-basics call that gives permission to do the uncommon to achieve the uncommon: consistent profitability (or doubling of it) in 3 months or less.

1. Niche is the New Big — The Lavish Dwarf Entertainment Rule:

Several years ago, an investment banker was jailed for trade violations. He was caught partly due to his lavish parties on yachts, often featuring hired dwarves. The owner of the dwarf rental company, Danny Black, was quoted in the Wall Street Journal as saying: “Some people are just into lavish dwarf entertainment.” Niche in the new big. But here’s the secret: it’s possible to niche market and mass sell. iPod commercials don’t feature dancing 50-year olds, they feature hip and fit 20-30-somethings, but everyone and his grandmother wants to feel youthful and hip, so they strap on Nanos and call themselves Apple converts. Who you portray in your marketing isn’t necessarily the only demographic who buys your product — it’s often the demographic that most people want to identify with or belong to. The target isn’t the market. No one aspires to be the bland average, so don’t water down messaging to appeal to everyone–it will end up appealing to no one.

2. Revisit Drucker — What Gets Measured Gets Managed:
Measure compulsively, for as Peter Drucker stated: what gets measured gets managed. Useful metrics to track, besides the usual operational stats, include CPO (“Cost-Per-Order,” which includes advertising, fulfillment and expected returns, chargebacks, and bad debt), ad allowable (the maximum you can spend on an advertisement and expect breakeven), MER (media efficiency ratio), and projected lifetime value (LV) given return rates and reorder %. Consider applying direct response advertising metrics to your business.

3. Pricing before Product – Plan Distribution First:
Is your pricing scalable? Many companies will sell direct-to-consumer by necessity in early stages, only to realize that their margins can’t accommodate resellers and distributors when they come knocking. If you have a 40% profit margin and a distributor needs a 70% discount to sell into wholesale accounts, you’re forever limited to direct-to-consumer… unless you increase your pricing and margins. It’s best to do this beforehand if possible – otherwise, you’ll need to launch new or “premium” products — so plan distribution before setting pricing. Test assumptions and find hidden costs by interviewing those who have done it: will you need to pay for co-op advertising, offer rebates for bulk purchases, or pay for shelfspace or featured placement? I know one former CEO of a national brand who had to sell his company to one of the world’s largest soft drink manufacturers before he could access front-of-store shelving in top retailers. Test your assumptions and do your homework before setting pricing.

4. Less is More – Limiting Distribution to Increase Profit:

Is more distribution automatically better? No. Uncontrolled distribution leads to all manner of head-ache and profit-bleeding, most often related to rogue discounters. Reseller A lowers pricing to compete with online discounter B, and the price cutting continues until neither is making sufficient profit on the product and both stop reordering. This requires you to launch a new product, as price erosion is almost always irreversible. Avoid this scenario and consider partnering with one or two key distributors instead, using that exclusivity to negotiate better terms: less discounting, prepayment, preferred placement and marketing support, etc. From iPods to Rolex and Estee Lauder, sustainable high-profit brands usually begin with controlled distribution. Remember, more customers isn’t the goal; more profit is.

5. Net-0 — Create Demand vs. Offering Terms:
Focus on creating end-user demand so you can dictate terms. Often one trade publication advertisment, bought at discount remnant rates, will be enough to provide this leverage. Outside of science and law, most “rules” are just common practice. Just because everyone in your industry offers terms doesn’t mean you have to, and offering terms is the most consistent ingredient in start-up failure. Cite start-up economics and the ever-so-useful “company policy” as reasons for prepayment and apologize, but don’t make exceptions. Net-30 becomes net-60, which become net-120. Time is the most expensive asset a start-up has, and chasing delinquent accounts will prevent you from generating more sales. If customers are asking for your product, resellers and distributors will need to buy. It’s that simple. Put funds and time into strategic marketing and PR to tip the scales in your favor.

6. Repetition is Usually Redundant — Good Advertising Works the First Time:

Use direct response advertising (call-to-action to a phone number or website) that is uniquely trackable – fully accountable advertising — instead of image advertising, unless others are prepurchasing to offset the cost (e.g. “If you prepurchase 288 units, we’ll feature your store/URL/phone exclusively in a full-page ad in….”). Don’t listen to advertising salespeople who tell you that 3, 7, or 27 exposures are needed before someone will act on an advertisement. Well-designed and well-targeted advertising works the first time. If something works partially well (e.g., high response with low percentage conversion to sales, low response with high conversion, etc.), indicating that a strong ROI might be possible with small changes, tweak one controlled variable and micro-test once more. Cancel anything that cannot be justified with a trackable ROI.

