Not all your customers are good to have. Some are great. Some actually cost you money. Some are just so-so. Dharmesh Shah has some good ideas on ranking your customers. His post is geared toward software companies. For other types of companies, I would add things like

• do they pay on time
• do they haggle
• do they refer in other business
• are they fun to work with. Yes fun (or other values) are important.

There is no set list of what makes a customer valuable – a lot depends on your goals and your business style. A client who might be great for one law firm, may be terrible for another.

Obviously a lot of this involves judgement  – it’s not all quantifiable – but that doesn’t mean you shouldn’t track it. Before you tell me that’s too much work, let me toss this into the mix. When I wrote the 5 numbers a business owner needs to know, I left one out. Here’s the 6th. How many customers do you need to meet your goals? The fewer you need the less daunting the task of tracking and ranking your customers.

Some service companies need less than 50 clients. They could start from zero and hit that number in a year by making one sale a week. How many does a hair salon need? A lot fewer than a supermarket. Figuring out what that number is, helps you get that many. Ranking them helps you have the right number of the best customers. That will make your business more profitable and more fun. Isn’t that what it’s all about?

While we’re on the subject of customer service, let me tell you about my BBQ grill. I got my first Weber at a garage sale. It served me for several years. www.weber.com

When it finally rusted out I decided to buy a new one. I even splurged the extra $5 to get red instead of black. I got it home and unpacked it and noticed a couple small bubbles in the paint. No big deal. But being a business owner I value customer feedback. So I actually filled out the customer registration card (which I rarely do) and mentioned the paint bubbles.

A couple days later I got a phone call from Weber. The woman told me the product was guaranteed for life and that I could return it for a new one. It really wasn’t a problem I said, very small and only cosmetic. Besides I’d already put mine together and didn’t want to lug it back to the store.

That didn’t satisfy her. She said she’d be happy to send me the new parts free, and I wouldn’t even have to send the bad ones back. It was obvious she didn’t have to check with anyone for approval to make this offer. Well, the parts in question were the bowl and the top which make up the guts of the unit (except for legs and grills). So they practially sent me a whole new unit for free, just to keep me happy – which I already was. I ended up giving the new “grill” away to our nanny and her boyfriend.

I’ve moved a few times since this happened, and I don’t remember where the red weber is (I think my ex-wife has it). But I can tell you I still cook on a weber. I’ve got two of them in fact.
Takeaways:

• They used to say that advertising doesn’t cost – it pays. I think that’s true of customer service. Especially when you treat people like people.

This site is hosted by BlueHost.com. I’ve used them for about 6 months. Never had a problem but that’s not a lot of time to tell. What it is plenty of time to tell is that they have WONDERFUL Customer Support.

I’ve emailed support requests several times. Each time I hear back very quickly and, more importantly, in English – not techspeak. They read my whole question and tell me exactly what I need to know in the right context. At one point they even changed the main domain of my account for me – something that I didn’t think they’d do, at best, would tell me to do it myself, but they did it right away.

Now I get an email saying they are increasing their support hours from 24/6 to 24/7 Way to go.

Takeaways:

• I know tech support is a cost (COGS) but I can’t imagine how much lower their COGS is because they do this right the first time. Not to mention the improvement in customer satisfaction, referals and sales.
• Use them if you want a responsive web host (as always I have no financial stake in this company).
• They’re inexpensive and have lots of features.

Jeremy J at 37signals says when writing computer code, he writes the tests first. Then he knows that the code he writes will have to pass the tests. He says it wastes less effort and keeps him happier and more productive.

I sometimes do the same thing when trouble shooting. I write down what I’m looking for and what should happen. Then check it off. If I don’t find the problem at least I know what not to try again. And the list of failed tests helps me narrow in on what the cause of the problem is.

I’ve never done it when trying a new project, but I suppose it could work. Next time someone comes up with an idea you’d like to try, do this: before you roll it out, design the tests. That means specifiy what you expect to change, by when and how you’ll measure it. Define what measurements will constitute success, and failure. Then see what happens.

DON’T

Says Seth Godin. I think he gives a pretty good alternative.

