The old business model of a closed / control is failing us here online, we truly believe that if we are in control, put things behind walls, force people to pay first, we will create new money and all will be well. Not true. The new open & free model is somewhat the opposite of that model, your product & services are out in the open for people to try and use, then they will buy. Recently, media futurist Gerd Leonhard put his products out there for you to freely download and use, and announcing the payment model for his new iPhone & Android mobile apps: pay what you think it’s worth. Would you do this, you will in the future.
I can tell you first hand that most business owners are scared to death of this model, but what they don’t realize is, they will create more new money with this open & free business model than they believe they will. Now I am not saying there isn’t a need for controlled models, I am however saying, here online it can’t be maintained and have it survive. Gerd Leonhard stated in a presentation he made March 2nd, 2009, “Rights-holders / Content-Owners have the choice: Control + Declining Revenues or ‘Open’ and New Revenues “.
This is only one example of someone embracing the new open & free business model, he is trusting his marketplace, his following and current strategic business alignments to provide revenues. Social Currency (trust) is the key here, your brand must be trusted for this open & free business model to succeed. It’s not that simple, you must be open, transparent, and have integrity at all times. This sounds great but is a lot of work, maintaining this kind of model can’t be done with the current closed business model. The current model relies on control, fear and you not pushing back. We are moving to this model, it’s going to happen, why? You won’t tolerate the old control model, you want access first, you want to try before you buy, you will dictate how business is done. Eventually.
If you write a book or make a product and try to position yourself under the old model, you have to jump through all the control mechanism hoops. In the open & free business model you just make it available, you may not make money from the book immediately in terms of sales. You will however realize revenues by monetizing around the book, consulting, coaching, teaching and or maybe even get hired because of your insights and know how. Your book must be good of course, you must bring quality in order to get the attention you need to realize the levels of revenue you desire. Attention is another form of currency.
Chris Brogan is all about making business human again, he also knows you will help him drive that process. You may not know it, but you want business to be human, not a system making you a number. You want to feel human, be viewed as human, and most of all, you want to feel important. Chris knows we are all after the same thing really, he is helping you see it, we want to make a difference, and make the world a better place, we all want to feel important. The problem has never been the desire, it was the how do we do it. Social Media has opened the door for you to exercise what you didn’t know how to do, you now have a way to express yourself and make it happen. You will and are shaping the future of business, the open & free model even if you can’t see the bigger picture right now.
Eventually you will make it happen, Control Is Dead!
In July I wrote an article for you called, ” Your Break Even Point “. The premise was to help you calculate that number and for you to have a better understanding as to why you might be loosing money everyday and not know why. Your business depends on you knowing! I mean it’s not something real obvious because it’s kind of hidden, if you don’t have the right indicators in front of you everyday you won’t see it. Hopefully you were able to figure out what those indicators might be and you are monitoring them daily. I’ll assume you’ve done that because next I want to walk you through an advertising slash marketing concept with you.
Years ago when I was selling Radio Advertising we used a thing called Return On Investment Selling, it was an education and very interesting. The program was to show how you would be able to pay for a new ad campaign and make money too! Yep, pay for the advertising and make your desired ROI, sounds to good to be true right? Well….yes & no. Let me lay out a scenario and we’ll walk through this together, I think you will find it most interesting.
I’ll change the names and places to protect the innocent, just kidding. I’m going to take you through a simple Growth Objectives equation and an Investment Analysis so you can understand the number at the end when I’m finished. Oh, and the Forward Slash ( / ) means Divide By in my equations if I don’t use the ÷ Symbol, I thought I should clear that up right upfront 🙂
Let’s pick a market, let’s say you are in the furniture business and the Market Potential was say 5 Million Dollars. That means 5 Million Dollars in business is being done in the Market your business operates in. Lets keep it simple and say you have a present Gross Sales figure of $500,000. That means you have a 10% market share. But you want to realize a growth objective of $100,000 out of your market, what kind of additional penetration do you need to achieve your goal? You would need 2.2% more, here’s how I figured it out:
100,000 ÷ 5,000,000 – 500,000 = 100,000 ÷ 4,500,000 = .022 x 100 = 2.2 (actually 2.222222)
If you’re struggling with the equation, get your calculator out and punch it up. It works.
