Attractive Thinking. Chris Radford
products that work for customers.
The business has basic economics that work
Whether or not profit is the primary purpose of your business, if it does not make a profit (or persuade investors that its asset price will grow in the future e.g. Uber, Airbnb, Amazon, Google, Facebook) then it will not survive. We need cash and profit to pay for the previous three success factors. This is the fourth success factor. It really boils down to two measures:
Profit – does it cost more or less than the customer is willing to pay to deliver the product and service the customer wants?
Cashflow – will the business have enough cash to do everything it needs to do, or will it run out of money? If the business cannot support its early cash requirements, then are there options to secure loans or investor equity capital to see it through the development period?
As marketers and creators, we need to run the numbers and track performance. If we create a business plan and have that verified with our team and a finance professional, then we can get on with building a brand and invest in that as long as we track:
• sales volumes;
• sales revenues;
• pricing;
• cost of goods;
• overhead expenses;
• working capital;
• speed of payment by customers.
If we have these under control, then the profit and cashflow will follow. We need to understand this. Financial control is an important subject that is a whole separate discipline that we will not be covering in this book.
Who is responsible for each of the four things you must have in place?
Have a think about who looks after each of these four things in your business:
1 A value proposition for their customers that is relevant, distinctive and differentiated – who does this?
2 Communicate it with sufficient power – usually sales and marketing.
3 They make sure they deliver it every time and every day – usually operations, technical, customer service.
4 The business has basic economics that work – usually finance.
Many businesses do not have a function that is dedicated to creating and managing the value proposition. In consumer products branded businesses, the marketers assume responsibility for it. But often it is spread across different functions and the CEO is the only person who manages it. The CEO has many other things to do and needs some help.
Summary of the four things we must have in place
If things are not going too well and our competitors are doing better, then identify which of these four success factors are the problem:
1 A value proposition for their customers that is relevant, distinctive and differentiated.
2 They communicate it with sufficient power.
3 They make sure they deliver it every time and every day.
4 The business has basic economics that work.
One of the ways to fix number 1 is to reduce the price, but that messes up number 4. We may have to do that in the short term to survive. But we really need to fix the value proposition. In Part II, PINPOINT, POSITION, PERFECT and PROMOTE reveal the Attractive Thinking way to do this.
Attracting vs extracting
As a business leader we are driven by numbers, especially financial ones. These could be a matter of survival (cashflow), growth targets (revenue), generating returns (profit), or controlling costs (profit). We need profit as a means to retain freedom and control over the destiny and direction of the firm. The financial success of a business is a function of some critical numbers:
1 Prospects – the number of prospective customers.
2 Customers – the number of prospects who buy.
3 Volume – the number of sales made.
4 Price – the price achieved on each sale.
5 Revenue – which is volume {multi} price.
6 Costs – how much it costs to make each sale.
7 Overheads – the permanent infrastructure cost to run the business: Labour, premises, IT.
8 Profit – which is revenue less costs and overheads.
9 Capital invested – how much money has been spent to set up the business.
10 Working capital – how much money is tied up in the business e.g. stock or unpaid invoices.
11 Cash in the bank – and future cashflow.
12 Assets – things that we own that will produce income e.g. property, IP, machinery, systems, processes, customer lists, distribution agreements, franchisees, brand reputation.
13 Return on assets/capital – which is the ratio of profit to capital and working capital.
14 Share price or shareholder value – our current numbers plus the shareholders’ view of the prospect of us improving these numbers in the future.
That is a lot to keep an eye on, so we need to establish priorities. I find that if we focus on the number of customers, the price achieved, the cost of goods/services and make sure we collect on invoices promptly, the rest of the numbers fall into place. But it will be different for each business and for different business leaders.
Which numbers are the right ones to focus on? This depends on our situation. It will also be influenced by our need for quick wins and immediate gains vs our desire to create sustainable longer term growth or profit. Remember Collins and Porras in Built to Last17 produced some convincing evidence that purely focusing on the short term will not be as successful in the long term vs an organisation that invests in the future and knows its purpose.
How to choose the numbers you should prioritise?
There is one overarching factor that will determine how we make decisions, and this is whether we are focused on attracting more customers or extracting the most profit from our existing customers. This is also related to whether we are after quick wins and short-term gains in profit or want to build a long-term sustainable business. This mindset will drive the priorities and your decision making.
Attractive Thinking is about building a long-term sustainable business whilst also getting quick wins and short-term profits. It does not accept that there is a choice between the long term and the short term. What we must do is make our offer to customers more valuable and more visible and more available so we will attract more customers. Whereas the extractive approach is about the quickest and easiest way to maximise short-term gains. Let’s look at some examples of Attractive Thinking and the extractive approach.
The extractive approach is summed up by Figure 1.1. The extractive mindset looks at customers in much the same way as the cowboy here with his lasso. The customer is there to be targeted and captured, or even trapped into buying our stuff and preferably more stuff than they need. The customer is our victim. This is how customers sometimes feel when trapped by deals and offers. A good example is mobile phone contracts that force us to pay for more than we need each month; insurance companies that silently increase prices to people who renew their policy without shopping around; banks coming up with ever more hidden ways to charge customers whilst pretending to offer free banking, whilst knowing that we will find any excuse to avoid switching banks. These behaviours of entrapment may then be coupled with a drive to reduce the costs of servicing customers to the point where the customer experience is compromised, and it becomes difficult and stressful for customers to deal with the organisation.