Takeaways:

• Not all VC funding is bad for every company.
• Thinking that funding is always the solution is bad for every company.

Just thought I’d share a nice piece of software I’ve been using called The Journal ($40 with a 45 day trial and as always I’ve got no financial stake in the company.) It’s designed to pop up a new page every day where you jot down your thoughts. Sort of like a journal. DUH!

I’m using it in a feeble attempt to stay on top of all my projects using David Allen’s Getting Things Done method. The Journal lets me set up categories (the tabs you see in the picture) and they can have entries and sub-entries. Did you know it’s not uncommon to have 60 projects a person is dealing with? Makes me feel better.

In the default useage, you have a new entry for each date of your ramblings. But I use that as a kind of scratch pad / TODO list. Then I have a tab for each project. In the project notes, you can do a lot of formatting (outlines, tables etc – in some cases easier than WORD) and you can assign topics to any text or picture you put in the journal. Then you can search by word or by topic. That’s the power.
So scattered about among many projects you have many tasks. Some are assigned to your assistant. You can put them all in a topic and then search by that topic. All the tasks assigned to him from every project show up in the search. All without making a separate list. Followers of the Getting Things Done method (GTD as the cult members call it) will realize you can make a topic for calls, at home, at computer, waiting on, shopping and all the other ways you’d want to catagorize tasks. COOL

The war analogy doesn’t work because business is not a zero sum game. A great business makes the pie bigger for everyone. And in war, you’re focused on the enemy (ie your competition) but in business you’re supposed to focus on the customer.

The sports analogy doesn’t work either. It’s all about getting in the zone – where you make decisions based on instinct, and training – instantly without thought. Great for sports where key plays happen in seconds, and the rules never change.

The best business analogy I can think of is sex – the seduction, not the act itself. And I’m thinking of seduction in the olden days like the bumper sticker says: “Remember when air was clean and sex was dirty?” Back then you couldn’t even mention – much less advertise in the newspaper – for exactly what you wanted. And then there was a tension of guys wanting sex only and always and girls not ever wanting to “give it up” – until they did. Why this analogy works is because:

It takes two to do it.
You can’t sit in your room all day inventing stuff – you have to find a customer. Otherwise you’re just making a product, not a company. Drucker said the very purpose of a business is to make a customer. Hubba Hubba.

You each want something the other has.
You want their money more than you want your own widgets, and they want what you provide more than they want their money. So business really should be a win-win (that horrible phrase). You both win in sports or war.

You don’t quite know what the other wants and can’t always believe what they say.
Sure you sell widgets, but they buy the value the widgets provide. They won’t always tell you what that value is or how much they’d really be willing to pay for it. Often because they don’t always know. Just like when you fill out an on-line dating form. Don’t the choices seem a bit arbitrary? In our abundant society so much purchasing is based on feeling and desires and the stories we tell ourselves about what’s going on rather than needs and easily specified facts. To succeed you have to tap into unspoken emotions – and they can’t just be your emotions.

Fundamentalists aren’t allowed to have sex standing up because it leads to dancing.
Dancing is a great analogy too. You each move differently, yet together you make something that’s more satisfying than you’d be able to do on your own. You’re constrained by the rhythm of the music, and the moves of your partner – but isn’t that where the excitement comes from?

First comes love, then comes marriage then comes baby in the baby carriage.
OK. So no analogy is perfect. You can get laid on the first date (so they tell me) but you rarely get married on the first date (unless you’re Brittaney Spears). The relationship between business and customer takes many forms, so I guess we’re back to the modern day sex era. There are times where a one-nighter is all either party wants. But there’s usually a lot more than that. And too many businesses refuse to call anyone back the next day.

Takeaways:

• Get over the war mindset. Stop thinking like you have an opponent.
• Start to seduce. Figure out how to get what you want by providing what someone else wants.
• Dance.

Others say it better than I. Here’s a piece by Craig James (was a top recruiter for Hewlett Packard) about how to build a team that does your interviews. Thanks to Guy Kawasaki for the link.

