As Boring as Bat Shit

Do you pretend the environmental change didn’t happen (the osterich strategy)? Do you react from the seat of your pants (the John Wayne strategy)? Or do you manage *live* strategic documents that guide your business toward profit and sustainable enterprise (the sensible strategy)? Before you answer that question, I’ll add that the answer should continue to be correct over the long-term.

There is no way around the fact that business can be mundane and boring. I agree. While corporate strategies may have a certain theoretical coolness, the areas of finance, accounting, statistics, law and general reporting are on the short list for uncoolest thing to talk about at the bar on Friday nights.

A good example: the reputation of the humble business plan is as likely to clear a room as throwing a wounded skunk through the door. Strategic marketing documents fare little better. Accounting forecasts seem to have invisible duck fat all over them because nobody will even pick them up.

So I get it. I do. Most of what business is about is boring and you got into it to be your own boss, follow a passion and take surfing holidays in the Philippines.

Get Excited about Live Documents

But here’s the rub… you should be excited to open your business plans and marketing plans because that’s where you’re going to identify new opportunities and threats ahead of your competition.

Given that the person who knows more and is finding out about the market environment has the first chance to respond… who do you think is going to win from a standing start? You will. Your business will have a constantly updated dossier on everything that comes past your corporate ears – your competitors’ pricing, their suppliers, their major customers. This is how you manage to sell your goods and services to the right people at the right price in the right place using the right promotion and employing the right people who will develop ongoing customer / supplier relationships.

This is how you know when to purchase a new asset or to rent it. Or to diversify into new directions or to divest non-core business units and regroup. The marketplace is dynamic… it’s not a static world you push into your drawer for 12 months and review with a yawn over a coffee. These are the business trenches.

Because you want to figure out who and why those customers go to the competitor with their money… and when you understand the answer you have a chance to poach that customer with a more targeted offering.

Live strategic documents are about the vibrancy of being in business. And they are about the business determination to survive in the marketplace over the long-term.

And I don’t care who you are… to defy those general rules you’re either a brilliant exception or a lucky exception.

What it Means to Manage Live Documents

Yes, I know that it all sounds like hard work but I have one suggestion. Just as a good accountant will make you more money than they cost, so will a good manager. Hire a manager to at least help you author the original documents.

From that point you’re not necessarily looking at a large time investment. A live document is simply one that you update whenever there is a change. If, for some reason, IKEA opens a superstore near your local airport and you sell bookcases then you’re going to lose a great deal of your market. It needs to go into one of your live strategic documents.

It’s that simple. Over time live documents not only allow you to better explain your business data points (successes and failures), they also improve your ability to predict and pro-actively adapt to upcoming challenges and opportunities in the environment.

I would also ask you to consider this: if you find a live document about your business is uninteresting then perhaps you’re in the wrong business. If you like the work then get a job… if you like the business of that work then put on a suit and start managing it like a professional.

That sounds harsh but in a shrinking world of hyper-competitive markets you have to make a tactical decision: sink or swim?

Businesses that refuse to plan mostly sink. In the short-term. Because of a wave that everybody who maintains a set of live documents saw coming six months earlier.

The Limitations on Australian Companies

However, in the modern world everybody should be aware that companies do have limitations on the claims they can make and the manner of selling they undertake to snag new customers. In the modern world it’s not enough to be greedy in business… even if you’re successful. You are going to be held to account for your marketing integrity.

The limitations for an Australian company are spelled out in the Competition and Consumer Act 2010. Prior to 1 January, 2011 this piece of legislation was more widely known as the Trade Practices Act 1974.

Any Australian company should understand what constitutes misleading and deceptive conduct under this legislation. And they should realise that:

No matter how a business communicates with you—whether it is through packaging, advertising, logos, endorsements or sales pitch—you have the right to receive accurate and truthful messages about the goods and services that you buy.ACCC

Legislation that Protects Consumers

When defining what constitutes misleading and deceptive conduct in business the ACCC provides these statements:

There is a very broad provision in the Australian Consumer Law that prohibits conduct by a corporation that is misleading or deceptive, or would be likely to mislead or deceive you.

It makes no difference whether the business intended to mislead or deceive you—it is how the conduct of the business affected your thoughts and beliefs that matters.