7. Limit Downside to Ensure Upside — Sacrifice Margin for Safety:
Don’t manufacture product in large quantities to increase margin unless your product and marketing are tested and ready for roll-out without changes. If a limited number of prototypes cost $10 per piece to manufacture and sell for $11 each, that’s fine for the initial testing period, and essential for limiting downside. Sacrifice margin temporarily for the testing phase, if need be, and avoid potentially fatal upfront overcommitments.

8. Negotiate Late — Make Others Negotiate Against Themselves:
Never make a first offer when purchasing. Flinch after the first offer (“$3,000!” followed by pure silence, which uncomfortable salespeople fill by dropping the price once), let people negotiate against themselves (“Is that really the best you can offer?” elicits at least one additional drop in price), then “bracket”. If they end up at $2,000 and you want to pay $1,500, offer $1,250. They’ll counter with approximately $1,750, to which you respond: “I’ll tell you what — let’s just split the difference. I’ll overnight FedEx you a check, and we can call it a day.” The end result? Exactly what you wanted: $1,500.

9. Hyperactivity vs. Productivity — 80/20 and Pareto’s Law:
Being busy is not the same as being productive. Forget about the start-up overwork ethic that people wear as a badge of honor–get analytical. The 80/20 principle, also known as Pareto’s Law, dictates that 80% of your desired outcomes are the result of 20% of your activities or inputs. Once per week, stop putting out fires for an afternoon and run the numbers to ensure you’re placing effort in high-yield areas: What 20% of customers/products/regions are producing 80% of the profit? What are the factors that could account for this? Invest in duplicating your few strong areas instead of fixing all of your weaknesses.

10. The Customer is Not Always Right — “Fire” High-Maintenance Customers:
Not all customers are created equal. Apply the 80/20 principle to time consumption: What 20% of people are consuming 80% of your time? Put high-maintenance, low-profit customers on auto-pilot–process orders but don’t pursue them or check up on them–and “fire” high-maintenance, high-profit customers by sending a memo detailing how a change in business model requires a few new policies: how often and how to communicate, standardized pricing and order process, etc. Indicate that, for those clients whose needs are incompatible with these new policies, you are happy to introduce other providers. “But what if my largest customer consumes all of my time?” Recognize that 1) without time, you cannot scale your company (and, oftentimes, life) beyond that customer, and 2) people, even good people, will unknowingly abuse your time to the extent that you let them. Set good rules for all involved to minimize back-and-forth and meaningless communication.

11. Deadlines over Details – Test Reliability Before Capability:
Skills are overrated. Perfect products delivered past deadline kill companies faster than decent products delivered on-time. Test someone’s ability to deliver on a specific and tight deadline before hiring them based on a dazzling portfolio. Products can be fixed as long as you have cash-flow, and bugs are forgiven, but missing deadlines is often fatal. Calvin Coolidge once said that nothing is more common than unsuccessful men with talent; I would add that the second most common is smart people who think their IQ or resume justifies delivering late.

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Posted on: June 24, 2008.

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126 comments on “The Margin Manifesto: 11 Tenets for Reaching (or Doubling) Profitability in 3 Months

  1. Hi Tim,

    Read your book earlier this year but it is only just recently when I read it again that I’ve been putting the principles in to practice. Fool me for delaying – It really works!! Did the outsourcing thing with one of the freelance sites you mentioned and I had awesome results.

    My mindset’s totally changed through enrolling on Alex Jeffreys Coaching Course and the community of students helping one another to make real progress is phenomenal, in essence using much of what you teach in your book. You can see how much the students are contributing to all making successful online businesses on my blog.

    Garry (a follower from the UK)

    Like

  2. Hi Tim

    I hear a lot of good reports about your book. I first heard about it through Alex Jeffreys and by the look of it he’s influenced a lot people to read it. I will be getting hold of a copy over the holidays and hope to review it on my blog in the near future. Wish you all the best for the coming year.

    Dave

    Like

  3. I want to apply more of these principles however, I am in the medical industry and work for a company. I have to meet and treat every one of my patients.
    any one have suggestions on how to implement any of these concepts? Any other physicians, dentists etc out there with this same delema?

    Like

  4. Hi Tim and all the fellow posters,

    As a student in entrepreneurship I have to say that a lot of what Tim is say rings true for small business start-ups. I will go into some examples as follows:

    1: Niche:
    A nice market is crucial to success. an example niche I have seen start in Australia the last few years is Hippo (www.hippo.com.au). Hippo is a company that provides jobs advertising but focuses on jobs for students and the younger generation. A lot of these individuals are looking for casual work which is hard to find on the bigger job recruitment websites, and Hippo has met with a great deal of success as a result of capitalising on a niche opportunity in the market, even if it is not the whole recruitment market available.