In case you missed it: Part 1 – Part 2 – Part 3 – Part 4

Payback

Payback is the third reason for a company to spend money after COGS and Operations. I don’t mean payback as in sending some goon out to break a bunch of kneecaps. Payback is what I’m calling the money you use to pay back lenders and investors who gave you cash to get the business going. If it’s a loan, the payments are usually figured as overhead, because you have to pay them every month. If investors contributed the funds, payback is usually figured as a dividend, or share of profits or maybe return on investment. It’s not usually figured all in one place, after COGS and Operations. And that accounting methodology has made it harder than it should be for entrepreneurs to raise financing. Let me explain.

Entrepreneurs tend to focus on potential (size of the market) and cash flow (making it through the month paying all the bills). Investors and lenders know that after paying all the bills there has to be something left over to pay back their investment and make a profit on it. Sure they want to see potential, but they also want to know how long it will take before there’s enought money to pay them back without hurting the operations. And they want to see that the risks of them never getting paid back have been minimized. So if you want to raise funds, be prepared to show how you’ll pay back your investors from cash flow, and when. Thinking about it as a separate category makes this easier to show.

Tech bubbles happen when investors too, forget about this and figure they’ll get paid back by selling the company to GOOGLE for $25million. But I digress.

I suggest that when you do cash flow projections you separate all the people you’ll pay into groups. Put the payments for COGs in one group, the payments for operations in the second group and the payements to payback in the third. This should show you and investors how much cash will be available to return their contribution, and when.

Takeaways:

• Use a separate category to show how you’ll have money to pay back your loans and investors without hurting the cash you need for COGS or Operations.

If you have excel (who doesn’t?) get FlowBreeze. It installs itself within excel and allows you to make flow charts very easily. 30 days free trial and $30 introductory price. Works simply and easily – just as advertised. What a concept, and it’s still in beta, but I haven’t found any problems with it.

Why?

You’d be amazed how much clearer things are when you flow chart them. And how differently you’re employees actually do things compared to how you think they do them. This is usually a bonus.

Here’s one I put together in about 6 minutes. Gray shapes represent information. Other colors represent different workers. One thing that was obvious to me is that the only event NOT triggered by another envent is the waiter taking the drink order. Not a problem in most restaurants, but in other work flows you should know what triggers every event – even if it’s “Check this every day at 9AM”

Takeaways:

• Get this program (and as always I have no financial relationship with the sellers)
• Use it to be enlightened

What do you call a person who speaks two languages? Bi-lingual. What do you call a person who speaks three languages? Tri-lingual. What do you call a person who speaks only one language? An American. – Old Joke

Numbers are the language of business, yet many business owners don’t really know that language. They survive, but not as well as they could. My learning of this language has been completely self-taught, as a result, my understanding is less than orthodox. In some ways that’s better.

• I’ve tried to learn to use the language, not to produce reports that I’m “supposed” to have but to actually accomplish what I need. Usually what I need is some basis for making a decision. The language isn’t designed for that, but the process of learning it myself has been very helpful.
• Because I don’t know the language very well, I don’t trust my understanding of it, I usually come at a problem from several different angles. If they all point in the same direction, I’m reasonably confident that I’m on the right track. But I don’t stop looking for a new angle. This has given me confidence in my decisions through tough times.

You’ll see the ideas above in the numbers below. Advice for MBA’s and accountants: You are schooled in numbers: the language of business. But knowing the language doesn’t mean you have anything to say. If you want to help entrepreneurs, you have to learn to use that language in the context of what a small company needs.

Here are 5 numbers every business owner should know.

#1. Your COGS – Cost of Goods Sold. As a percent, this is how much of every sales dollar goes to buy the material and make it into a form that it will generate that sales dollar. If you sell only a few things, you should know your COGS for every product. If you sell a lot of items, perhaps you can group them and figure your COGS by product line or market. If you do a lot of custom work, you may need to figure out your COGS for each sale.

