The refurbished album will come in 5 versions. You can buy the original CD for $14, or you might choose a double CD that has lots of extras for $30; or for just $120 you will get a 4-disc vinyl box set.  But it doesn’t stop there, $168 will buy you 4 CDs, 16 art prints and a hardbound book; and if you are a real fan you’ll want to invest $470 to get everything plus other bonuses including vinyl singles and …. wait for it … Bono’s signature “The Fly” sunglasses!

Now, what were you saying that tax return you just did was priced at?  How about bundling in an Annual Business Performance Review complemented with a  review meeting, plus a How to Improve the Profitability of Your Business booklet, a free seat at your next Practical Financial Management Program and a pair of sunglasses so your client can see the forest for the trees.

The key drivers of profitability are price, variable costs (that is, those costs that vary in direct proportion to sales revenue and which typically are represented by the cost of sales), the physical volume of sales (that is, the number of transactions) and finally, fixed costs or enterprise overheads.

To illustrate this consider a business that has the following financial performance characteristics:

A 1% improvement in each of the four profit drivers for this hypothetical business will yield a 40% improvement in net profit!  An increase in profit of $40,000.  This is shown in the  graph below that is produced by a module in GamePlan called Profit Sensitivity Analysis.

What’s important to notice is the fact that for this business, the 1% improvement in price has more than 3 times the impact of a 1% increase in sales volume and nearly 4 times the impact of a 1% reduction in fixed costs.  This is shown in the screen shot below.

While the relative impact of price compared to variable costs, volume and fixed costs will depend on the financial characteristics of the business, it will always have a greater impact than any of the other drivers and usually that impact will be in the order of more that two to three times that of the other drivers.

The reason for this is quite straight forward.  An increase in price for a given volume of transactions means that not only will total revenue increase but so too will the margin (price minus variable cost) on each transaction.  A reduction in variable cost will change the margin but not the level of revenue.  An increase in volume will increase revenue but will not change the gross profit margin and a reduction in fixed costs will have no impact on gross profit at all.  Interestingly, reducing fixed costs will always have the smallest impact.

For example, in this hypothetical business, fixed costs would have to reduce to $625,000 to achieve the same result as a 1% increase in price.

If you look at a larger change such as a 10% improvement which will take your GP% to 38.18%, the differences are even more dramatic.  With this scenario, a 10% price increase will increase net profit to $350,000 whereas a reduction in fixed costs of $350,000 (43% reduction) would be needed to yield the same profit.

You might be thinking “that’s all well and good in theory, but if I put my prices up by 10%, how much business would I lose?”  That’s a good question but a far better one is, “how many customers could I afford to lose without being any worse off?”  For this business, the answer is 24%.  This would result is a reduction in total revenue of about 16% given a current GP% of 32%.

In other words, you could lose 24 out of every 100 of your “average” customers and be no worse off.  And if that were to happen, which 24 customers do you think you might lose—we suspect it will be the 24 people who are price sensitive and who keep reminding you and your team of that.  You might also want to remember that a 24% reduction in the number of people you service will take the pressure off you and your team members and will, in all likelihood, enable you to cut back on some of your fixed costs.

The strategic implications of this type of analysis are very important.  Most business people are pre-occupied with getting more revenue—often from new customers.  They pay very little regard to the customers they already have and usually adopt the view that price is something over which they have very little control because of competitive pressure.  They also  believe that seeking ways to reduce costs is the most effective way to build a profitable business.

This is absolutely the wrong way to run a business even though it may seem to make intuitive sense that the more revenue you generate the bigger, and therefore the better, your business will be.  It also makes intuitive sense that cost reduction leads to improved profitability.

Let’s first address the cost reduction strategy.  We have no argument with the proposition that reducing costs (whether they are fixed or variable) will improve profit.  But there is a big qualifier to this.  If a cost is necessary for you to do business, then reducing it may also reduce your capacity to do business.

Furthermore, the costs that can be reduced are generally those of a “discretionary” nature and these tend to be the ones incurred today to build the future of your business (for example, marketing, team training, research and development.)  A more useful strategy to pursue is to constantly review your costs and ask yourself the question “what are we getting for what we’re investing here?”, and related to that, “is there a way for us to get greater productivity from the resources that are driving these costs?”