If the overall impression left by an advertisement, promotion, quotation, statement or other representation made by a business creates a misleading impression in your mind—such as to the price, value or the quality of any goods and services—then the conduct is likely to breach the law.ACCC

That means if you are selling goods or services as an Australian company you had better provide a realistic idea of what they can expect from the product. Wild sales pitches that cannot be guaranteed should not be guaranteed, for example. And I don’t see that as a hard call to make – you don’t mislead people about the benefits of something just to get access to their bank account.

Australian Consumer Law

It is well worth your while – business people and consumers alike – to check out the new ACL (Australian Consumer Law) website. A general description of the new Australian Consumer Law includes:

• a new, national unfair contract terms law covering standard form contracts;
• a new, national law guaranteeing consumer rights when buying goods and services, which replaces existing laws on conditions and warranties;
• a new, national product safety law and enforcement system;
• a new, national law for unsolicited consumer agreements, which replaces existing State and Territory laws on door-to-door sales and other direct marketing;
• simple national rules for lay-by agreements; and
• new penalties, enforcement powers and consumer redress options, which currently apply nationally.ACL

The ACL applies to all Australian businesses and all transactions since 1 January, 2010.

If you are a consumer and you feel that any business has been misleading or deceptive then I would recommend that you should make a complaint to the ACCC.

Lodging a Complaint against a Seller or Proprietor

The process is to contact the seller or proprietor to attempt negotiation of the issue and if that fails then notify them of your complaint and your intention to take it further with the ACCC. If you have no response from the seller or proprieter after 10 days to 2 weeks then write a letter to the ACCC to lodge your complaint. You may want to also talk to a lawyer.

The problem is really as simple as this: we get the business environment that we deserve. If we don’t demand honest businesses then we won’t get them. Yes I do understand that entrepreneur’s feel that selling is just the ticket to get your dollar… but that’s so old school. We expect more from entrepreneurs and businesses nowdays.

The ACCC website also have this to say… and Australian businesses should pay attention:

We are more likely to take action against a business for misleading advertising if it has been carried out through a medium that reaches a wide audience, such as over the internet, on national television, or through a nation-wide print advertising campaign.ACCC

Just be Honest & let the ACCC know your concern

The Internet, for example, is NOT the Wild West. And even if you complain and nothing happens… others may be having the same issue with the same business. Eventually the ACCC will see a pattern and may decide to act to protect Australian consumers.

Just be honest about what happened, provide all the documentation that you can, and about what you can and cannot prove. Obviously smart operators will keep the incriminating stuff verbally on the telephone and watch their words within the email trail.

And don’t let anybody bully you out of complaining… by threatening you with a legal action. It is your legal right as an Australian consumer to complain to the ACCC if you have concerns.

The Myth of Writing your own Contracts

One of the stupidest things anybody could do in business is try to shortcut their way through the legal landscape. Just like accountants will save you more money than they cost… so will hiring a decent lawyer.

For a lot of people this is real news: a contract isn’t just anything you cobble together and get some fool to sign. There is a structure, like a dance, that determines when and where any contract was made, the parts that are valid and the aspects the courts will or won’t enforce. But I’ve received my fair share of these self-authored car wrecks to know it’s a real problem. People do want to cut corners in the short-term.

The real and present danger is that small businesses generally have no idea about contract law… and I’m hoping they might glean one thing from reading through this series of 15 posts (starting with Contracts 101 – Part 1: Outline). That one thing is this:

Sometimes you just need to know when to hire a lawyer. Appreciate what you don’t know.

Installments in Contracts 101

• Contracts 101 – Part 1: Outline
• Contracts 101 – Part 2: Which Contract?
• Contracts 101 – Part 3: The Six Elements
• Contracts 101 – Part 4: The Agreement
• Contracts 101 – Part 5: The Offer
• Contracts 101 – Part 6: The Acceptance
• Contracts 101 – Part 7: Battle of the Forms
• Contracts 101 – Part 8: Consideration
• Contracts 101 – Part 9: Capacity
• Contracts 101 – Part 10: Legality of Object
• Contracts 101 – Part 11: Possibility of Performance
• Contracts 101 – Part 12: Genuine Consent
• Contracts 101 – Part 13: Promissory Estoppel
• Contracts 101 – Part 14: Ending the Contract
• Contracts 101 – Conclusion: Protect your Business

