Editor’s note: This article was first published in November 2016, and its iPod advertising example comes from a 2007 book, so it was already old by then.
An entrepreneur’s main goal should be to get the business turning a profit in the shortest possible time and with the least possible effort. If anyone knows about that, it is Tim Ferriss, author of The 4-Hour Workweek, who has succeeded in business by simplifying everything as far as possible and getting a business up and running in record time. Best of all, with minimal involvement from the entrepreneur, to the point of outsourcing practically all of the work.
Some time ago we published some of Ferriss’s ideas for finding a profitable product to sell. This time we again gather some of the advice from his book to reach profitability as fast as possible with a new business idea, or to double profitability.
Ferriss does not talk about getting more customers, more revenue, hiring more employees or opening more offices. With these tips, all he wants is for the business to become more profitable.
How to make your business more profitable in less time
1. Specialise
Ferriss tells the story of a businessman who was arrested during a party on a yacht for which he had hired a company that supplied little people as entertainers, something that was common at this businessman’s parties. The press carried a comment from the owner of the supplying company, who said, in essence, that some people simply enjoy having little people at their parties.
Specialisation is the future of business, and don’t think that by specialising you lose the chance to sell on a massive scale. Ferriss gives Apple’s iPod as an example. The ads don’t play songs from the 1950s or 1960s. They play current hits, because they are aimed at people in their twenties or early thirties. But even people in their 40s, 50s and 60s buy an iPod, because they want to feel young.
In other words, the people you target with your advertising are not the only ones who will buy your product.
But Ferriss advises against diluting your message in an attempt to reach everyone, because if you do, you won’t reach anyone.
2. Measure what can be measured; anything that can be measured can be managed
To make a business more profitable, we should compulsively measure every number we can. It is not just about taking orders and delivering them. For example, those who sell through a website could measure CPO (cost per order). How much does it really cost me to send an order to a customer, including every step from the moment the purchase is placed? The cost of advertising, cancelled orders, cancelled payments, the maximum amount to invest in advertising, the return on advertising spend.
Knowing these numbers and managing them properly will help us when it comes to working on our product’s margins.
3. Set prices before you produce; plan distribution first
Here Ferriss wants to stop you from focusing only on the short term and get you thinking about long-term problems.
Many companies sell directly to consumers at first out of necessity, but once they grow, they realise their margins cannot accommodate suppliers and distributors. If you have a 40% profit margin and a distributor needs a 70% discount to sell wholesale, you will be doomed to selling to the end consumer forever, unless you later decide to raise your prices.
That is why the advice is to plan distribution before setting the price. Otherwise you could enjoy early success with no room to grow.
Would you have to give very large discounts on very large orders, pay for shelf placement or a prominent spot, pay for corporate advertising? Ferriss mentions the case of a manager at a big brand who had to sell his company to one of the largest soft-drink makers before he could get onto the main shelves of retail stores. So consider every possible scenario and do your homework.
4. Less is more: limit distribution to increase returns
For Ferriss, wider distribution does not mean everything will work better, since uncontrolled distribution can cause all kinds of headaches and lost profits.
For example, supplier A lowers its prices to compete with online supplier B, and the price war continues until neither of them makes any money, so in the end they stop ordering from you because selling your product is no longer profitable for them.
See also: How to build a profitable online store: ideas for your internet business
So avoid this situation by choosing a few key distributors, and negotiate exclusivity in your favour, with smaller discounts, prepayment, preferred placement, advertising support and so on.
The big brands became big because they controlled distribution. Not just anyone can sell your product. Remember, the point is not to get more customers but to make more profit.
5. Create demand rather than offering terms at the start
Many businesses fail early on because of payment terms. Even if everyone else is getting paid at 30 days, you don’t have to. Create demand among customers so that you are the one who sets the terms.
To do this, Ferriss advises using the argument that you are just starting out, along with the ever-useful “company policy”. Don’t make exceptions, because a single good customer placing orders on payment terms that are too long can bankrupt you.
That is why Ferriss insists on creating demand among end customers: if your product is in demand, suppliers and distributors will have to buy it and accept your conditions.
Starting a business is like a game, and at the beginning the essential part of the game is not running out of chips. In other words, sell on prepayment whenever possible and, where you can, pay at 30 or 60 days. That way, the working capital becomes a financial cushion.
6. Sacrifice margins for safety
When you hire a factory, it is clear that the more units you make, the bigger the manufacturing discounts you get. Ferriss advises against producing large quantities to increase your profit margins unless your product and your marketing strategy have been tested and are ready to work without changes.
If a prototype costs 10 dollars a unit and sells for 11, that is fine for the trial period. There is nothing wrong with sacrificing profit margins while you are testing.
7. Use the Pareto principle
The Pareto principle says that 80% of results come from 20% of our activities. In other words, being busy all the time is not the same as being productive.
Sometimes 20% of our customers produce 80% of our profits, so that is where we should focus our energy. The same goes for many activities that take up much of our time and are the least productive. Ferriss is a wizard at outsourcing that kind of task. In his book he described how he had a personal assistant in India who saved him a lot of time for very little money.
So invest in doubling your performance in your strong areas instead of spending your efforts on weaker ones. If something can be outsourced so that we can focus on what really matters, we will do it without a second thought. And that brings us to the next point.
8. Fire some customers
The customer is not always right, so Ferriss advises applying the Pareto principle to them. Which customers take up most of our time? Which are the most troublesome, the most demanding, even though they bring in hardly any profit? Identify those customers and fire them.
To do this, Ferriss suggests putting them on autopilot and then sending them a letter with new company policies that require some changes, such as new rules with standardised orders. Often a customer who is a real pain in the neck will fall into line, even though they can no longer give you grief. Others will take it as an insult and stop ordering from you of their own accord. One way or another, we put an end to the headaches that customer gave us, which kept us from devoting time to other customers who are more profitable for our business.
9. Prioritise deadlines, not details
A perfect product delivered late can do more to destroy your business than a decent product delivered on time.
It doesn’t matter what product you sell. If it is delivered after the agreed deadline, the customer will remember the bad buying experience and will most likely not buy again.
Today, fast delivery is synonymous with success and an advantage over the competition that counts for more than price.
Featured image: Steve Jurvetson, CC BY 2.0, via Flickr.
