Wealthification Part 9

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Tweetables:
Cashflow is what it is all about. [Click To Tweet].
Money NOW has more value than money LATER. [Click To Tweet].
Focus on more value instead of lower prices. [Click To Tweet].
Conversions are crucial to cashflow. [Click To Tweet].
Analyze everything. [Click To Tweet].

Do you prefer text? here you go…

James Schramko here and this is one of my favorite modules of wealthification, of couse it’s cashflow.

Because cashflow is what it’s all about. We’re in this to make money, that’s why we have a business.

Hopefully, you’ll be making a profit instead of a loss and this will be a fantastic outcome for you.

One of the biggest things that comes up with business is timing.

What we want to do with cashflow is we want to get paid in full, in advance before we do the work or deliver the goods.

If you run a business where you have to do work and then get paid – That can be dicey and you’ll have bad debts. So if you want to eliminate bad debts, then what you want to do is to set up a business model where you get paid first. One of the best ways to do that is of course is to set up packages:

 Put up your package prices
 Get paid
 Deliver the work

If you want to know examples of this in business, places like car dealerships will receive money for a car and then deliver the car. Sometimes, they’ll do a finance plan but they still get paid by the finance company. Somebody gets paid before that car leaves the dealership.

Now if you look at other industries, like trades, then what you’ll see is plumbers and electricians, even dentists, will do work and then do an invoice and get paid in arrears and that can be deadly because they need all the costs of infrastructure, materials and do the labor and then they might get paid if they’re lucky. Now the smart people set up packages where they get paid in advance and that is the way to go.

Money now is more valuable than money later. If you have a 100 dollars today that’s more valuable to you than 150 dollars in a fortnight because you can take that 100 dollars and you can invest it back into the business to get more resources, to get more marketing and accelerate your customer growth.

The best thing of all is you get a compound effect. One of the beauties of online business for example is that you can get paid in advance and then deliver the service and you have no debt. So the aim of the business generally would be to be cashflow positive and do your work in arrears and sometimes if you do bundles, especially if you sell time, then you may never even have to deliver on the balance of the goods. So get paid upfront.

Of course, the big conversation always comes up around pricing.

How much to charge? Well, the first thing is, avoid discounting. If you take the price stance, you are in a race to the bottom. You’re in there with companies like Amazon and Wallmart and you’re just not going to be competitive and somebody can always come along and sell something for less than you. What you want to focus on is increasing value instead of decreasing the price. Consider a discount as the equivalent of a financial apology. You don’t need to make financial apologies.

What you need to do is test. It’s worth testing diffferent price points and runing a multi-price test. Now, depending on your environment, this could be electronic or it could be even in a store, changing prices around to see what happens. There is an old saying that expensive equals good. I think Professor Cialdini made this fairly popular. Sometimes, it’s not about the lowest price. It’s about the price that the customer feels the most value is offered and it also is controlled by certain other factors.

Dan Kennedy talks about three things being important:

 Your opinion
 Your customers opinion
 The environment in which something is sold

Of course you are going to pay more for a cappuccino in a fancy restaurant than you are at Starbucks because the environment dictates that the price is probably going to be higher. So knowing that, what you can do is create an environment that matches the value of what you are looking to sell. So if you are able to create a better branding, a better marketing discussion, if you’re able to increase trust or authority as we’ve discussed in the marketing and assets module, then you are able to charge a little bit more.

The other thing to keep in mind is you need to charge enough so that you can deliver the service that you are selling. If you under-bid or under-cut, generally you have to cut a corner and it is unwise for you to accept too low a price because then you’re not even happy or motivated about delivering the goods or the service. So make sure you charge what you’re worth. As general rule of thumb, people tend to undercharge significantly. Sometimes, it’s good just to stick to your goal – put a higher price, suck it up, see what happens and before you know it, someone will buy, and you’re away.

Now another thing to really avoid is getting drawn into comparisons. You don’t want the spreadsheet shopper and you don’t want to be doing quotes. There’s a simple technique for this – just don’t do quotes. I found it very effective to put packages up there and to lead people to packages either directly if you are on a business to business market or via a survey if you are in a business to consumer market.

If you put a survey between the customer and the packages, it allows you to filter their responses and to tailor a solution that is just right for them that also happens to be one of your packages. Or you can make up bundles of your pre-determined packages and create an excellent solution from what you already have standing by in your business.

If you are drawn into a comparison, try and create an oranges to apples comparison. Show why your product is so different that nobody else can compete. We talked about having a defensible position in the strategy module. This is very important, make sure that no one else can compare you against another player in the market. That you have something different, something special, something that no one else has. We call that the black box. Other things that help pricing are genuine scarcity – either scarcity in volume or scarcity in timing. If something is not available, then that can drive the price up. It’s a simple supply and demand scenario.

Also people want what they can’t have. If you do have something scarce, you can hold it back until you’re ready and that creates demand and the sale is actually much easier. The main thing around pricing is:

 Have a theory about what you think will happen
 Put it out there
 Measure
 Learn what you can from it
 Make adjustments accordingly

My final note on pricing is if you can possibly have your own comparison that allows a customer to choose between 2 or 3 versions of your own product that actually makes it a much easier situation. Now, they’re comparing you against something and something within your own business rather than one of yours and one of someone else’s.

