Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, “What is Your Profit/X?” The results showed that there this concept is not clear to many. So I will try to provide some clarity below.

What is Profit/X?

Jim Collins, in Good to Great, said,

“The essential strategic difference between the good-to-great and comparison companies lay in two fundamental distinctions. First, the good-to-great companies founded their strategies on a deep understanding along three key dimensions; what we came to call the three circles. Second, the good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts … one particularly provocative form of economic insight that every good-to-great company attained is the notion of a single ‘economic denominator.'” 

The economic denominator is Collins refers to is “X.” So if you could pick just one “profit per X” ratio to increase over time systematically, what “X” would have the most significant and sustainable impact on your business?

Whatever it is, it is your single, overarching KPI, and to achieve that status, it needs to meet the following:

  • Everyone in the business knows it.
  • It is the factor by which all significant, strategic decisions are measured.
  • It has a positive impact on revenue and is cost-effective
  • More “X” is desirable.
  • It is tightly aligned with your long-term vision.
  • It is unique within your industry.
  • It should improve your team’s discipline and focus.
  • It should decrease the likelihood of spending on initiatives that end in failure or don’t align with your strategy.
  • It can always tell you whether you are trending forward or backward? 
  • Everyone understands their role in driving its improvement.

How do you determine it? 

Again from Good to Great, “The denominator can be quite subtle, sometimes even unobvious. The key is to use the question of the denominator to gain understanding and insight into your economic model.”

So, determining your “profit per X” is not just choosing what appears to be the most obvious answer, as many do. Instead, you need to understand your company’s economic model. Don’t just accept any denominator, but figure out what is the strategy to increase it.’

However, determining your “profit per X” is difficult! It requires an investment of time and effort and will be the source of many debates and disagreements. Not only that, but once you do agree on your unique KPI, it needs to be managed, which is also tricky. Finally, it requires the discipline to review and monitor it continually; otherwise, it won’t provide helpful insight.

Determining your unique economic denominator is difficult. Because it’s complicated, many companies are unwilling to invest the time and effort required for this exercise to succeed. 

Remember, what works for one company may not work for yours!

Those who struggle to determine it?

Some of the CEOs I asked struggled to develop their “profit per X.” What is apparent is that those companies are not clear on their core customer and marketplace, so they cannot clearly articulate what problem they’re solving and for whom.

A CEO didn’t have the data on their profitability per client, so without that, they couldn’t determine effectively who their core customer is. However, he informed us that the larger customers were the most profitable. Suppose the data shows that is the case. In that case, they are probably over-servicing their smaller clients and making barely any money from them.  If the company lost all these smaller clients, they would be only marginally worse off.  It would be better for them to focus most of their resources on our higher value, larger customers, which will lead to exponential growth.

It needs to align with your strategy.

It is critical that “profit per X” is tightly aligned with your long-term vision. Many companies either pull a random number out of thin air or align it to a vague aspiration statement. That will not work! Your strategy and “profit per X” must support each other, and your strategic goals should be measured in the same units as “X.”

Some of the CEOs I mentioned said “gross profit per FTE” and another revenue per FTE with a general assumption on profit levels. The latter fails the test above because no one in the company knows it, gets behind it, and it’s not measured regularly. Gross profit per FTE reflects efficiency, but does it align with the strategy and drive growth? If the strategy is to be the most efficient in the industry, maybe. But if your strategy is to grow to $XMM in revenue and be the market leader, probably not. Using up valuable management cycles and energy to improve efficiency will distract from your growth objective. Instead, find a “profit per X” that drives revenue growth.

Unique within your industry.

When discussing this concept recently, someone mentioned that they didn’t believe it needed to be unique to your business. However, suppose the key driver in your economic engine is the same as your competitions’. In that case, you are all focused on pursuing the same outcomes from the same market. The result is that you are viewed as a commodity rather than differentiated from your competition. Once you’re a commodity, it is a race to the bottom.

Also, a good “profit per X” can provide an advantage to your business even during an economic downturn by differentiating the company from the competition and focusing on revenue and costs containment. It can help a business succeed, even if it’s in a dying sector.

Here are some examples of how uniqueness can enable your business to scale dramatically.

Walgreens. In Good to Great, Collins uses Walgreens chemists as an example. The industry model was profit per store, so to increase “profit per store,” the trend was fewer larger stores. Instead, Walgreen adopted the Starbucks model of profit per customer visit. As a result, they focused on opening lots of smaller stores instead of a few big ones. With more (conveniently located) stores, customers’ likelihood of coming to one of their stores increased. Since the customers were no longer visiting for a single purpose, customers’ spend per visit increased.

