Read The Mobile MBA: 112 Skills to Take You Further, Faster (Richard Stout's Library) Online
Authors: Jo Owen
the fatal trap is to fall in love with your own product
At the other end of the scale, cosmetics are sold purely on the basis of forlorn hopes and dreams: buy our product and look young, beautiful, and glamorous. Just like the car manufacturer or Fairy Liquid, they will still refer to some of the features of the product, to give the consumer the reason why they can believe the product claims. For cosmetics, the feature is likely to be some exotic sounding ingredient which has been tested in some plausible way.
“Features, benefits, hopes and dreams” sounds obvious but it is not. Producers focus on features too much. And consumers will not tell you what their hopes and dreams are. Coca-Cola made the classic mistake of thinking of their product in terms of features and benefits: when they were being beaten by Pepsi’s “taste challenge” they responded with an improved product. Mistake. They were not just selling sweet fizzy pop. They were selling a culture, a dream of America and an identity. The market research never told them that and they never thought of it themselves.
No one says they buy Fairy Liquid to keep up with their neighbors, but they do. Instead, they play the producer’s game when they are asked why they buy: they start talking about the features of the product (it lasts longer and is mild on hands). So you need more than research and marketing by the numbers to market well: you need creativity and insight.
Everyone needs to sell. The more senior you become, the more important selling becomes. In some businesses this is explicit: you cannot be a partner in a consulting firm unless you can sell to clients. But even if you are not selling to clients, you have to sell your ideas and your agenda to colleagues.
The road to enlightenment is through failure, especially when it comes to selling. You can be taught all the theory, but it is only by messing up in front of clients that you learn, the hard way, what really works and what does not. So let us set aside the theory for a moment and learn how to mess up. If this saves you even one painful experience, it is worth it.
Think back to occasions when you have been thinking about buying but you did not. What put you off buying from that sales person? Here are some of the reasons I found when I have been buying:
• The salesman talked at me and did not listen.
• The salesman talked about his product rather than asking questions about me and my needs.
• I was given no space.
• He was more interested in making commission than in helping me.
• He gave me hype, not facts.
• He said trust me: never trust anyone who says “trust me.”
• I got confused by too much choice: the greater the choice, the less the chance of finding the best package. I did not want to look like a fool to my family by getting the second best deal.
Ultimately, people do not buy because there is too much risk and uncertainty. Buying is stressful. Imagine buying the office photocopier: get it wrong and everyone will give you grief every time there is a problem. From this, we can start to see some of the basics of successful selling. Selling is partly about products, but mainly about people. So it is as much an emotional journey as it is a rational one. The 10 basics of selling are shown on the next page.
None of these has anything to do with learning 25 different ways to close a sale. Most sales are not won and lost by learning fancy techniques. They are won or lost using the 10 principles on the next page: on the many occasions I have messed up it is because I have missed one of these 10 principles.
The 10 basics of selling
1.
Listen.
2.
Help more than you sell.
3.
Focus on the client’s needs, not on your product.
4.
Be expert, but don’t talk down.
5.
Give the client time and space.
6.
Offer a restricted choice of one or two options: simplify the decision.
7.
Focus on the benefits of the product to the customer, not on its features.
8.
Build trust, but never say “trust me.”
9.
Be positive and enthusiastic.
10.
Give the customer a story which they can tell their friends and colleagues to show that they have made a smart purchase.
•
The financial structure of the firm
41
•
How to use the Capital Asset Pricing Model
45
•
Assessing investments in practice
48
•
The nature of costs: cash versus accruals
55
•
The nature of costs: fixed versus variable
56
•
Cutting costs: method changes
58
•
Cutting costs: slash and burn
60
•
Cutting costs: smoke and mirrors
61
Some people fall in love with numbers for the same reason people fall in love with distressed donkeys: they are preferable to humans. But numbers are very dangerous. They give the illusion of certainty in a very uncertain world. You cannot run a business just by sitting behind your desk and dealing with the numbers. John le Carré wrote in
Tinker, Tailor, Soldier, Spy,
“A desk is a dangerous place from which to view the world.” That is as true for managers as it was for le Carré’s spies.
The good news about finance and accounting is that you do not need to be in love with the numbers: you do not have to be a math wizard. The key to working the numbers is to:
• Understand the business
• Understand the thinking and assumptions behind the numbers
• Understand why the numbers may or may not be reliable
numbers should support thinking, not constrain it
If you can do this, then you will be highly effective at dealing with finance, accounting, and the math of the business. So the focus of this chapter is not on numeracy but on thinking. If you think clearly, you will be far more effective than someone who uses numeracy as a substitute for thinking. Numbers should support thinking, not constrain it.
Math make some people break out into a cold sweat, while others start drooling with excitement. An MBA course makes all managers sweat the numbers and the math. Here are 10 ways in which you can drive business thinking into the numbers you are presented with.
Ten ways to control the numbers
1. Work the assumptions not the math.
You know that the spreadsheet in front of you will have been created from the bottom right-hand corner upward. People start with the answer and then create assumptions to fit the desired answer. You need to unpack the assumptions behind the spreadsheet. And if the assumptions are
not clear in the spreadsheet, do not be bamboozled by complexity. Insist on seeing a simpler version that highlights the real assumptions and variables.