Chasing new revenue and the activity that involves is a major cost driver in itself.  While we tend to describe enterprise overheads as being fixed costs, they in fact aren’t in the long run.  They tend to be driven by the volume of transactions.  If that was not the case every business would find that its net profit margin (that is, net profit divided by revenue) would increase over time.  That is rarely the case in practice.

By far and away the most profitable strategy is to aggressively price your products or services, elect to deal only with those customers who see and accept the value you deliver to them, do not allow customers (or competitors) who are price sensitive to dictate the pricing strategy that you adopt across the board and do not see “big” as being the definition of success and monitor the productivity of the resources that are provided by your fixed costs.  At the end of the day, profit is the only measure of success.  Revenue does not pay the bills or give you the resources you need to grow—that comes from profit.

I’m writing this piece for three reasons. First, Don King’s life was a life to be acknowledged and celebrated. Secondly, his passing is a sober reminder of how important it is for us to use our time and talent to best effect. And thirdly, I want to share a couple of important life lessons from my relationship with him.

Don will be remembered not for his skill as an accountant (which was considerable) but for the positive impact he had on the people he came in contact with. The thing I admired most about Don was the fact that he had a very tough background as a child and had good reason to carry a chip on his shoulder. But he rose above that and through determination and hard work carved out a very successful professional career. He had a wicked sense of humor but always took life, work, family and friendships seriously.

At Principa we talk about the need for professional offices to have serious fun – he totally understood and was a master practitioner of that concept. I doubt that there were many days when he didn’t look forward to coming to work, when I was at the firm anyway, and not for that reason! And I doubt if there were ever any people in the office who did not enjoy having him around.

I first met him as a student in one of my classes at the College I was teaching at in the latter part of the 70’s. He was quietly competent. Quite, because he was not someone who felt the need to talk unless he had something useful to contribute. Competent, because he took his work seriously and he consistently got top grades.

After I left teaching and went into public practice he approached me about working with my firm. Unfortunately we had just made an offer to another person otherwise I would have hired him in a heartbeat.

Right after Don called I got call from Jim McKerlie who was one of the partners in our biggest competitor at the time—Rutherfords. I had supervised Jim’s research thesis for his post grad degree when I was at the University of New England so I knew him well, I had a very high regard for his ability and I liked him a lot. He asked if we had any good candidates for the position we’d advertised who would be worth hiring. Big dilemma: Don is looking for a job and is extremely competent as well as deserving of the opportunity; Jim is a friend looking for a good team member—but he is also a competitor so do I really want to give him another competitive weapon? Why can’t life decisions always be easy?

The first life lesson I learned from this experience is simple. My father always said when confronted with tough decisions do what your heart says is the right thing and everything will work out. The right thing was to put Don and Jim together so I did. Don joined Rutherfords, he and the firm were a great fit and he eventually became the Managing Partner who guided the firm through a massive period of transition and expansion as part of the WHK Group – a public company and one of the few successful listed accounting firms in the world.

My father was right. When you do the right thing, good things come back to you. After Don joined Rutherfords our two firms became closer, largely because Jim and I shared a common vision about the emerging “modern” practice. Within two years (I can’t remember precisely) I joined Rutherfords and Don took over responsibility for the accounting and tax work of the clients I brought to the firm.

It was through Rutherfords that I met Paul Dunn and it was with Paul Dunn that I started Results Accountants’ Systems and have been privileged to work with thousands of wonderful people for that past 20 years. It’s interesting to contemplate whether any of this would have happened had I chosen not to put Jim and Don together. He may have joined Rutherfords, our firms may have merged, I may have met Paul Dunn but who knows?

Don remained my right hand man throughout my time at Rutherfords and did all of my work after I retired from practice. The practice lesson I learned here is that if you have a good guy on the ground YOU do not need to be the person who “does the work.” Delegation is crucial for practice growth. If you’re having difficulty delegating it’s because you don’t have the right people, you don’t do enough training, your ego is too big, or you’re concept of practice contribution is misdirected.

And now to the second life lesson. For as long as I can remember I have been talking to anyone willing to listen about the idea that those of us who are fortunate enough to be in public practice have considerable scope to choose what we do, with whom we do it and for whom we do it. Don’s passing reminds me how important it is to follow your passion and make life choices that allow you to make the contribution you were put on this earth to accomplish and to enjoy life while you do that.

