Greed and Integrity
Anyone who has been in business will learn that they will come across people who are either very greedy or completely lack integrity. The problem is that many of us have been taught that “all is fair in love, war and business”. This then creates an impression that “greed is good”. I would like to challenge this.
Wanting to make money is a noble desire. Wealth creation creates opportunities for society and improves the well being for an entire society. It is the only thing that can permanently lift people out of poverty and cycles of low expectations. But dumb people (and you know who you are!) confuse business acumen with something which is Greed.
Business acumen is about how you can generate value for your customers or shareholders, and capture some of that value for yourself and your backers. Greed is very much about what you alone can take out of a situation. A good acid test on whether you are acting with greed or with business is how you feel about describing your actions.
If you are embarrassed or want to blame someone else for what you did, it is greed. If you are able to stand up and tell people how you created value- it is more likely to be good business acumen on display.
I have always tried to behave with integrity in business, but that has not always been the case. When I was very young (pre-University) I did a couple of things which were acts of greed. As such, we should always make allowances for people who are young and in a hurry. But there must come a time in your life when you should know better.
I have had experiences with greedy people (more so recently than in the past bizarrely) but the great thing about greedy people is that they reveal their hand very early. Tell tale signs to look for are
1) If you are not clear about the motivations of your business partners – that is a big red flag. I tend to tell people within minutes what I want out of a situation.
2) They invoke religion as a character reference. One of my best friends and business colleagues is a very devout Christian, but he never uses that as a reason why I should trust him.(a real tell tale sign of a crook. They will say – as a devout (whatever religion I will not do this or that)
3) Strangely, they never want things to be crystal clear in terms of who does what for what. They may stick to broad things like 50-50!
4) They don’t like people they are doing business with.
5) They agree with everything being said (even when they are totally contradictory)
You have been warned!
Marginal Cost + Sales cost v Revenue
Anyone who has been subjected to sit through one of my lectures, will know that I love Economics. I am so grateful to Mr. Shellard at my college for encouraging me to pursue this subject.
Economic concepts are so highly relevant to understanding business models and profits and I think more entrepreneurs need to understand concepts such as marginal cost and marginal revenue. But I think an important piece in this equation often gets missed which I hope to illustrate in this blog; the cost of acquiring and keeping a customer.
Marginal cost is simply the cost of producing the last unit. Some businesses have zero or very little marginal cost. So a cinema for example will have a zero marginal cost (the cost of allowing one more person to ‘consume’ a film). Equally, the transport industry has zero or virtually zero marginal costs. How much extra would it cost to sit one more person on an otherwise full flight from London to New York? Perhaps $50?
Economic theory states that providing you can cover the marginal cost (and do not confuse marginal cost with average cost) you are always better off making that trade. Profit is maximised where Marginal Cost is equal to Marginal Revenue. This is very much the pricing model that airlines and hotels adopt.
But, you can still be making big losses as a business even if you are covering marginal costs (because you may not be covering average costs). Again an airline may have a very expensive average cost of a flight – and the breakeven may be to get the flight 70% full. But given that most of the costs are going to be incurred anyway, providing they can get marginal costs covered, it is always a better decision to accept that additional ‘contribution’ to the average cost.
Digital businesses often assume that they have zero marginal costs. This is true to a certain extent. But what is often missed by a lot of businesses I deal with is the cost of selling to a customer and then keeping that customer.
It is easy to think of your cost of production – and thats it. But what about the time, effort and SEO cost that goes into acquiring that customer?
And many people will want customer service – that can be thought of as a marginal cost (if x% of people will phone and take up y% of time, you can add that to the cost). Often businesses fail to make a profit because they confuse this element as a fixed rather than a variable cost. The business plan assumes that this overhead is fixed and not related to sales volume. This is not true.
One of the companies I spent some time with recently, wanted to employ some account managers and I had to show them that there simply was not enough margin in their pricing for them to afford to do this (even though it would grow revenue).
Entrepreneurs have to remember the old adage from Economics “Sales is vanity, profit is sanity, but only cash is reality”.
Have you worked out the true cost of each sale?
Trymeum
When I worked at PwC in Villiers Street, we had several sandwich stores right in front of us. I always used to go to Benjy’s (a cheap chain) and pay 99 pence for a ham and tomato. I could never understand why people would pay £2.99 for the same sandwich at Pret. It seemed madness to me.
And then one day, I was at a meeting with a client and someone had ordered sandwiches and I remember being totally and utterly wowed by how good it was; it was from Pret. Since that day I have become a premium sandwich addict. Extra quality is worth paying for.
I was reminded of this episode this week because it was the first time I was flying from Heathrow since I became an ‘Elite’ flyer. The perks of this status included being able to use the Star Alliance business lounge. I had always questioned why someone would pay £20 to use one of these lounges – and after just one trip, I am wondering how I survived without using it!
And it just got me thinking about the problem that a lot of businesses have is in persuading potential customers in a market that the premium service they provide is worth paying for. With a branded product like cars, clothes sunglasses etc, it has always been easier. With a service it is difficult because you are asking people to take a massive risk. They have to pay for something and they will only know if it was worth it when its too late.
So what can you do to de-risk this?
Well, if my experiences on both sandwiches and airport lounges are anything to go by, it is essential that you find a way to get customers to trial the product. With clever targeting you can ensure you are providing this service to just the right people.
Internet based services have always struggled to get consumers to pay for premium services (LinkedIn and newspapers for example). There are several reasons for this. Firstly, most people are too content with the free model that is often offered. (And I simply detest people who say Fremium model – what does that mean?) There is also the question of competition that is offering services for free.
And finally, many premium services require personalisation and personalised delivery that many digital companies are not best placed to deliver (and indeed it does not make economic sense for them to do so).
So if I can invent a meaningless word to compete against Freemium – it would be Trymeum!