Southwest Airlines. The world’s most profitable airline. Southwest identified that their core customer was someone who would otherwise get the bus or drive. They weren’t solving the problem of a Fortune 1000 executive who needs to fly from the US to Europe on a flatbed. With customer clarity, their “Profit per X” was profit per airplane. They made their money while their planes were in the air. They identified their competitors, not as other airlines, but bus companies. So, their business was focused on price. They stripped out food and assigned seats to increase profit per airplane and only used one model – the 737.

Autopia car wash. Like many companies, it was focused on “profit per customer.” While they offered car wash memberships, the “profit per customer” metric showed membership customers were less profitable. They took up more admin time to update credit card details than single-transaction customers. 

However, looking at the data and examining the company’s economic engine, the CEO realized membership customers were ten times more valuable, not the inconvenience he perceived. The company pivoted its model to focus on memberships, making customer satisfaction and member benefits central to the strategy.  Profit per membership card became the new “profit per X,” the one metric that drove the company’s growth. (Thanks to Doug Wicks, a Scaling Up coach, for sharing this story).

New System Laundry. New System Laundry serviced the hospitality industry, picking up and delivering laundry. Again their “profit per X” was profit per customer. However, given their core customer, they could only scale the business by increasing business per customer or prices. They re-examined their business and economic model. Changing their “profit per “X” to “Gross profit per truckload” enabled them to focus on reducing cost per delivery through more efficient delivery routes and schedules, customer clustering, and core customer locations. They added new customer locations strategically, and the business grew dramatically! 

A jewelry design firm. Their initial “profit per X,” like many, was profit per customer. However, looking at the data, it was apparent that many showroom customers were not profitable as they took up too much time and didn’t spend enough. As a result, the owner closed the showroom and moved into a studio, taking customers by appointment only. Taking appointments on weekends and offering champagne and hors d’oeuvres while customers shopped, revenue per appointment increased over 400%. As a result, “profit per X” is now “profit per appointment.” By optimizing appointments, the business can scale dramatically. (Thanks to Glen Dall, a fellow Gravitas coach, for sharing this story.)

So what is your “profit per X?”

As I have tried to show above, profit per X is different for everyone. It needs to align with your strategy and drive dramatic growth. What works for one company doesn’t necessarily work for you. 

Below are some examples to get you and your team’s imagination going about what is the unique economic denominator for your company:

  • Profit/customer visit or interaction
  • Profit/customer
  • Profit/employee
  • Profit/location
  • Profit/geographic region
  • Profit/part manufactured
  • Profit/division
  • Profit/sale
  • Profit/purchase
  • Profit/life of the customer
  • Profit/plant
  • Profit/brand
  • Profit/local population
  • Profit/invoice
  • Profit/market segment
  • Profit/store
  • Profit/square foot
  • Profit/fixed cost
  • Profit/recurring revenue client
  • Profit/seat
  • Profit/plane
  • Profit/product line

If you would like help determining your “profit per X” and dramatically scaling your business, contact me.

(c) Copyright 2021, Marc Borrelli

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  • the vision
  • the people
  • the issues
  • traction – meetings and goals (“Rocks”)
  • the processes; and
  • the data

I am a supporter of EOS in that I believe all companies should have some system to improve their performance. However, as I have worked with clients who have implemented EOS, I found that it is just that, an Operating System and not a business model that enables the organization to grow!

As defined by Wikipedia, an Operating System is “the software that supports a computer’s basic functions, such as scheduling tasks, executing applications, and controlling peripherals.” So for a business, I defined it as “a model that supports the company’s primary functions, such as identifying a vision, getting the right people in the organization, improving meetings, defining goals (rocks), etc.” At the risk of upsetting EOS Implementers®, I think EOS satisfies these metrics to a varying degree, but in most cases, doesn’t enable the company to build a growth engine.

Here is what I believe is missing to develop a growth model.

The Hedgehog Concept

In Good to Great, Jim Collins talked about the Hedgehog Concept named after Isaiah Berlin’s essay, “The Hedgehog and the Fox,” which divided the world into hedgehogs and foxes. The theme is based upon an ancient Greek parable where “The fox knows many things, but the hedgehog knows one big thing.” Collins found that those companies who became great followed the Hedgehog Concept. Those companies which didn’t tend to be foxes never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent. 