#2 Your Gross Profit in dollars per month. This is what’s left after you subtract COGS from your sales. This dollar amount has to cover overhead, payback and profits. It’s also the lowest price you can sell your next widget for without actually paying the customer to take it. Obviously you can’t sell them all at this price or you’d never cover overhead. But if you hit a dry spell and want to keep your crew busy, or if you want to entice a new customer with a loss leader, this is as low as you can go without really taking a loss. Gross Profit as a percentage of sales is called Gross Margin. You’ll need the margin for the next one.

#3 Value of your next customer. Here’s how it works. You take the dollar amount of your average sale TIMES the number of sales the average customer makes over their lifetime as a customer TIMES the Gross Margin. This is how much money your next customer will put in your pocket.

EXAMPLE: Let’s say you run a country club. Your average member stays a member for 5 years (60 months) and spends $1,000 a month in dues, green fees and restaurant meals. Your COGS for all that is $600 a month. So your gross margin is 40%. Your next average customer is worth $24,000: $1,000 per month sale TIMES 60 months TIMES 40%

CAVEAT: This is only true for your NEXT customer. Or the next number of customers you can serve without adding to your overhead, or making some capital expense. But in that context it can be useful to determine ways to increase the value of each customer (“You want fries with that?”) and you use it to compare to #4

#4 Cost of acquiring the next customer. This is money spent on marketing, advertising and sales DIVIDED BY the number of new customers that effort brings. Effort that brings in more value than it costs is worth it.

#5 The Magic number. Every business has one number that summarizes the health of the whole business – usually on a daily basis. Sometimes it’s obvious: a hotel uses % occupancy, a restaurant, the # of meals sold per night. But sometimes it helps to get creative. One manufacturer used the weight of all the items they shipped out in a day. It turns out for them, pounds on the shipping dock did a good aggregation of profit margins in different product lines. One restaurant owner used the number of people in line at 8:30 PM. If there were a lot of people waiting, his staff turned tables quicker to sell more meals. If not, they encouraged dessert and after dinner drinks to sell more that way.

The Magic number for a start-up is always your break even point. You must know that. When you hit it consistently you’re not a start-up anymore.

Takeaways:

• Know your numbers.
• Make them easy to use and train your staff to use them.
• Be sure you know what assumptions your numbers are based on. The Apartment industry has been using Occupancy Rates as a magic number. But recently as their market went south, staff would give away concessions (free rent) to entice people to sign leases. This kept their occupancy (and presumably bonuses), high while profits tanked. It took some companies a surprisingly long time to figure out this disconnect.

MedBillAdvisor raises the question; albeit mostly via post to this blog.
I’d say no one starts a company without profit as a motive, yet it’s never the only reason to be an entrepreneur. As the company grows, these goals can conflict. Profit is so generic and passion so individual, it’s often assumed you don’t need to negotiate between the two.

When I talk with entrepreneurs about what they want from running their companies, there are almost two dozen categories of response. Money only plays into 4 or 5 of those. The more specific you are about your passion and your goals, the better chance you have to run the company in a way that satisfies them. Otherwise it’s like designing a ship before you know what your destination is. Building an ocean liner to get across the pond is as bad as trying to cross the sea in a canoe.

Takeaways:

• Passion and profit conflict less in a private company than in a public one.
• The clearer you are about your passion and how it plays out in your business, the better equipped you’ll be to deal with conflicts.

I have a problem with this test of your Entrepreneurial Quotient posted by Guy Kawasaki. My problem is that while I agree with all the questions and answers save one [more on that in a minute] I don’t think it’s about entrepreneurial quotient.

It’s about the hyped up buzz about what is an entrepreneur: Someone starting a company making some sort of software and who needs venture capital to take their company public.

Sure there are entrepreneurs like that. But it’s a small sub-set of all entrepreneurs. Of course it’s the flashy newsworth sub-set. And given Guy is from the high tech world, and a VC it’s no wonder he’s made this mistake.

And I must say, for the record, I like what I’ve read of Guy’s approach to building companies. There’s a lot right with it – I just wish people wouldn’t limit the concept of entrepreneurship in this way.

As for the test itself  #11 is a very good point. But #6 I have a big disagreement with. I guess it depends on your definition of success. But I’d choose answer A.

Most people don’t think – they just think they think.