Resources for this Series

The bulk of this information is obtained through Australian Business Law 26^th edition by Paul Lattimer, Managers and the Law: A guide for Business Decision Makers by Lynden Griggs, Eugene Clark and Ian Iredale, A Guide to Business Law thirteenth edition by John Carvan, John Gooley and Evelyn McRae, Law in Commerce third edition by Brendan Sweeney and Jennifer O’Reillly, as well as through the MBA unit BFA682 Law for Managers taught at the University of Tasmania by Simone Watson in 2009. These resources are highly recommended for improving your understanding about these issues. Many case files hyperlinked within this series are directly accessed via the Austlii database (Australia) and the BAILLI database (United Kingdom).

The part that really gets me is that cameras can go in and reveal mouldy fridges and grubby hovels, they can reveal the most disgusting vestiges of slop being fed to patrons… Ramsay can show them they’re losing a thousand pound every week… they’ve lost their house and live in a box in the alleyway… everything in the commonsense world says THIS IS FUCKED – but the restaurateur disagrees.

And that’s the amazing thing about offering advice to small businesses whether they’re doing well or going down the drainpipe. The owner is in the trenches with invested money and emotion. The owner is invested in a dream… in reconciling the success or collapse of that dream in their own fragile human world. So when Ramsay comes and tells them the facts, they don’t find it easy to accept.

This is the saddest part about watching a lot of small businesses slowly fall out of business. Sometimes it’s not that hard to pick what’s wrong – they’re selling too expensively or too cheaply to be viable concerns, their value proposition is crap against the alternatives, they’re not breaking even, they haven’t figured out that you need a strategy and focus… and the entire enterprise is falling over.

But what do you do? I mean, if the owner even respects your ability to identify and fix an issue then you can bet they’re not going to hand over the keys. Even if they hire you on board as a manager… they still probably won’t hand over those keys.

The keys to the shiny Jaguar that lives in their minds-eye when they envision their beautiful (but probably struggling) business.

Sometimes all a business is doing wrong is not understanding who their real competitors are… or they’re in the wrong business… or they’re trying to sell ice to fucking Eskimos (or Innuit)… or there’s a systemic issue with some slugger in the office playing gatekeeper. Sometimes they just don’t realise where the niche opportunities lay or who are their real customers. Quite often it’s a matter of realising that debts should be payed slower and collected faster because cash is the lifeblood of meeting short-term financial commitments as they fall due.

Sometimes it’s all of that and more… and it can be theoretically complicated to explain without a shared professional vocabulary.

Because, don’t be surprised by this, business isn’t all about living the dream. It’s all about being in business. It’s about realising the reason you are in business isn’t even to make money – the reason you’re in business should be to serve social needs not met by government; the reward for doing that well (better than most) is people will give you money.

Money is a consequence of doing all that other stuff correctly. All the Ramsay detail laid out in Ramsay’s honesty. You may like the man or not; he produces one of the best practical small business shows on commercial television if you’re interested in how small businesses struggle to evolve and adapt to their market.

A good example is the first-mover in an area. Say you make a suite of software that automatically records the amount of alcohol consumed over a night of drinking and based on your weight, body mass and other known data it can give you a ballpark figure on your inability to drive. This, in turn, disables your (modern) car unless you sync another person’s smart phone to the driver’s role. That smartphone needs the mobile application and the relevant data… or the car is stuck until at least 8am. It may also phone a relative for automatic notification, pay any parking fines by default and serve other simple needs.

Yes, that’s a bullshit application that probably doesn’t exist but let’s run with this hypothetical.

Because nobody else has worked on this specific area of application you’re in a good position to make a decent profit. Things look good. Your team are developing expertise that give you advantages over other businesses – industry contacts, research driven design decisions and capital raised from private investors. Things are looking good.

[Note: please don't send emails about existing applications or technical limitations... this is a hypothetical, OK?]

But it’s never that easy in a hyper-competitive globalised world. Everybody is watching you, including your existing (and future) competitors. One rule of thumb is that any area where money is made will attract competitors like flies to a lamington… someone out there will want to create that drink-driver application faster, cheaper, better and with a bigger smile… possibly, on a larger scale. They’ll either try to expand the current profit pool (imagine that as a large pie being upsized) or they’ll want a share of the existing profit pool (meaning less pie for your business) and push you out.

