The NBD model – ways to grow your business

Let’s get mathematical for a change and talk about negative binomial distributions (NBD) – more specifically the NBD-Dirichlet Model as developed by Andrew Ehrenberg (Wikipedia Link Here).

The maths of this need not put you off, however, if you understand the principles that Ehrenberg uncovered you will improve your business decision making rapidly.

For a great introduction to this model and also to read one of the best books on business I have ever read please track down Byron Sharp’s ‘How brands grow, what marketers don’t know.’  The following is a precis of some of the points from Byron’s book.

The above is an idealised version of a negative binomial distribution – I say this to mean that the percentages and frequencies are guaranteed not to match your industry, but the principles of this illustration are what counts. And apologies to Byron Sharp – the following is my poor attempt to paraphrase the key principles.

First off, you can see that light buyers represent the largest part of your buyers. In other words it is infrequent buyers who make or break your business.

I personally think you can also apply this to a service business too if you think of the number of purchases as blocks of billable hours.

Secondly, you can see that improving the loyalty of your frequent buyers won’t make that much of a difference to your revenues.

Thirdly, targeting a particular segment of your buyers is unlikely to make a material difference to your business. You are better off targeting the light, medium and heavy buyers through mass marketing.

Finally, as your market penetration grows the binomial distribution will stay roughly the same shape, it’s just that you earn more sales revenues. Again, this means you are better off targeting all buyers rather than a select few.

Ever since reading this I have been applying (and likely misapplying) this principle all over the place.

Even this blog and the user statistics bear out the NBD-model in a crude way.

My main marketing so to speak is LinkedIn. I post the blog on a Monday and my regular readers are on to it the same day. However, after reading about the NBD model I realised many people may log on to their LinkedIn account weekly if not monthly.

So given that most of us don’t go past the first page of news on LinkedIn by Friday my blog post advertisement would be buried by new posts somewhere on page 2 or 3 of your LinkedIn home page.

As an experiment I started reposting (sometimes) on a Friday, and lo and behold, readership went up as I captured those who log on on Friday and Saturday too.

To take it to the next stage, I realised that many LinkedIn users only log on every month or so – which I see when someone logs on and catches up on 10 or 20 postings – which happens once every week or so. So, the next step would be to repost old blog postings regularly (daily) as the light readers would be unlikely to have read that headline yet. On the other hand, regular readers will become jaded, and many people would start blocking my LinkedIn posts. However, targeting lighter readers appears effective.

One of the key challenges I would like you to take away from this is how you can best service light buyers.  

For example, the following are a challenge to those in the world I live in, service firms:

• Calling all law firms – while it makes sense to chase large clients which undertake a lot of complicated transactions, don’t neglect the many thousands of small and medium size businesses that only undertake a transaction every 5 to 10 years.
• Calling engineering consultants – winning major deals that employ hundreds of people for a couple of years does make sense. However, have you thought about how to win and deliver the smaller jobs for smaller clients.
• Calling bankers – winning the big deal is nice, but I bet if you added up a lot of smaller deals it would be better for your bottom line.

I have been talking to some of you out there about this, and the most common line I am hearing against targeting lighter buyers in the service industry is that there are too many overheads and that it is hard to be efficient.

My counter argument to that would be to say that if you have a large volume of customers in the light buyer category then you are likely to make enough margin to cover the overheads.

As to the efficiency argument, my response would be to commodify those transactions as much as possible. A lot of service firms build themselves up around providing specific tailored solutions to exactly match each client’s exact problems. I’ll bet a lot of customers will be happy with ‘a solution’ as opposed to ‘the solution.’ I am sure you will find that much of what you are doing is the same, except for the names of the companies involved.

So, next time you are talking to someone about their business, feel free to ask how they are affected by the NBD-model. It’s a great party conversation.

P.S. After posting the above I was watching the cable TV show Storage Wars in which the most successful businessman said, "It was when I started selling low end items instead of just high end furniture that I turned my business around and started making a profit." It took this man 20 years to figure that out - don't wait that long.