The Hedgehog Concept is based on the questions prompted by the three confluence of questions. 

  • What can you be the best in the world at?
  • What are you deeply passionate about?
  • What drives your economic engine?

The EOS Model® doesn’t focus on the hedgehog concept, and so many companies using EOS have goals and strategies based on bravado than from understanding.

Knowing your hedgehog concept will keep the organization focused on something that aligns its passion with what it can be the best at. Being good at something means you are only good and indistinguishable from many others. If you are the best at something, then you stand above the crowd. Finally, the economic engine keeps the company focused on a metric that drives profit.

Vision

While the EOS Method® works to develop a ten-year goal, I find that is not as compelling as Jim Collins’ BHAG. A BHAG, Big Hairy Audacious Goal, is a clear and persuasive statement and serves as a unifying focal point of effort with a defined finish line. It engages people, is tangible, energizing, highly focused, and often creates immense team effort. People “get it” right away; it takes little or no explanation. 

A visionary BHAG is a 10-25 year compelling goal that stretches your company to achieve greatness. It should be a huge, daunting task, like climbing going to the moon, which at first glance, no one in the company knows how on earth you will achieve.

As Collins’s noted, the best BHAGs require both “building for the long term and exuding a relentless sense of urgency: What do we need to do today, with monomaniacal focus, and tomorrow, and the next day, to defy the probabilities and ultimately achieve our BHAG?”

Profit/X = Economic Engine

The BHAG’s economic engine is the concept of Profit/X. In Good to Great, Jim Collins defines this strategic metric as “One and only one ratio to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?” Unfortunately, too many companies don’t have an economic engine, so they fail to deliver hoped-for profits. This metric is not easily identified; however, Collins noticed that the companies that took the time to discuss, debate, and agree on one key driver for their economic engine are the ones that went from good to great.

Profit/X how you choose to make money; it is a strategic metric, not an operational one. This ratio is a key driver in your financial engine and when you make decisions about how to spend money. When developing your Profit/X, you need to have that is unique and not the industry average because if you choose the latter, then everyone will be pricing and driving costs the same way to maximize it. Like the BHAG, a correctly defined Profit/X will promote teamwork as everyone can focus on their role to drive the metric, from how many people to hire, where to open new operations, etc.

Here are some examples of Profit/X.

  • Profit/customer experience or customer visit
  • Profit/customer
  • Profit/employee
  • Profit/location
  • Profit/geographic region
  • Profit/part manufactured
  • Profit/division
  • Profit/sale
  • Profit/brand
  • Profit/local population
  • Profit/invoice
  • Profit/market segment
  • Profit/store
  • Profit/plant
  • Profit/purchase
  • Profit/square foot
  • Profit/fixed cost
  • Profit/recurring revenue client
  • Profit/seat
  • Profit/plane
  • Profit/product line
  • Profit/life of the customer

To frame this in a real-life context.

Southwest Airlines: Profit per plane

Walgreens: Profit/Customer Visit

New System Laundry: Profit/Delivery Truck Load

I think the EOS Method® ignores the following areas, but to me, they are part of the Hedgehog Concept. If you are doing something with clarity and focus, you need to have clarity and focus on these areas.

Value Creation

It is said, “A Business That Doesn’t Create Value for Others is a Hobby,” so what value does your organization create? Value creation is part of what you can be the best at. However, organizations need to know, “What is the problem they are seeking to solve for their customers.” Christian Claytonson defined this as “What is the job your customer is hiring you or your products to do?” Too many organizations define the job to be done as what they do, e.g., “We integrate your systems.” While that is what they do, that is not the job they are hired to do. The job they are hired to do may depend on the client but could be, “Provide information from across the organization to make better-informed decisions.” Knowing the job to be done enables your marketing and sales efforts to focus on the customers’ needs rather than on what you do. No one cares about what you do; they care if you can solve their problem. I don’t see the EOS Model®’s focus on this crucial question, but it is central to a company’s growth.

Core Customer

Who is the company’s core customer? I have discussed this before, and many companies can identify their core customer. However, most haven’t analyzed their customers from the point of view of Profit/X. If Profit/X is the driving metric of the organization’s profitability, then failing to know which customers meet and exceed it is crucial in defining your Core Customer. There is little point focusing on a Core Customer that doesn’t meet your economic engine’s critical financial metric, hoping that somehow you will magically capture the lost profit elsewhere. Furthermore, if you don’t know your Core Customer, your marketing and sales activities will be directed towards the wrong groups, further weakening your performance. 