Here are some interesting ideas about how decisions are made. (The first three come from a book about web site design by Steve Krug called ‘Don’t Make Me Think‘).

1. People take the first choice they can find that doesn’t have obvious problems. This means we don’t bother to consider alternatives and get the best choice. We just look down the first road we come to and if we can’t see any big hairy monsters before that road disappears around the bend, then that’s the road we go down.
2. This is called satisficing (a cross between satisfying and sufficing.) It produces the first reasonable option – not the best.
3. People don’t bother to figure out how things work – we just muddle through. If we hit on a way that’s inefficient, or cumbersome but it works we tend to stick with it.
4. Daniel Kahneman won the Nobel Prize in economics for discovering such things as the fact that people will travel 20 minutes to save $5 on a $15 calculator but won’t spend the same20 minutes to save the same $5 on a $125 jacket. Thus tossing to the wind the basis of economic thought – that people make decisions based on their economic best interest.

Takeaways:

• If you want customers to make buying decisions – make it easy for them to buy. One CEO referred to all the little choices buyers have to make to complete a sale as ‘Moments of Truth’ when they could just as easily decide not to buy at all. And there may be dozens or even hundreds of these moments in the course of any sale. The fewer the better.
• Don’t expect that your employees are making decisions based on analysis or rational deliberation. They’re likely to do what’s worked before or what seems easiest. If that’s not good enough, it will be up to you to put systems in place to make it easier to make the best choice rather than just the simplest.
• Once a decision has been made people will stick with it (or make the same one again) as long as they can. Don’t assume they are continually reevaluating and looking for improvements. You do things that way – but you’re an entrepreneur. So it’s a good idea to forcibly set aside time for re-evaluation of key decisions.
• Once in a while it’s a good idea to take a decision inventory. Revisit what decisions you’ve made, how they were made and if they need to be adjusted.
• Let the simple choices be mind-numbingly easy. Don’t force people to analyze and justify their decisions when the easiest is good enough. Whoever said ‘If something is worth doing it’s worth doing right,’ never ran a company.

I actually believe most small companies have too few meetings. As a result effort is wasted, ideas aren’t shared, mistakes take too long to correct, and the cost is high.

The problem is that most meetings are run so poorly they are actually worse than no meeting at all.

The solution is to figure out what you want to accomplish in the meeting and design the entire meeting for that purpose. Insist that the right people be there and enforce the right behavior (starting with yourself). For some kinds of meetings having them at a regular time with a set agenda actually saves time because stuff people would interrupt you with waits for the meeting.

Takeaways:

• How to Run a Better Meeting from 43folders.com
• 8 Types of Meeting Attendees from Jonathan Grubb
• A Meeting Agenda form I designed for a client (with generic notes). Half the power of a meeting is what gets written down and followed up. This form makes that easy.

A trade show display has to do one thing in about half a second:

Allow passers by to decide if they should stop at your booth. That’s it.

To do that, it should be visually striking, and informative. The information should be in bold, short, jargon-free words. As someone is walking by, without slowing down, they should be able to turn their head and read:

• Who you are
• What you do
• Why they should (or should not) stop

The should not’s are just as important as the shoulds. You don’t want to waste your time on the wrong folks – or worse, have the so booth crowded with the wrong visitors that you don’t have time to spend with the right ones.

The display type I’m showing you does this (if you design it well). It also has the benefits of being:

• Cheap – less than $300 to produce (exclusive of design costs)
• Fast to set up. Because anyone can do it in 5 min – no need to pay union wages for help you don’t need, or pay for shipping and storage costs at inflated prices, or fly in the night before to set up.
• Easy to transport. We carry ours in a surf-board bag. It has straps like a back pack. We can check in on an airplane, and walk it right into the show.
• Looks great. It’s not huge and overwhelming like those WALL O’ VELCRO displays, but it does look professional. And most of those wall displays have so much jargon and fluff in them they don’t do what they’re supposed to anyway.

It’s made of 3 posters. Each 24×36 inches mounted on sturdy plastic or foam core. Once your designer comes up with a PDF file, Kinko’s can print and mount them for about $80 each. Put a table across the back of the booth (a high table gives more visibility) and mount them on small easels. That’s it.

