Wednesday, April 29, 2009

Big v. Better

Recently I read a blog by Seth Godin titled "Infinity - they keep making more of it." Essentially Seth poses the question to why is everyone focused on getting bigger instead of better? I call this decision matrix the “Return on Effort.” It takes into account what is more important (profit or revenues). I always say profit. If I can make $2 million selling $4 million, or $10 million selling $100 million, I will pick the $4 million. Why? First it is really difficult to sell $100 million! No one really thinks about that. It takes tons of resources, effort, people, planning, logistics, etc. Secondly, at $100 million and $10 million I only make 10% margins. So that every additional customer I bring on, I make progressively LESS profit due to the fact that I most likely be capacity constrained in some matter and will have to expend progressively more effort to expand. On the on other hand, with “less” customers but more profit, I have the freedom to pick and choose which new “profitable” customers I can add at progressively higher margins. Profit margins give me freedom to add incrementally more customers at MY choosing. Being bigger is usually not being better (on a lot of dimensions). While I am only making 1/5th as much money, I am expending only 1/10th as much effort to do so. I ask this question of just about every sales person I hire, and 95% percent of them get it wrong! Remember, it is ALWAYS better to get a 50% return versus a 10% return. Being the biggest is not always the same as being the best. Choose being the best (most profitable).

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