Brand Promise

What is your Brand Promise, and how is it measured? This question is one that the EOS Model® doesn’t address. However, it is crucial.

  • It is what convinces your targets to buy from you. 
  • It is what you stand for and promise to deliver. 
  • It is the metric against which you will be measured.

Some organizations do have a brand promise, but it is not measurable. In that case, it is “valueless” because if it is not measurable, no one knows if you are delivering it, and in that case, it has no value to prospects or clients.

Value Delivery

Value delivery is vital for knowing how customers value the performance of the organization. While the EOS Model® discusses many metrics, this one does not get enough focus. Companies need to understand if their customers are satisfied with their performance. Recently, I spoke with a CEO who said that 80%+ of their customers were “Very Satisfied.” However, on further investigation, I discovered:

  • It was just a guess as they didn’t measure it.
  • 7 – 10% of their customers had complained in writing about their product and delivery in the last year.
  • None of their clients had recommended them.

Here is wishing over reality. I would expect that the company had a “Very Satisfied” score of less than 25%, and they should be working hard to improve their delivery and start collecting customer satisfaction data.

Critical Number and Counter Critical Number

The EOS Model® deals with goals (Rocks) and meetings, and that is one area that I think it does very well. However, I notice that the Rocks are not aligned to improving a critical number for the quarter. The Rocks should seek to improve some Critical Number each quarter. Without a Critical Number, you are once more a Fox, not focused. Those that use Scrums know the importance of the Critical Number. 

Rocks are great, but they need to improve a single business area to have the most significant benefit. As the saying goes, “You cannot defeat ten soldiers by sending in one soldier every day for 100 days.” For example, if our Critical Number is Customer Service in a Call Center, then the Rocks could relate to:

  • Hold time
  • Time on the call
  • Customer satisfaction at the end of the call
  • Percentage of calls resolved in one call
  • Employee satisfaction.

The Counter Critical Number is essential to preventing the critical number from overwhelming the company and leading to adverse effects. For example, if our Critical Number is project completion, then a Counter Critical Number would be customer satisfaction. This metric would counter the attempt to deliver incomplete or defective products or projects.

Focusing on a Critical Number and Counter Critical Number for the 13-Week Sprint is essential to developing focus and alignment within the organization.

Team Alignment

The EOS Model® does a great job of looking at the “Right People” in the “Right Seats.” However, what it doesn’t look at are alignment among the leadership team and employees’ satisfaction. Is your leadership aligned around the company’s direction or not? Culture will bring them to agree on values, but not necessarily alignment.

Your employees may all have the correct values, which is crucial, but if they are not engaged or dissatisfied with the leadership, cultural values will not prevent them from leaving or, worse, showing up but not there. Companies need to survey their leadership teams for alignment and their employees for satisfaction to ensure everyone is working in the same direction and committed to its success.

Conclusion

Thus while I like the EOS Model®, I think it doesn’t deal with many of the key things involved in the Hedgehog Concept. This failure enables companies to perform but not grow at an optimum rate. I am not ignoring many of his other areas of focus in Good to Great; however, this refinement of the Hedgehog brings an additional guide that the EOS Model® doesn’t. 

The above model is most of Gravitas 7 Attributes of Agile Growth® model, and if you add in the rest, you have a model that will propel you to growth while keeping your operations running smoothly. The 7 Attributes of Agile Growth® focuses on:

  • Leadership
  • Strategy
  • Execution
  • Customer
  • Profit
  • Systems
  • Talent

making it a more encompassing system. If you want to start your transition to an agile growth company as a certified Gravitas Agile Growth coach, please contact me.

 

 

Copyright (c) 2021, Marc A. Borrelli

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What is the Critical Number?

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When identifying the critical number for the period, frame it with a sense of urgency. “If we don’t hit this critical number, customer satisfaction will fall and drag down revenue, causing us to lose money and die, so it is essential to achieve this number.” That may seem a little extreme, but by framing it that way, the entire organization realizes its importance and has a ripple effect.

What About Your Counter Critical Number?

