Managing for Profit
August 29, 2023
Welcome back to Business Unfiltered with Mercer and Jeff Sauer today's topic is Managing for Profit.
0:00: How do you think about managing for profit? The whole purpose is to exchange value with the marketplace, and at the end of the day, it should cost us less than what they gave us so that we can have that extra for profit. The team has a lot of say in the finances of the business right now.
3:54: Managing for profit by setting expectations. One way to manage expectations is through KPIs and expectations, telling someone what their expectations are and having them go out there and improve upon or get to those expectations. Another way is to make good choices and put healthy stuff into the system and get healthy stuff out. The rule of five-for-one approach to marketing, and how it was introduced to the Dial team. The two ways to build profit, revenue and expenses, and the goal is to have a 20% profit margin for every $5 in revenue that is brought in.
8:05: Managing for profit. There's a way for you to reduce expenses, because if you don't, you're not going to reduce the dollars of expenses. The 541 rule is either get $5 in revenue or trim $4 in expenses in order to get profit, but either way, it's one way or the other. The goal is to manage for profit, not for activity, and not just to pay the bills.
12:07: Do we need this tool anymore? Tough decisions to ask the team if they want to use the tool or not, and if not to use it, get rid of it. Investing in education and education.
13:27: Managing for profit and expenses. The team is structured to not have to worry about the expenses, but they do talk to their profits coach. Any business has less than $10 million, the answer is almost always revenue, because there's almost no expenses you can cut. The problem with looking at expenses is that it discourages people from looking at the expenses, and they don't see the fact that they're paying out to campaign for two years. The big challenge he has had with numbers, and he's close to solving it.
18:15: What should your profit margin goal be? The importance of having a profit margin goal for an agency, and how to think about what a goal should be. A good profit margin for a agency is around 15% net profit, and anything less than 10% means that you are over-delivering and overdelivering.
20:38: Having a plan for when your business will be profitable. His business is in a weird flux point right now. He's making major team investments to get himself out of the day-to-day, and that's made achieving a profit margin nigh impossible. He's in a major reinvestment phase right now, which means that one business is profitable, but it's feeding another business. The importance of having a time limit on forecasting and having a plan ahead of time to avoid a sunk cost. How to know when this is when this isn't working and cut when it's not working, and how to know that it's time to cut and cut, because people don't want to think about the failure aspect.
25:58: What if the bet doesn't work? It's great if it works, but what if it doesn't. It's hard because you have to have faith when you make a major bet like that. Putting an all-in bet, you need to be all in on it. All-in means either you're going to lose the entire hand. There is a use case to think about shutting down a new offer if the market doesn't want it in any way you want to pitch it, even if it's low probability. A brand is a organic living breathing thing, so if you fail, failure is only when you give up. The only time that you fail is when you pack it up now, which is a sign that you should fail.
30:55: Being a failure vs. being a failure. Fail being being a failure versus failing versus being a fail. The final thoughts on this is that it takes skill and muscle, and it's not something intuitive to everybody. The goal is to keep moving on and dealing with what's in front of you, not ignoring the signs, because those signs are telling you what to do next and how to fix things if you're willing to look at them.
Topics Covered In This Episode
- Introduction to Managing for Profit: The podcast begins with Mercer and Jeff discussing the concept of profitability and the critical role of the team in ensuring a profitable business. They emphasize the importance of generating a profit surplus through value exchange in the marketplace.
- Setting Expectations & Expense Management: This section covers how Key Performance Indicators (KPIs) can be used to manage expectations and performance. Jeff and Mercer introduce the 'five-for-one' marketing approach for a 20% profit margin on every $5 in revenue. They also explore ways to reduce expenses, such as eliminating unnecessary recurring subscriptions, to manage for profit rather than just covering costs.
- Reviewing Tools & Profit Margin Goals: Mercer and Jeff emphasize the need to assess operational tools and discontinue those that are redundant. They also underline the importance of setting profit margin goals, suggesting that an ideal profit margin for an agency should be around 15% net profit.
- Planning for Profitability amid Reinvestment: Mercer and Jeff discuss the challenges of sustaining profitability during substantial reinvestment phases in business. They stress the importance of time-bound forecasting and proactive planning to mitigate sunk costs.
- Managing Business Risks & Failures: This section explores the implications of a business bet not panning out. They emphasize the need for an exit plan in the face of negative market response to new offers. They also differentiate between experiencing failure and being a failure, underscoring that failure is part of the learning process. They wrap up the episode by encouraging listeners to stay forward-focused and heed the signs that guide the next steps.