Can I have some more efficiency please

If cash is king then efficiency is the queen.

Also known as productivity, efficiency means taking care of only what needs to be taken care of in the most resource and time efficient manner. Every percentage point your people are more efficient means less cost per unit of production, which in turn means that you are more competitive, or more profitable, or hopefully both.

Government sponsored major public-private sector efforts to improve productivity in what then was mostly the primary (mining and agriculture) and the secondary (manufacturing) industries.

For example, on the factory floor time and motion studies are used to identify optimal layouts for equipment and motions for the workers. Management and supervision are modelled on rigid hierarchy.

However, in the tertiary sector - the knowledge, software and service industries - matters are not so straightforward.  If you can work out how to accurately measure productivity then you could make a fortune selling the idea.

There is no definitive ‘right way’ to instil efficiency as an aim in your people, only observations. Here are a few.

Being busy doesn’t mean efficient

Many of us believe that being busy is a sign of a good worker. We admire (consciously or subconsciously) busy people. They have a sense of energy and achievement that others want to be part of.

However, what if the person who is busy is just a perfectionist, unable to make timely and informed decisions?

What if they just fill their day with trivial and unimportant activities that do little other than keep them busy?

Being orderly is a sign of efficiency, or not

A clean desk and a clean workspace with everything in their proper place is important for efficiency isn’t it?

The answer to this is both yes and no.

There are many people who can’t concentrate if anything is out of place. You remember them from school, they were the ones who obsessively lined up their ruler and pencil on the desk to the nearest millimetre and would have a meltdown if someone moved their eraser. To these people having an orderly personal workspace is important as they can’t work properly without order.

On the other end of the spectrum are the paper collectors – you know who I mean – the types of people with foot high stacks of paper on their desk who know from experience roughly where everything is. If you mess with their filing system they too will have a meltdown as they won’t know where anything is any more.

The main problem with an overly orderly workplace is that it reeks of inefficiency. Everything in its place means nothing is at hand when you need it and you spend a lot of time organising rather than working.

So, let people use and abuse their personal workspace as they see fit (subject to hygiene and safety), and enforce a general level of cleanliness for the rest of the office. Understand that other people can work with and cope with different levels of orderliness.

Volume versus quality

Someone who produces a high volume of work must be missing out on quality, right?

The software industry has discovered that their most productive workers produce 10 times as much work as their least productive, and that includes higher quality work.

Having a thorough knowledge of your field, plus the innate curiousity that goes with finding out about new fields of knowledge and the drive to be more efficient are what I would be looking for if efficiency were my sole goal.

Many companies are now turning to practical tests to see whether potential candidates can perform the job well or not.  The reason for this is that in an interview process we tend to favour the well groomed and well-spoken candidate who may in fact be bullshitting you and maybe themselves about their ability.

Hire the best only – a bad mistake

One of the worst mistakes you can make is to build an organisation around one or two efficiency superstars (and yes, this may include you as the founder).

At the beginning you manage to pull off miracles on a regular basis for your clients based on your superstars. Everyone is happy: you, the superstar who gets to feel achievement, and your customers.

As your company grows you put on good people who do a great job and are highly competent. However, they may need more direction and support, and they don’t produce as much under the tight deadlines the superstars responds to.

At first your best and brightest take delight in coming in at the last minute and saving the project.

Later, this turns to resentment as they see themselves as the only ones who know how to get things done and they are only being paid about the same as everyone else. If you are lucky this is the point where they quit in disgust. If you are unlucky they will stay around and turn toxic.

So, hire a good team and recognise that they need help and support to be efficient. Leadership and culture will be key to improving the average level of efficiency across your organisation.

In other words, you need to bring your whole organisation on the efficiency journey, not just rely on a few key people to average out the inefficiency of the others. 

Cash flow management for a startup – learning to be frugal

Money doesn’t grow on trees, and for many startups the expenses that go with establishing a business come as a shock. The delays in revenues come as an even bigger shock.