So, having identified your critical number and supporting “Rocks,” the following question to answer is, “What is the counter-critical number?” The necessary counter metric ensures that the focus on the key metric for the quarter doesn’t damage the company elsewhere. For example, suppose the critical number is customer support times, and we want to improve efficiency. In hitting that critical metric, we might provide worse customer support but achieve the support times we desire. 

So the appropriate counter-critical number might be customer support satisfaction scores. We need to reduce customer support time but maintain or exceed a customer satisfaction score of X. Thus, the counter number stops the organization from hitting the critical metric at a detriment to other areas of the organization.

Selecting the appropriate counter-critical number needs work, as we often don’t anticipate all the changes that can result from setting the critical metric. Think of metrics for sales teams, as great salespeople are excellent at figuring out how to hit their targets with the least amount of effort and gaming the system. Many sales metrics have resulted in bad outcomes because no one thought through the ramifications of the targets. So get your team together and challenge each other about what you would do to hit the critical number that might damage the company. Do not take pride in the authorship of the critical metric or argue that certain behaviors would never occur within your team. To quote Douglas Adams, “A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.”

As you work through this, a great rule is the “And” rule. You can only respond to any suggestion by agreeing with at least 10% of it and then improving on it by saying “And.” No “Buts” allowed!

Communicate and Celebrate!

Throughout the quarter, update the organization on its progress towards the critical number and maintaining the counter-critical number. Do this in weekly updates. Suppose you can’t generate the critical and counter-critical metrics weekly. In that case, they are bad proxies because, by the time you report them, it will be too late to correct to implement correcting actions to achieve them.

Also, when establishing the “Rocks,” critical and counter-critical numbers for the quarter, set a celebration budget. If you follow EOS, Verne Harnish, or any other management systems, you are aware of red, amber, green, and super-green targets. Basically, red = miss, amber = close, green = met, super-green = overachieve. The celebration budget should be dependant on the level of achievement, e.g., 

  • if Y% of the “Rocks” are green and none are red, the budget is $X;
  • if all the “Rocks” are green, then the budget is $1.2X; and 
  • if all the “Rocks” are green, but Z% are super-green, then the budget is $1.5X

Have the team, not the leadership, plan the celebrations for the different budgets and share them with the organization. Regardless of what it is, ensure that it’s something that will get everyone excited and motivated to work together to achieve it. If the numbers are reported weekly, everyone knows how they are progressing towards that exciting goal, and if they are missing some, they can adjust to try and achieve them by quarter’s end.

So go and set targets that will lead you to your 3HAG and not trip you up on the way. Celebrate each accomplishment. You will be glad you did.

Copyright (c) 2021 Marc A. Borrelli

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Knowing how much cash you generate is essential for planning for growth. Too many companies don’t know and when they grow they find they are continually running out of cash. Understand your cash flow generation and how to improve it through improvements in your Cash Conversion Cycle and using the Power of One.

What Are Your Critical and Counter Critical Numbers?

What Are Your Critical and Counter Critical Numbers?

The key to achieving long term goals is to define short term goals that lead you there. Focusing those short term goals around a key metric is essential. However, ensure that the metric will not lead other areas astray by having an appropriate counter critical metric act as a counter balance.

Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.

Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Who is your Core Customer?

In working with many clients on improving their business and developing a growth model, we soon get into the issue of their “Core Customer.” I have realized that many have not given this much thought and cannot easily define their “Core Customer.” Your Core Customer is the customer you are targeting, the customer that is preferred, and the one that your marketing and sales efforts are focused on. A Core Customer has the following attributes:

  • A real person with wants, needs, and fears.
  • Will buy for optimal profit.
  • Has an unique online identity and behavior.
  • Pays on time, loyal, and refers others.
  • Exists today among your customers

Not knowing your Core Customer is not a terrible problem, as we can quickly work through a session to put a definition in place. However, a more complicated issue is knowing their Core Customer but unable to define their “Economic Engine,” or profitability per customer. Lack of good data is always a severe problem! If you can’t measure something, then your performance is purely an assumption, and down that road is chaos.

Profit per Customer

If you don’t know your profit per customer, the customer you consider your “Core Customer” may generate sub-par profits pulling down the company’s performance. During a recent conversation, a CEO told me their metric was revenue per employee. While that would generate top-line revenue, it does nothing for profit, efficient customer targeting and marketing, or market differentiation. The business adage, “We are losing money on each item, but will make it up on volume,” seems to be the driving force.