If you really don’t like what you’re doing stop doing it or make a choice to fix it! There will always come a time in your life when you will ask yourself the question: have I made the best use of my time and talent? Given that you are going to ask yourself this question at some time, it’s a good idea to ask it when you can actually do something about it not when it’s too late. I think Don asked and responded to that question early in his life.

So here’s some advice that I’m sure Don would agree with: live life fully, do work you enjoy doing, work with clients and team members you respect and like. Love your family, be a nice person and have fun.

He commissioned a study of the top 5% and the bottom 5% to determine what characteristics, if any, differentiated the two groups.  What the study revealed was a consistent difference between the two groups came down to two things: firstly, the top 5% exhibited much higher interpersonal astuteness i.e. they better understood, related to and empathized with people and secondly, the top 5% read at least 2 books per month!

Hall concluded that readers are leaders, leaders are readers, earners are learners, and learners are earners.  

The more you read the smarter you become.  The smarter you become the more valuable you become.  The more valuable you are the more opportunities you get.  The more opportunities you get the more you learn and the more you earn.  It’s as simple as that – earners are learners and learning projects you into a positive spiral of success.

Reading and writing are known to develop reasoning and thinking skills.  Reading is also the primary mechanism to develop your verbal communication skills which in turn increases your effectiveness in whatever you do.  The only way to expand your vocabulary and ability to structure ideas is to read.

I find it rather curious that knowledge is readily accessible at such a low cost and yet so many people claim they do not have time to read despite the fact that the vast majority of people who are in top leadership positions are avid readers.  Interestingly, they, like all of us, have 24 hours in each day some of which they choose to use for reading and reflection.

So with that in mid here’s a little challenge. How about you get up in the morning 1 hour earlier and you spend that hour reading something other than a professional technical journal.  That would give you nearly 30 hours per month of knowledge acquisition and 360 hours per year.  There is absolutely no doubt that your value to clients, the value to your team and the value to your family will dramatically increase … so too will your income and sense of accomplishment.

To get you started here are five books that I would put at the top of your reading list.  It would have been a lot easier to make a list of 50 books but I have chosen these because they are also books that you could recommend to any client who aspired to a better life through having a better business.  The entire library of five books has a total cost of less than $100 but mastering their content would yield a return of millions!

1. Stephen Covey, The 7 Habits of Highly Effective People – this book needs to be studied not just read!  If you “read” it several years ago but you can’t recite the 7 habits, open it again and study it with a highlighter and a notebook by your side. It will change your life.
2. Ken Blanchard & Sheldon Bowles, Raving Fans: A Revolutionary Approach To Customer Service – I put this in my list because, in a disarmingly simple and highly readable way, it explains the essence of business—it’s primary purpose if you will: to attract and retain customers. It’s a classic as are all of Blanchard’s books.
3. Jack Canfield, The Success Principles – this title is on my list because I firmly believe that personal development comes before business development. Covey’s 7 Habits will give you a framework for success through greater effectiveness while Canfield’s book is packed full of anecdotal practical ideas that when applied to your daily life will change everything for you.  I would bracket Canfield’s book with Napoleon Hill’s Think and Grow Rich, the book that really started the personal development industry, but Canfield’s book gets my nod because of its contemporary context.  
4. John Maxwell, The 21 Irrefutable Laws of leadership – I have added this to the list because I believe that sound leadership is a key to success in business and life and this book is the most “readable” and down to earth practical summary of 21 leadership principles that anyone can master.  There is no doubt that some people are born with a talent to lead but I believe it’s also true that all of us can develop better leadership skills and when we do our organization will be transformed.  
5. Michael E. Gerber, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It – Gerber’s book is a must read if for no other reason than it reminds us that business is essentially a system and that anyone who approaches it in a systematic manner can master.  I have placed this selection at number 5 but if I were giving this reading list to a client I’d start with Gerber.  If the client was excited by what Gerber has to say then I’d know he/she is interested in creating a better business in which case the other books would have more relevance.

But I really do believe that everyone is born with a talent to be great at something and the only reason most people don’t realize their full potential is because our education system and the social pressure (from parents and peers) that is wrapped around it has caused us to go down the wrong path for us.  This video is not only amusing in the typical English style, it is very thought provoking.