Here are some of the key things to remember.

It will cost three times as much and take three times as long as you think.

This old saying is a reminder that you will either need to save more than you think before you start, and that you need to start looking for income or investment in your company as soon as you can. Also, forgive yourself for not meeting your ambitious schedule that wasn’t tempered against suppliers or the market.

Flog product as soon as you can

You may have grand plans for your ultimate product, but I guarantee that you will go bankrupt before it is ever developed. Products are always a work in progress. Always remember that your product needs to satisfy your customer first, and you second.

None of this is suggesting or recommending selling inferior products, only that you sell products that meet your customer’s needs.

On TV we are often treated to tales of people who stick relentlessly to their vision of product and quality and have reaped the benefits in the long run. Fine, yes a few do succeed, but you have a better chance of winning the lotto than doing this.

The people who do succeed like this tend to be artisans for whom there is a small but rich clientel willing to pay for the product.  You also need to have a decent amount of experience, the ability to deliver on your visions of perfection and an ability to ignore the fact that you are out on your own.

The market will tell you what is working or not, and you will very rapidly start adapting your business model and product to match.

In other words, you need to make money to pay for improvements to your product, and you can’t do that unless you are selling product.

Spend as little money as possible

To start a business nowadays you need a website, email address, a business card and a company. This should only cost a couple of grand.  I would have said computer, but as of the last year or so you can probably run your business on internet based software (SAAS) without even owning a computer if you really wanted to.

Wait till later to reward yourself.

Spend money on the product or experience

A typical trap for a startup is overcapitalisation. You pay too much for everything up front to build what you think is the way to run a business.

Stick to this rule – ‘If it doesn’t genuinely make a difference to the customer experience or genuinely help staff retention, safety and productivity, then don’t spend it.’

Here are some tips on saving money: 

1. Office and business premises are expensive, so work from home for as long as you can. Use telecommuting tools and online collaboration tools.
2. Pay a bit more for an unlimited phone plan.
3. If you are embarrassed by your car, catch a cab to important meetings or park your car round the corner and walk a bit further.
4. Spend time doing research yourself rather than paying advisors where you can. As the owner you have a vested interest in making things work, and your time is effectively free as long as you aren’t neglecting sales. So ask around for pointers, but do the heavy lifting yourself to save money.
5. Pay for a virtual office address. Sadly, many buyers feel weird about dealing with people working from home and this is why there are companies who will answer the phone for you, collect your mail and offer meeting rooms for clients.
6. Meet people in good cafes rather than in your home office or tatty cheap meeting room.
7. Meeting rooms, showrooms, retail space and the reception areas should always be professional looking, very clean and welcoming. If you don’t take anyone behind this façade it can be held together with sticky tape and string as long as it works.
8. Use public transport where you can and always but always travel economy class. If you really want to be fresh for that important meeting then it is often cheaper to fly economy class the day before and stay at a hotel for the night. 

Counter examples include: 

• Paying the money to be located near the majority of your potential customer base could be the best investment you make.
• Make sure your website looks great and functions well.
• Don’t skimp on IT for knowledge workers -  I make sure my team get a decent lightweight laptop with a good internet connection and current software.
• Allow people to personalise their work space a bit. That element of choice can make a big difference to morale.

Always bill on time

Yes, this is obvious, but when you are in the time consuming business of a startup invoicing can take second place to more urgent work – after all they have a contractual obligation to pay don’t they.

This is true to a certain degree and can work while you have a decent amount of credit available. The issue here is that the timing of revenues and expenses don’t match.

For example in my own business I pay my staff every two weeks and invoice monthly. In practice this means that I receive cash up to 6 weeks after I pay my staff. If I delay invoices by a week, then in many large companies this means that I am now allocated to the following months invoices, and I will then be 10 weeks out of sync. If you have large expenses this timing mismatch will kill your business faster than anything else.

The second reason for billing on time is more psychological. If you bill late you are effectively saying to your customers that you don’t care so much about money and that they can pay you late too.