Many companies I have worked with cannot tell me the profitability per customer and so work on the assumption that they are performing well, but cannot understand why they cannot scale and have profit and cashflow issues. Also, often their data is corrupted by the “Flaw of Averages.” So to paraphrase the proverb, “First get your data.” Sometimes getting good data on project costs is difficult, but without there cannot be:

  • Knowledge of performance;
  • Plans for improvement;
  • Measurement of improvement.

And “Hope is not a strategy.”

Select the Right Core Customer

Once we have data showing your Core Customer’s profitability, we can determine if they generate optimal profit. Since a requirement of a Core Customer, as mentioned above, if your Core Customer is not generating optimal profit, then there are one of two choices:

  1. Change your economic model so that they do, or
  2. Change your Core Customer.

When examining the data, many companies have found that the companies they were targeting as their “Core Customers” were their less profitable customers and ones that everyone in the market was fighting over. Targeting a different segment of customers that generated optimal profit could increase its profitability and differentiate itself from its competition, a great “Blue Ocean” strategy.

Lake Truck Lines, a Gravitas client, was focused on large customers. However, when analyzing its data, Lake Truck Lines realized that everyone was targeting those customers so there was pricing pressure and low margins. By make mid-sized customers its Core Customer, the company was able to operate with less competition and generate the optimal profit per customer. Similarly with Build Direct, focusing on young women seeking to do DIY, it was able to realize a much higher margin and operate in “Blue Ocean” waters compared to when it was focused on supplying general contractors.

The time spent analyzing your clients, their profitability, and your Blue Ocean possibilities can result in you operating at higher margins with less competition.

Profit / X

I have discussed the “Economic Engine” before, but it is the concept of “Profit/X,” Profit/X is the crucial part of your strategy, and it must:

  • Tightly aligns with your BHAG®
  • Be the fundamental economic engine of your business
  • Be a single overarching KPI to scale your business
  • It must impact revenue while controlling cost.
  • More X must be desirable.
  • It must be unique within the industry – you have to differentiate yourself from your competition.

What is critical is finding a Profit/X that is unique within your industry. If you choose the same Profit/X as everyone else, you are all competing on the same drivers, and you cannot differentiate yourself from your competition. Having identified our Core Customer, the appropriate Profit/X can be identified. Picking the wrong Profit/X given your Core Customer again will lead to sub-optimal results. These two concepts are interconnected and for you to achieve the best results, you need to determine both and have them connected.

Having the Right Profit/X

If your Profit/X is defined as profit per employee, you have only three ways to achieve this: increase the price, improve employee performance or cut the product’s quality. Since price should be driven by value creation, not employee profitability, raising prices may be difficult. We do not want to cut value delivery, and driving employees harder is no recipe for success. Thus a better metric may be profit per customer.

With customer size, if you are servicing large customers it may require longer larger projects compared to mid-sized companies. If mid-sized companies have more set up and administrative costs then your Profit/X must be different between the two.

There are many examples of Profit/X from Southwest Airlines’ profit per plane to a dry cleaner who measured it by profit per delivery truck. The key is to find the one that drives your business and will also differentiate yourself.

Conclusion

Many CEOs and Business Owners are salespeople and are not interested in digging into the financials and getting to the data I have discussed above. However, the effort is well worth it, as once you have a clear understanding of where you are, you can:

  • Target marketing towards your Core Customer;
  • Differentiate yourself from your competition;
  • Ensure that all projects, services, or products meeting your Profit/X to ensure profitability; and 
  • Position yourself for growth and profitability. 

Get your CFO, your team, and a coach and spend a day or two to determine the ideal results. The payoff will be huge.

 

Copyright (c) 2021 Marc A. Borrelli

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

Last week saw the birth and collapse of the European Super League (ESL). Living in Atlanta, to me, the defeat was on a par of the Falcon’s 2017 Superbowl and Greg Norman’s 1986 Masters. On Sunday evening, there was the announcement of the formation of the ESL, comprising 12 “founding clubs” from England, Spain, and Italy. Three other unnamed clubs were soon to join, along with another five teams that would qualify annually for the 20-team competition. Within 48 hours, it was dead!

The announcement of the ESL was accompanied by a promise to “deliver excitement and drama never seen before in football,” and did they deliver!

Why was the ESL formed?

Why? Simply, MONEY. The fifteen founding clubs were guaranteed a place every year with no messy football stuff like qualifying and relegation! The teams would capture a larger share of the revenues with less risk. Expectations were that broadcasting rights might generate €4bn a year, nearly double the €2.4bn brought in by the Champions League in the 2018-19 season. 