So now we know the Penetration needed to reach a $100,000 Growth Objective in your Furniture market. Next I’ll break down how many customers or prospects it will take per day to achieve your goal of One Hundred Thousand Dollars.
To make this equation work we will need to know a few things first before it will work. We need to know what the average customer worth is in your store, how much each customer spends in your store. We also need to know what your closing ratio is, a great way to see how well your sales staff produces I might add.
For the purposes of this exercise I’ll use an average customer worth of $1,000 and a closing ratio of 40%. That will keep the numbers easy to work with. The equation is somewhat simple, I’ll try to lay it out that way.
$100,000 / $1,000 = 100
Growth Objective / Avg. Customer Worth = Additional Customers Needed
100 / 40% = 250
Additional Cust. Needed / Closing Ratio = Additional Prospects Needed
250 / 312 = .08
Additional Prospects Needed / # of Selling Days (Days Open) = # of Prospects per day
Is the number of prospects needed realistic? Yes No
This is only part of the equation, this merely tells you how many prospects per day you would need above and beyond you current customer base over the course of one year or 312 business days.
OK, we now know what the daily number is, but it still doesn’t tell us what the additional Gross Profit is going to be. Well, if your Growth Objective is $100,000 we now need to multiply it by the Average Gross Margin. Let’s use a simple number and one that might be realistic, let’s use 25%. Using our numbers from above this is how the equations looks:
$100,000 x 25% = $25,000
Growth Objective x Avg. Gross Margin = Additional Gross Profit
So in order to achieve the additional gross profit of $25,000 you were going to need to make $100,000 more (above and beyond) in business over the next year. We figured out how many new prospects / customers it would take to hit that number (0.8 per day) and we felt it was realistic. Now, what kind of ROI did you want to achieve, I’ll assume you wanted 100%! You want to make $100,000 in additional business which would give you an additional gross profit of $25,000 and you want a return of 100%, right?
The question begs to be asked…..HOW?
Well, obviously you would have to do something different than you have been doing to achieve that fine 10% market share. You want to grab 2.2% more of that market right? That means you have to do something above and beyond what you are already doing in your advertising efforts. You WILL have to put more advertising dollars into achieving your goal of 12.2% Market Penetration, your $100,000 Growth Objective and put the additional $25,000 Gross profit in your pocket.
The ROI I’m talking about is what you have to spend in additional advertising dollars to make it happen. You are probably asking yourself how you figure out how much to invest in advertising dollars. the Investment Analysis is quite simple. Here’s the equation:
Desired ROI is 100%
$25,000 / 1 + 1 = $12,500
Gross Profit / Desired ROI as a Decimal (1 + 1) = Maximum Additional Advertising Investment
25,000 ÷ 2
So, you want to get 100% of your advertising investment back, you will spend $12,500 in new advertising dollars plus make $12,500.
You will Invest $12,500 in additional advertising to realize the Growth Objective of $100,000 in additional revenues that will produce and directly impact your bottom line by an additional $25,000. Cool & achievable based on the above numbers.
The above is an over simplified view, achieving a market share growth of 2.2% on top of the already acquired 10% market share is not easy, the numbers don’t tell the whole story. Now you still have to go through the process of doing the creative, copy, layout and cross promotional stuff but now you an idea in advance the hill or mountain you may have to climb.
I hope this helps you when you get the notion to grab more market share, do your homework and crunch the numbers. You will have a much better picture and it will allow you to enjoy the process of achieving it. Keep this in mind the next time your advertising sales rep wants to up sell you. If you want more real gross profit you will invest to get it, it’s a fact of life. Just make sure it fits your goals, think with the end in mind and work hard to reach it.
Until next Time.