The old rule is that if you act like you’ll get paid then you will. I have learned the hard way how true this is.

Learn to think short term to reduce locking yourself into longer term risks

Lease equipment at the start. Sure the monthly bill may be high, but you get to sign up a short term contract, or even take equipment on an as needs basis.

For physical products use rapid prototyping or other higher unit cost, short product run methods for your initial product. The reason being is that it the capital costs are a lot lower. You don’t want to spend $30,000 on tooling dies when you can print your product on a 3D printer or use a slower more labour intensive method.  Many of the truly cheap unit cost manufacturing technologies require you to make many thousands of your product. This can be the kiss of death to startups as it is pretty much guaranteed that your first design or two are not going to be as popular with the market as you think.

There are also manufacturers who specialise in short product runs and prototype manufacturing for complex goods. They spend a lot of money on equipment and sell their high quality services to a wide range of clients.

Use local IT people for any complicated web based business where you can. The reason for this is that you can have that face to face interaction and spend time with them to learn what the problems are and sort them out. Yes, this is a lot more expensive that hiring people out of India, Ukraine, the Czech Republic or so on, however, it makes the process smoother and brings local cultural sensibilities to design and wording.

Keep on being frugal

I could keep going on this topic, but you get the essence of it now. Learn to be cheap where it doesn’t matter and you will do better.

Selling: how to keep motivated

Do you sometimes feel you can't even get in the front door?

As I sit here at the quietest time of the business year my mind is turning to sales.

We don’t know yet what the troubles in Europe mean for the global economy but we do know that not all companies will survive the tide going out for the next little while.

Having fought my way through the last recession by taking on five times the normal customer base in order to maintain turnover (and almost having a nervous breakdown to go with it), I am furiously determined to come out of this one with a bigger and more profitable company.

So again back to sales – the lifeblood of any business.  Of the many aspects of sales my question today is how to keep your motivation up.

I don’t know about you, but the rejection can really get to me sometimes.

For every positive meeting you may have ten bad ones.

For every friendly phone call you get told to go away by four or five people.

Most of the time you can brush it off, but every negative experience takes a little piece of you and it’s hard to get it back. After over 7 years of selling professional services, recruitment services and engineering services, some days I feel worn down.

If you really want to feel some more rejection in your life just try selling recruitment services into middle management – it is a magnificently masochistic profession.

On top of the constant rejection there are also times where personal factors such as illness in the family, divorce, death of a loved one, etc. can sap your energy leaving you with little vitality for making sales calls.

Yes, I know taking a holiday could help, but guess what folks, when you are establishing the business that’s really not going to happen for the first year of two.

First I thought I’d start with a bit of a sidetrack into acting. Actors are selling themselves and their own ability, so the many rejections they face are truly hurtful. Their pride is trashed by rejection on an almost daily basis and they can’t separate their own ego from the product as they are the product.

Here are some tips from the world of acting.

http://www.ace-your-audition.com/dealing-with-rejection.html

http://www.actingbiz.com/articles/dealing_with_rejection.php

http://joy-osmanski.suite101.com/dealing-with-rejection-as-an-actor-a194744

Next, the following are links into articles and blogs from salespeople on how they deal with rejection and stay motivated.

http://salescareer.net/how-to-stay-motivated-in-your-sales-job/254

http://www.nextlevelsalesconsulting.com/sales-insights/free-sales-tips/tips-staying-motivated-while-prospecting.php

http://thomas-kelly.suite101.com/how-to-stay-motivated-to-make-sales-calls-a99215

http://www.davekahle.com/article/motivated.html

http://www.salesresources.com/articles/article.cfm?ID=103

http://www.inc.com/geoffrey-james/5-easy-ways-to-stay-motivated.html

http://salesgurunl.blogspot.com.au/2010/07/staying-motivated-in-challenging-times.html

Your observations are also welcome – please feel free to comment or email me.

As a good friend says – “keep on swinging, you might just connect”.

And remember to smile.