We use another table across the side of the booth to lay out literature. We try to get a corner booth so people can see it from two angles.

Takeaways:

• If the show is a buying show where people come to place orders then you probably want to highlight the merchandise, and a cheap display is not what you want.
• If it’s not a buying show, at least half the benefit comes from what you do after the show with the contacts you made there. If you don’t do that right you should evaluate whether to do the show at all.

In case you missed it: Part 1 – Part 2 – Part 3 – Part 4

Operations
The second reason to spend money is on operations. These are called fixed costs by accountants and they are the costs that stay the same from month to month just to keep the lights on and the doors open. Rent, utilities, marketing and advertising costs, taxes and labor that is not COGS go in this category.

There are two keys to operations costs. The first is sales volume. Very often people get seduced into starting a consulting business of some sort by not considering sales volume. They see that if they sell their skill at graphic design, or wedding planning, or computer programming or some such they can get $100 per hour. Their COGS is close to zero and working out of their home, so is overhead. Except for their salary. But if they only sell a couple hours a month their sales volume won’t cover much, even at a high hourly rate. At the other extreme, Starbucks sells coffee for about $3. Even though their COGS is pretty low, it doesn’t leave much from a $3 sale. But they sell so many that it covers the rent, and the green aprons and the comfy chairs.

So no mater how high your gross profit is, if you can’t sell enough volume to cover your overhead you’re sunk. One problem start-ups have is estimating how long it will take to ramp up their sales volume high enough.

The other key to controlling operations costs is chunking. You want to keep these costs as low as possible. But operations buys you capacity, and you can’t serve your customers without capacity. Every time Kinko’s gets a new copy machine, its capacity to sell copies goes up. Paper and toner are COGS, but the cost of the machine is the same whether anyone uses it or not. So their operational costs increase or decrease in “chunks” the size of a copy machine.

You can think of operations cost and the capacity it buys like a stair step. They stay constant for a while till you “chunk” up to the next step. (COGS on the other hand is like a roller coaster – constantly moving up or down with sales).

The trick is to run close to the top of your chunk. The most profitable companies are ones who are close to maxing out their capacity because their operational costs are low compared to their sales volume.

Takeaways:

• No matter how high your profit margin is, if your sales volume isn’t enough to cover your fixed costs, you’ll run out of cash.
• Operations costs buy you capacity. Try to run as close to maxing out your capacity as you can – that allows the greatest amount of your sales volume to flow through to the bottom line.
• In other words, don’t buy more capacity than you can use to serve customers.

I actually didn’t make this mistake. We’re only remodeling two but I thought of it because the third one is downstairs in the cold part of the house, poor me [sniff].

Anyway, this thought is relevant here because of why we’re remodeling. We’re getting ready to sell the house. So now we’ll have two bath rooms with a nice modern look instead of that “what were they thinking?” wallpaper that I’ve lived with for eight years!

The point is, why didn’t we do this seven years ago? Then we could have enjoyed them all this time and still have the house in shape to sell.

My friend, John Hyde is in the business of “work outs” – making closely held companies look good for suitors. Either they’re growing so fast they need alternative financing, or they’re selling, or something like that. It usually involves cutting some expenses and rejiggering three years of financials. Nothing illegal mind you, but making them more accurately reflect what it really costs to run the place. The goal is to show as much profit or cash flow as possible because that results in a multiple for a sales price, or lower financing costs.

He told me that if people would hire him at the start of those three years instead of the end, two things would happen. One is his fee would be smaller, and the other is there would be more profit or cash flow for all that time. In other words, the owners would get to enjoy that remodeled bathroom all that time.

Takeaways:

• What costs would you cut or other improvements would you make if you were putting your company on the market next week?
• Which of those changes should you make anyway?

Does this make sense?
Stowe Boyd suggests that as the need for investment in start-ups diminishes (he’s talking high tech) the need for advice remains high.

He suggests offering equity in a start-up in exchange for and advisory role.

As an advisor, I think it’s a great idea. What do you entrepreneurs think?