    2: What gets measured gets managed:
    Following a recent video I saw of Tim he mentioned rescuetime (www.rescuetime.com) to measure how you spend your time, so that you can then improve your management of it. I am finding this to be the case with my blogging. How could I possibly measure how successful my blog was if I had no idea of the number of people reviewing my blog?

    3: Less is More:
    This is the one which a lot of older business owners find hard to come to terms with, but it is essentially true. The way i personally view this is that most small and big deals take about the same time to manage and complete, yet the profit is dramatically different. Why settle on poor results?

    4: Call to action advertising: In my recent marketing for entrepreneurs class we learned that for an advertisement to call people to action, it must have three things: a reason to buy, a dramatic offer and a time limit. Does your advertising have all three of these in place in order to receive a direct response?

    5: Pareto Principle: I have found as a student that attending 20% of classes usually gets me 80% percent of my results. I also found that using 20% of the recommended time allocation to study outside of university also yielded 80% of the success. The more I have applied this principle over the years the more I tend to find that it is true. I learned about this back in school and while many people have disagreed with me I have found it so liberating and worthwhile to implement.

    The question for all fellow posters out there is this:
    Have you actually reviewed these 11 tenets and implemented them, or have you merely glossed over them and then gone back to trying to operate your life and your work the same way as before? Taking action can improve results dramatically and can help you to achieve the goals you want out of life.

    Best of success!

    Like

  5. Tim,
    What manufacturer would you use for your pxmethod course and would you try to find a manufacturer to drop ship or use a fulfillment company? Thanks for your time and the great book.
    Josh

    Like

  6. Tim – this, like all your other stuff is awesome. Reading it, and being in the times we’re in, got me to thinking about those trying to get out from under (namely bankruptcy and foreclosure) and probably not in a position to use some of these tactics. Do you have any research/insights on how to quickly rebuild credit history after bankruptcy? I’m interested to hear…

    Like

  7. Hey Tim,

    Less is more. In business, life, work, and creativity.

    Targeting a niche, 80-20’ing it (coincides with less is more), and planning scalable profit are my favorite tips here.

    By focusing on a specific target audience that will a) be most receptive and b) be able to spread your message, planning a scalable model that’ll automatically grow when your audience does, and then focusing on the 20% of the actions that’ll bring you 80% results, you have a practically bullet-proof system for achieving your goal easier and faster.

    Thanks for your tips on keeping it simple and effective,
    Oleg

    Like

  8. Tim,

    Do you recommend:

    – Selling 1 Product?
    – Creating a Product oppose to Licensing a Product?
    – Products that can be Manufactured in USA instead of overseas?
    – Staying away from Apparel? (as sizes & colors mean many products not 1)
    – outsourcing marketing?
    – outsourcing copy-writing or sales pages (not my forte)
    – hire ad designers for magazine ads?
    – a particular fulfillment house suitable for a start-up?

    Looked at Standard Rate & Data Services…the Ad Costs are quite substantial.

    I’ve been at B&N looking at Magazines for product ideas. Went on Writer’s Market, but did not know how to use it.

    My 2 Biggest Obstacles:

    – Coming up with a Product
    – Filter Ideas so the Product fits in the Architecture & Fully Automate.

    Since coming up with a product take so much time for me. Do you recommend I look at Inventors’ products and license one that will market well?

    Just quit my job and relocating to Vietnam for 3 months to think & come up with a product.

    I have implemented Definition, Elimination, and a short Liberation from the DEAL Method.

    I am stuck on Automation; my brain hurts thinking about it everyday.

    Your book has changed my life. It’s what I’ve been after for so many years.

    Anxiously waiting for your case studies to come out.

    QT

    Like

  9. Wow Tim,

    I have only just found you today but what an insperation, I must admit i dont know that much about you but i will definatly be looking at everything you do from now on.

    I was in waterstones today and picked up this book “4 hour working week”
    I read a few pages thinking it would be a ton of sh*t, OMG I ran over to the checkout and haven’t put it down since THANK YOU!

    Matt :)

    Like

  10. I have been sent back to the drawing board in recent months due to an illness. And re-inventing ourselves has been perfect bcuz now we can get rid of what didn’t work and install what does work.

    Always a good read Tim. Thanks.

    Like

  11. Selling Online is not an easy thing to do, Its takes time to build up an audience that turn into paying customers, most of the time this is built on trust.

    The Customer is Not Always Right, If your selling products make sure you ask yourself this question.

    WOULD YOU USE THIS PRODUCT if no dont sell it.

    Like

  12. Tim,

    What are your thoughts on moving from one price point to a drastically higher one (added benis, bonuses, etc.) while having distributors?

    i would test this price first, obviously. But if succesfully, do I
    -get distributors on-board?
    -or let them stay low and justify my high cost to my end-users.

    Like