Conversions are crucial for cashflow.

It’s ok to have business coming through your door but you actually need to turn them into sales. The way that you can help conversions are to do your testing.

 Test with analytics
 Test with software
 Test with observation
 Test with any sort of data that you can get access to

And of course, keep an eye on it.

If you have an online business you could be using SpeedDash (SpeedDash is available to members of SuperFastBusiness) to pull in your analytics from Google. If you can increase your conversions by even just 1 or 2%, quite often that is the same impact as having a huge influx of fresh traffic. So work hard on the conversions.

The thing about conversions is it’s probably not the sexiest topic like traffic and getting customers but keeping customers and having a higher proportion of the ones who you deal with is actually the better game because it’s easier and nobody does it.

In simple terms, for cashflow, we’re talking about profit.

The best way to calculate a profit is to take your revenue, subtract your costs and you end up with a profit and I want to tackle one of the biggest myths in business here.

If you are bringing in $100k in revenue and your costs are $50k, you make a $50k profit. You want to have a guess at what most business owners do? They focus and obsess on how they can reduce that $50k so that they can increase their profit of their percentage of profit.

And I want to give you a heads-up, you can only ever cost-cut 100%. So the maximum you could remove in this scenario would be $50k and then you would have a $100k profit. You can double your profit. Wow, it looks ok except there is a trade off. The problem is if you’re not spending the money, then you’ll probably decrease your revenue or now you’re working in the business more because you’re not hiring that project manager or that sales person. You’re not investing in marketing or you’re not getting a third party supplier to fulfill products and services that you sell.

So what I do is encourage coaching students to spend more money, not less money. Let me show you what this looks like.

Now, we spend an extra $450k dollars into marketing, and systems and third party suppliers, cost of goods sold, except the extra marketing and the extra leverage created from that now brings us a million dollar revenue and we make a $500k profit. So our revenue, and our expenses and our profit have all gone up to a factor of 10 and I don’t know about you but I’d rather a $500k profit than $50k profit but to get there we had to spend an extra $450k dollars. I would say treat it as an investment rather than an expense. The key to knowing this is of course to look at all the numbers and you have to do this on a quarterly, monthly, weekly or daily basis in some cases and you want to assess all areas of revenue as separate buckets.

In the wealthification exercise, you’ll see how we do that with the spreadsheet. When you’re investing more, now you start to get a real business. And here’s the good news, you can probably sell your business from somewhere between 12-60 times your monthly profit. Or if it’s a traditional business, it could even be somewhere around 3-10 or 12 times the annual profit. So you want to get the profit number up. And that’s what cashflow is all about. So how do you get cashflow?

This is the formula. It’s pretty straightforward, right?

Let me run you through this.

The first part is Leads. We need to get more leads coming into our business. That’s pretty straight forward.

Once they arrive, we need to convert them into customers so that is our percentage.

Then we multiply that by the amount that the customer spends on our products or our services.

And then how many times they purchase? Do they purchase 1, 2 or 3 products?

And then we work out our margin. So we have to take out:

 the cost of goods sold
 all of our fixed and all of our variable costs
 marketing costs
 supply, delivering and customer service
 rent
 electricity
 wages

I know it’s pretty tough with a business. But if you do it right, you should end up with a profit.

Now, let’s see how it looks like with real numbers. We take a 100 leads, we convert 5% of them into customers, a $1000 per sale and we sell 2 products at a 20% profit margin. We’ve made $2000 in profit from those 100 customers.

Now this might take a day, it could take a week, it could take a month, it could be a year per customer. That is not important but what I do want to show you is a little exercise. Have a look what happens if we can just increase this metrics by 10%.

If we get 110 leads instead of a 100 and we convert 5.5% of them instead of 5% and we sell something for $1100 because we’ve increased the value rather than discount and we’ve got a customer follow up program and a re-marketing program to our existing customer base so they tend to buy a little bit more often. 2.2 times instead of twice and we’ve managed to get a better deal on our supply so now we have a 22% profit margin. Guess what happens to the profit?

It’s not just 10% more, it’s a substantial increase. Goes from $2000 up to $3221. Now if this is just one customer, imagine if you had hundreds or thousands or hundreds of thousands of customers. That’s what happens in your business, so I encourage you go and focus on each part of this formula and explore and develop ways that you can improve each part of it using the wealthification training.

Analyze Everything

Of course the key to it is to analyze everything. What gets measured, gets done. And what you want to do is analyze all of your sales. Create a spreadsheet, have a look at:

 today’s sales
 your month-to-date sales
 your forecasted sales
 your average sales per day
 your average value of each sale
 how often you make a sale
 which one of your sales people sells the most
 which one of your websites sells the most

Analyze your reports, check your spreadsheets, track, test and measure. If you use PayPal, then I strongly recommend you use Putler, if you don’t then at least use something like Xero to get all of the numbers.

 Scale it out
 Break it down
 Score your business divisions

See if you can boost them all just 10% across the board. You’ll see this in the exercise module of Wealthification.

Wealthification is just one of the many courses inside SuperFastBusiness.com. Join me inside this Internet Business coaching community so that I can help you profit faster: Click Here

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