Ken Robinson on creativity

I’m in good company it seems.  A very similar view is delightfully expressed by Tom Peters in a presentation he gave recently- “Re-imagine! Business Excellence in a Disruptive Age”.  He says “you can’t be remarkable by following someone else’s remarkable.”  What makes firms great is being different in a way that customers value and then being able to capture that value through pricing and process.

Tom’s thoughts on this are worth listening to – click on the link.  Click here to listen to the audio.

After losing $60 billion in the last decade — and billions more recently when a cloud of volcanic ash grounded flights across Europe — airlines are looking to consolidate as a way to return to profitability amid continued struggles with high fuel prices, competition from low-cost carriers, and a limited customer pool that shriveled even more during the recession. But experts are skeptical about the “bigger is better” strategy. Many observers say the carriers have proved downright flighty at following through on making changes that improve operations and put the customer first.

After reading this I couldn’t help thinking, why don’t these guys take a leaf out of Southwest Airlines book.  That company creates a flying experience that consistently WOWs its customers and is very cost efficient to both customer and itself because it implements a sensible operational strategy, employs (and retains) amazingly loyal, engaged and empowered people, and makes air travel for both its customers and its team members a fun experience. It has an excellent on-time departure and arrival record and your bags practically always end up at the same airport that you do – sometimes even before you!

In my opinion consolidation will NOT make the airlines more profitable if past experience is any guide.  It will make air travel more expensive but that does not translate to higher profit. SWA consistently makes a profit because it has a superior business model.  It’s that simple.  What that means is they achieve higher utilization of their assets (they turn their planes and the team members in them) around faster than other airlines, and they have higher occupancy rates so their net margin is higher.  These two things result in significantly higher ROI (asset turn x net margin = ROI).  Simple isn’t it?  This is Business Finance 101!

Oh and one more thing, because they have more loyal customers and therefore higher capacity utilization they are able to articulate the customer value proposition that I have reproduced below.  I HATE HAVING TO PAY MORE FOR MY BAGS THAN I DO FOR MY SEAT (on a recent trip with Jetstar – an Australian airline, my seat cost $129 and my bag cost $300), AND SO DOES EVERYONE ELSE I’VE ASKED. I also hate it when I get severely penalized if I have to change my schedule — at SWA that does not happen.  Traveling with them is a pleasure.

Who we are determines how we see others. This principle says once we get our own act together, we will be able to help others get their acts together. It’s impossible, if I am an unhealthy leader, to have healthy followers. I have to fix myself. We don’t see others as they are; we see others as we are, because each of us has his or her own bent and that colors our view of everything. What is around us doesn’t determine what we see. What is within us does. For example, if I am an untrusting person, how you think I will see you? I will see you as untrustworthy. So anything that is unhealthy about me is going to spill onto you. That is what leaders have to understand. But as a leader, if I can get victory over myself, if I can fix John Maxwell, the odds are high I can help and fix others.

1. Before you attend a networking event find out as much as you can about what the theme of the event is, who is likely to be there, give thought to who you would like to meet and what you would like to discover by attending. Do your research on the people (and their organization) who you expect to be there – when you get to meet them you will seem well-informed an on the ball. What better credential could you have as a representative of a professional service firm in the knowledge industry?
2. Never be late for the event. If necessary get up 30 minutes earlier that day! When you’re early you can scope out the room, learn the names of people, get comfortable with the group and decide where you want to sit and who you want to get to know.
3. Do NOT try to use the occasion to sell anything. Your purpose in being there is to meet people and to establish rapport through learning as much about them and their needs as you can. That means take your business cards by all means but do not take your brochures – if someone wants to learn more about you and your services, set up a later meeting (perhaps over a meal) and talk shop there.
4. Take a small pocket notebook to make a note of things your discover, people you meet, promises you made etc. On this point take note of Stephen Covey’s 5th Habit – seek first to understand before being understood: develop your listening skills rather than your talking skills. You’ll be amazed at how fruitful this turns out to be for developing strong relationships.
5. Never sit next to one of your associates. The purpose of attending the event is to meet people, why on earth would you want to sit next to someone you already know?
6. Dress appropriately for the event. What is appropriate should have been determined as part of your discovery process that I discussed in point 1 above. Need I add, comb your hair, brush your teeth, polish your shoes, change your shirt if necessary – sorry, am I sounding like your mother?
7. Follow up the people you met who you would like to form a relationship with.