As Martin Baumann put it, “We can sell just about anything to the Europeans. Why not our hyper capitalistic cartel-based pro sports system?” That sentiment seems very popular on this side of the Atlantic. Many other commentators pointed out that the owners sought profits before tradition, financial opportunities before culture, and self-interest before communal identity. The ESL was the logical outcome of the increasing commercialization of football and powerful few’s desire for monopolistic control. To enable the ESL, J.P. Morgan underwrote its formation with a $4 billion line of credit. 

While I like capitalism, I find it interesting the claim that this is capitalism. So saying ignores a couple of the mainstays of capitalism – no monopolies or cartels and creative destruction. The owners were not imposing an American capitalistic system on football; they sought to create an American-style cartel to reduce risk and transfer more money to themselves. This has just been done with F1 under the ownership of Liberty Media, turning the ten existing teams from car manufacturers into holders of very valuable franchise charters. Of course, technology development will slow, and the product quality fall. But we can’t let that get in the way of making money.

American sports competitions, especially the major leagues, are all effective money-producing cartels. Professional sports leagues in the United States are monopoly-like structures that ensure that the riches are spread evenly among a self-selected group. The teams stay in the league no matter how they perform. So much for the American ideal of meritocracy! 

The only economic competition they face is from rival leagues; that is why the U.S. system is a century-old marketplace of rival sports leagues. The combination of less risk and less competition for talent produces higher profits for owners. According to a ranking last year by Forbes magazine, forty-three of the world’s 50 most valuable sports teams are American – aren’t cartels wonderful! Such a structure has several results:

  • “Brand value” is not necessarily tied to on-field success. The “worst teams” in one season get the best players through draft picks the following year. 
  • It provides an inferior product, as I have discussed before. Guaranteed a place in the league means there is no need to invest in the team and deliver a good product for the fans. Recognition that the product is inferior is reflected in U.S. sports capturing a smaller share of the global viewing audience each year. 
  • It delivers more money to the billionaire owners, who theoretically have invested in the clubs. In every American sport, an inferior on-field product isn’t a reason for billionaire owners to make less money, e.g., Tampa Bay Buccanneers. The Bucs, I believe, have the worst record of any team in the NFL, even though they have two Super Bowl titles – 278-429-1. With such a record, they would have probably been relegated in European sports and no chance at any championship.

For those unfamiliar with relegation, unlike American teams, European sides play in open leagues, where the three poorest performers get demoted to a lower tier, with stingier broadcasting and sponsorship deals. The three top performers in the lower leagues get promoted to a high league reaping greater rewards. Club owners thus gamble on making it to the top, investing generously at the expense of profits.

The European model is genuinely a capitalistic one where owners take risks and invest for a potential reward. Creative destruction is evident: between 1992 and 2014, there were 45 insolvencies in the top three tiers of English football, 40 in France and 30 in Germany. 

So why did the ESL collapse? 

I believe it was because of hubris. Through hubris, the founders ignored the sport’s business model and Ben Horowitz’s sage advice, “Take care of the People, the Products, and the Profits— IN THAT ORDER.” 

Hubris

Hubris is a terrible thing and causes many failures in life and business. Only hubris can cause a few rich people to come up with an idea that generates such visceral and universal hatred, or put another way, Never underestimate the incompetence of people.” The hubris of the American owners that they could easily impose the U.S. system on European clubs showed that they were willfully ignorant of an alien culture.

Value Creation

Value creation is about “the job to be done” for the customer. The league claimed it would be an exhibition of elite football. However, with no qualification, the teams would not have had to try very hard and thus reduce the value of the “job to be done.” However, even more concerning was that the league’s criteria were not based on being the best in Europe but merely the richest. Once a world power, Arsenal is barely one of the best in England and just a bougie to Newcastle United. Arsenal currently sits ninth in the Premier League table, out of reach of Champions League qualification, and likely to miss out on the less lucrative Europa League as well. Choosing the clubs by the wealth of the owners killed any pretense at value creation.

Marketing

The key to marketing is delivering on your brand promise. The brand promise in European sports is the promise of the club’s success. The basic unit is the club in European sports, which tends to be much older and more locally rooted than any franchise and far more fervently followed. Many clubs are over a century old and ripple with local associations and mythologies. For those who want a greater understanding, I would suggest watching Sunderland Til I Die.

