Strategy To Think About – Joint Venture And Strategic Alliances

For example, my banker for my business and personal loans recommended an accounting firm to me.

  • The accounting firm recommended an estate lawyer who drew up my will.
  • The estate lawyer recommended an insurance agent who sold me a policy to put into my life insurance trust to bypass probate and estate taxes for my family.
  • My insurance agent recommended a restaurant that I didn\’t know about.
  • The Maître D at the restaurant recommended a florist for anniversaries and birthdays for my wife.

Each business helps other businesses sell more things. Everyone benefits; each hand washes the other. You can create host beneficiary relationships in which you offer a free gift or a special bonus to another company\’s customers. This free gift or bonus appears to be coming from the other company, even though it is a referral and a new customer for you. In acquiring customers and entering into strategic alliances, joint ventures, or host beneficiary relationships, the critical number you consider is the cost of acquisition. Remember, you are in the business of buying customers at a price that is below the profit you earn from each sale. If you can buy your customers by advertising in various ways and make a profit on each customer after paying your advertising costs and all your cost of goods sold, you should do that more and more. If you can buy your customers by selling something to the customers of a strategic alliance partner, either by sharing or for a commission, then you should pursue that method as well. If you can acquire customers by giving a gift to the customers of a host beneficiary, you should go that route. Keep asking how much you can afford to pay to acquire a new customer. What are all the ways that you could spend that amount? In the financial statements of a Fortune 500 company? There\’s a small footnote that says it allocates 150 dollars for each new customer it acquires. It spends this money on a combination of advertising and bonuses that they give to people for buying from them for the first time. Could you do something like this in your business? How much would you be willing to pay to capture a new customer? Each product or service you sell yields you a specific amount of net profit. Because most companies bundle all their general expenses together, most businesspeople are not exactly sure where their largest profits are coming from; we’ve discussed this before in developing your profit curve.

  • You must first determine the rank order of profitability of every product or service that you sell.
  • Which is the most profitable both by individual unit and in total sales.
  • Which is the least profitable. And where do all your other products or services rank in between?

Most companies and businesses have no idea how to answer these questions. You begin this process of profit analysis with the average sales price that you receive for an item, after all, discounts, defects, shrinkage, and returns. It\’s important that you be accurate with this number. You then deduct 100 percent of the cost of goods sold, the exact amount it takes to offer this product or service to your customers. You start with the cost of the product or service itself. You then deduct all advertising and marketing expenses, selling expenses, including the salaries and wages of people involved in every aspect of product or service promotion, plus the amount you have to pay to salespeople, including social insurance, unemployment insurance, health insurance, and transportation expenses. Once you have deducted the total cost of goods sold directly and indirectly from the average selling price of the product or service, you will get your gross profit per item. You then analyze each administrative expense and allocate it to each product or service, the exact amount it costs to administer, and account for that product or service.

For example, if you have a service manager for whom you pay $25,000 per year and sell 1000 of your products yearly, you must allocate, per item, two dollars and fifty cents for his labor and one one-thousandth of his benefits package to each item sold. Go through every product or service you offer and allocate the exact cost, including the percentage of the rent for your facilities. The percentage of utility costs. The percentage of management time. The percentage of every dollar of labor you spend and even the percentage of time your accountants and bookkeepers spend sending out invoices, collecting bills, and maintaining accounts. The first time you do this exercise for a product or service, you will probably be shocked. You\’ll be surprised at the actual profit that you are making or not, from product to product or service to service. But once you have this knowledge, you\’ll be able to cut your costs and increase your profits consistently, dependably, and often rapidly. Your first discovery will be that certain products or services take up a lot of time but are not particularly profitable.

They may take up warehouse space, staff time, offices, utilities, insurance, and transportation costs. But you sell so few of them or at such a low profit per item that they\’re not worth the time and attention they take away from better selling, higher profit items. They are prime candidates for you to drop. In a strategic planning exercise I did with a company. I walk them through this exercise, helping them determine exactly what they actually sold, what their customers really bought, and where their profits were coming from. After this exercise, they eliminated 80 percent of the products and services they were offering. They got back to their core business and dramatically increased their profitability. And this experience is not unusual. No matter how you shake it down over time, 80 percent of your profits will come from 20 percent of your activities. But the shocker is to learn that your time and administrative expenses are divided equally across the number of products and services you sell. They are not allocated based on the profitability of these items. This means that it\’s probably taking you as many hours and as much time, trouble, and expense to sell low volume, low-profit products as it does to sell your most profitable products and services. As soon as you discontinue the low profit 80 percent of your products and services, you eliminate most of the expenses associated with keeping them in your lineup. Your company can often shift into higher profitability overnight. This is what turnaround artists do when they turn around a troubled company completely in just a few months. You should do the same with your business.

One of the famous turnaround specialists who got into trouble with the law for overstating sales and understating expenses was Al Dunlap for many years. He moved from company to company when he went into a troubled company. He was like a man with a chainsaw, pruning a tree. He lopped off every low profit, a non-performing branch of activity of the company, quickly freeing up the best people and resources to focus all of their attention on the healthiest parts and the most important customers of the business. He earned the nickname Chainsaw Al. You should think of yourself as a chainsaw as well. You must develop the courage and decisiveness to lop off all non-performing parts of your business. The only exception would be a poor-selling product or service that you can resuscitate and save by devoting more time and talents. But, you must be ruthlessly honest with yourself in this area, or you will throw good money after bad. One of the reasons business owners are reluctant to get rid of a non-performing product or service is that they personally thought it up. It may be a product or service that was very important when the business began. Often it is a new product or service that the owner came up with and in which he has invested a lot of egos. Rather than admit that it wasn\’t such a great idea, knowing what they now know, many business owners will take their attention away from their best-selling products and services and spend time and money promoting something that obviously has no future in the current marketplace.

  • The First Law of Holes is that when you find yourself in one, stop digging.
  • The First Law of Horses is when the horse is dead. Get off!

Keep applying zero-based thinking to each product, service, and market. Keep asking yourself if I were not doing this now. And I knew what I now know, what I started up again today. Get your ego out of your decision-making for your business.

Let\’s talk now a little bit more about what constitutes a profit-making business.

  • Rule. A general rule is that you cannot increase your profits directly, only indirectly.

You cannot just say that you will increase your profits with some specific strategy. The only thing you can do is improve the variables that ultimately determine your level of profitability. Let\’s look at them one at a time.