2. Test the what-ifs.
Try different scenarios with different assumptions and see what happens to the projections. Let your spreadsheet do all the number crunching.
3. Remember the sacred numbers and reject the silly ones.
You should know your business and your core numbers: staffing levels, key budget line items, etc. If you see numbers that look odd, they are odd. Check them against your sacred numbers to see if the basic inputs are right.
4. Don’t be seduced by the average (mean, mode, or median).
The average human being is 52% female and has slightly less than two eyes and two legs (go figure that). There is no such thing as the average human. From a business perspective, outliers and segments are much more interesting than averages: they tell you more about your business and its opportunities.
5. Math is an aid to thinking, not a substitute for thinking.
The clear answer on the spreadsheet looks definitive, but it is not. Keep your business brain engaged. For instance, your analysis shows that lower prices lead to more sales and possibly higher profits with economies of scale; but perhaps they also cheapen the brand, get the customers used to lower prices, and invite competitive retaliation so you end up far worse off. Good math can be the enemy of good thinking.
6. Compounding is the most powerful force in the universe
(if an unlikely statement attributed to Einstein is to be believed). If your business grows at 10% per annum, it will double in seven years and grow to be 128 times its current size in your glorious 50-year career. And if one of my ancestors had put $1 aside for me at the birth of Christ at a miserly 2% compound, I would now own the entire planet (about $200,000 million million in value). Never believe a trend will last forever.
7. Understand causality
: is violence on TV a cause of violence in society, or is violence on TV caused by society’s desire for action movies? Do happy employees cause firms to be successful, or do successful firms cause employees to be happy? The math will show that there is a relationship, but will not show which is the cause and which is the effect. How you decide determines how you act.
8. Scale counts so think big.
How can I sell detergent for $3 when the required advertising costs $6 million, plus all the sales costs, overhead, and R&D before we
even start on producing the product and paying for the raw materials? If I sell 100 million units a year, I can afford all this and make a big profit. The same goes for selling phone calls for a few cents a minute or for many other businesses: scale changes everything.
9. Model your business.
Every business has a simple financial model behind it: understand that and you understand how to make your business more profitable.
10. Forget the advanced math and keep it simple.
Bayesian analysis and chi square distributions are taught at top business schools, but are rarely seen in the world of management. Math should not just analyze, it should persuade. An analysis that no one understands is not persuasive.
The secret is that you do not need to be good at numbers in order to be good at analyzing spreadsheets. You just need to know how the spreadsheet is constructed. All spreadsheets are constructed the same way, from the bottom right-hand corner backward. In other words, staff start with the answer you want and work back from that. If you expect a 15% return, you will find the spreadsheet delivers 15.4%; if you want a million dollar profit, the spreadsheet will predict $1.057 million. Whoever constructed the spreadsheet will have wanted to exceed the target return while avoiding a round number that looks too simple.
Armed with this knowledge, you can now analyze the spreadsheet successfully. There are three basic questions to ask:
•
The venture capitalist’s question:
what is the track record of the person presenting the numbers? A B grade spreadsheet from a manager with an A+ track record is worth far more than an A+ spreadsheet from a manager with a B grade track record. The numbers are only as good as the person who stands behind them.
•
The banker’s question:
what are the assumptions that lie behind the numbers? Subject every number to the “what if” test: growth rates, market share, costs, salaries, etc. Start with the big assumptions: assumptions about the costs of the coffee machine will not make or break the spreadsheet (unless your business is selling coffee machines).
•
The manager’s question:
do I recognize these numbers? Every good manager will know the basic operating numbers of their business: margins, costs, growth and more. See if the numbers in the spreadsheet align with what you know to be the reality of your business.
If you get positive answers to all of the above, you are probably looking at a robust spreadsheet. By asking these questions you may also uncover some uncomfortable truths. Either way, you will be in severe danger of looking very smart, even if you are the sort of person who normally hates numbers.
You are on your own when looking for practical and impartial advice on deciding what level of debt and equity your firm should have. The theory (Modigliani-Miller) looks mainly at the cost of different sorts of financing, but not at what is most suitable for your sort of business: lowest cost is not always the best value. Providers of finance are always biased in favor of the sort of funding they provide: debt or equity. In practice, your decision will be based slightly on cost and greatly on your risk appetite. Put simply, businesses with high risk should not double up their risk by taking on more debt; lower risk businesses can cope with more debt.
lowest cost is not always the best value
Risk is not driven simply by your level of debt relative to equity and/or cash flow. Risk and leverage are driven by the following:
•
Financial leverage:
level of debt versus equity. The more debt you take on, the more volatile your results will be. In good times, you will look very good. In bad times you will be the first to go bust: this is a lesson learned by private equity groups during the credit crunch.
•
Operational leverage:
high fixed-cost businesses are highly sensitive to volume variations. Airlines have high fixed costs of financing and staffing which leads to very low marginal costs of carrying one extra passenger on each flight. Yield management becomes a vital survival tool for all airlines.