Not only is the club the basic unit, but there is a “holy trinity” in a football club, the fans, the players, and the manager. The owners are there to invest and collect profits. Unlike in the U.S., when a team wins a championship, the owners are never seen lifting the trophy, only the players and the managers.

Sales

The key to sales is to know your core customer, the FANS. The fans were not amused, to put it bluntly. Unlike peripatetic American sports fans, English football clubs’ fans are even more zealous and less forgiving. The Glazers, Stan Kroenke, and John Henry were pretty much despised by the fans of Manchester United, Arsenal, and Liverpool, respectively, before the ESL. If they were unaware of this, the fans that welcomed the Glazers to Manchester chanting “Die, Glazers, die!” should have been a hint. The ESL announcement only made things worse. Liverpool fans were burning effigies of John Henry outside Anfield. A banner outside Old Trafford read, “Created by the poor, stolen by the rich.” A YouGov poll found that 79% of British football fans opposed the Super League, 68% of them “strongly.”

There have been massive protests by Chelsea, Liverpool, Arsenal, and United fans at Stamford Bridge, Anfield, The Emirates, the Carrington training ground, and Old Trafford within the past 5 days. All the fans have been complaining about the money taken out of clubs rather than investing in them. Opposition was fiercer still among fans of clubs outside the ESL, some of whom burned Liverpool shirts. However, American billionaires excel at ignoring public outrage. Kroenke and the Glazer family might’ve waited out the protests until kingdom come. However, the rest of the founders abandoning the ESL gave them no choice.

Value Delivery

The key to value delivery is keeping the customer satisfied which in European sports is RIVALRY. The rivalry between teams is local, not leagues as in the U.S. Liverpool’s main rival is neither of the Manchester teams but Everton, a mile from Anfield. The ESL would have removed these rivalries. Further, ESL was not designed with these in mind, but for millions of foreign fans, in Asia and America who care less about such details. In European football, this was heresy. But overall, the ESL would have stopped the key rivalries that make European football what it is and thus reduced value delivery.

The Outcome

There were apologies all around. John Henry issued a groveling apology to Liverpool’s fans: “I’m sorry, and I alone am responsible.” This is something I don’t any U.S. fan has heard from an owner. Also, JP Morgan has apologized, which shows how much it has realized that its role might damage its chances of getting business in Europe. However, apologies are the least of the owners’ issues as hubris takes its toll. The speedy collapse presents an opportunity for the wider community [members of the Premier League] to drive a harder bargain during the auction of a new round of Premier League broadcasting rights. The result is that the ESL founders may receive a small cut this year.

However, the real threat is regulation. Boris Johnson, Britain’s populist prime minister, read the tea leaves and thus vowed to “do everything I can to give this ludicrous plan a straight red [card].” Oliver Dowden, Britain’s sports minister, wants to examine everything to stop the new league, from competition law to governance reform. His words, “Owners should remember that they are only temporary custodians of their clubs; they forget fans at their peril,” should be a stark warning. Also, the British government launched a wide-ranging review into how football is run this run. There is pressure for British clubs to adopt the German community-ownership model with fans owning 51 percent. While some point out that fan ownership did not dissuade Barcelona and Real Madrid from joining, the Spanish and Italian leagues’ financial health is more impoverished than England’s.

Who says football is boring?

 

Copyright (c) 2021 Marc A. Borrelli

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Passion. Your employees are passionate about the “X” and excited about increasing it.
Empowerment. Your employees are empowered to make decisions to ensure the baseline Profi/X is met.
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Thus is it is your Economic Engine that will enable profitable growth.

Many people look for a quick answer in determining Profit/X, but there is no quick answer. It is an iterative process that will get there, but no something you necessarily come up with on the first try.

Profit can be:

  • Gross Profit,
  • Operating Profit,
  • Net Profit,
  • Gross Margin,
  • Operating Margin, or
  • Net Margin,

to name a few.

“X” is very variable and can be:

  • “Product/Service,”
  • Customer,
  • Invoice,
  • lb,
  • pallet,
  • truckload, or
  • plane.

For a better understanding of Profit/X, my video below may help explain it better.

Profit/X

It is well worth your time to develop your Profit/X and get your employees to understand it and embrace it. The discipline it provides combined with the drive and empowerment it delivers makes a very strong economic engine and ensures continued profitability through your growth.

 

Copyright (c) 2021 Marc A. Borrelli

 

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