Second-movers have don’t have to invest in all of that expensive research and development… they can reverse-engineer the product you sell them. They have the advantage of riding on your coat-tails after you’ve marketed the original idea to a buying public… you’ve found that public and already convinced them how good the idea could be for social improvement. And second-movers often have plenty of time to check off big ticks against your faults until they enter the market with a significantly superior value proposition and business model.

However, the main second-mover advantage is that they stand back and watch every hurdle you jump on your way through the experience. They learn huge lessons from your expensive little mistakes. Then they implement and improve on your efforts.

Being aware of that is an important part of staying in business. And even if you think you’re alone in a market segment it’s necessary to improve your processes and hone your value proposition. Competitors are always watching, no matter what business you’re performing.

Your first step in this valuation process is to categorise your customers into three groups:

1. The few who are highly profitable and contribute the most to your business
2. The larger group who might move up into the highly profitable section and who have a high lifetime value
3. The largest group that are unprofitable and show little hope of increasing that value

The first group have to be considered in terms of retaining their business – build on their customer loyalty, value-add and offer special deals and consider offering some level of personal support. The happier and more satisfied your highly profitable customers the less likely that you’ll see a migration over to a competitive service.

The second group is going to be larger and your emphasis has to be on growing their value to push them into the first group. Individually these customers could provide less value for the business but they are profitable spanning their lifetime value. Lifetime value includes their sales but also the new business they bring in through advocacy. You would address this group with strategies to up-sell, cross-sell, offer recommendations and try to incentivise buying behaviour and develop customer loyalty.

The third group are simply unprofitable and you may need to consider whether you want them on your books. You have to weigh the cost of possibly moving them up to the second group, but for a whole bunch of these guys it’s not going to happen. They’ll drag your business chain like a sea anchor. Keeping or losing them is a judgement call… but unprofitable customers ultimately cost you money and you have zero hope of developing customer loyalty.

Once you’ve segmented your customers into these three groups the information can also be used to assess responses to requests and complaints. Obviously a request or complaint from a high value customer is going to warrant some effort. Whereas the same request or complaint from the unprofitable customer could lead you to recommend a competitor who is willing and able to serve them.

Because when you think about the idea that we should treat all customers equally in an online business it can be naive and ridiculous. You only have X amount of capital, Y amount of resources and Z amount of time.

And even if you’re trying to maximise your market share and feel that you need the bottom tier as customers, be aware that you still need to address the top tier in a separate way. One size rarely fits all and a good place to start is assessing the customers’ value.

That sounds counter-intuitive to a lot of people. If somebody criticised your business under the old model you simply took offense and told them to hit the road. It was pretty much how the commercial world worked when customers were limited by geography to a subset of competitive alternatives.

In the modern context, every business (that has survived) has been forced to operate in hyper-competitive environments. What was once a large world with international borders and significant lag between destinations has shrunk, for the most part, to an always-on society where it’s just as easy to purchase a new leather wallet from the United States as from Bolivia, Latvia, China or Uganda. Or from the shop in your local central business district.

So we’ve adjusted our way of looking at the squeaky wheel who complains. More often than not people who complain are genuinely happy with the service except for that one glitch.

Ask yourself this question: If nobody ever complained about a product or service then how would it ever be improved? Through focus groups? No. Through progressively smart ideas in the coffee room? No.

That point of failure is a pool of opportunity to incrementally improve and you want… you absolutely need… people to complain. And the more you can tune a company culture into adopting that philosophy the more successful you can become in the hyper-competitive environment.

Points of failure provide significant opportunities at cheap cost and potentially great return. If you fix a glitch for one customer who complains then the issue won’t be had by the thousand customers who follow. It just makes common sense.

Think about it. Business A fields complaints like they were personal criticisms of their girlfriend’s underwear… versus Business B who fields complaints as opportunities to identify ways to improve and hone their service.

Who do you think wins the hearts, minds and wallets over the long-term in head-to-head competition? Yes, Business B. Hands down. Always.

A key component in your strategic e-business marketing document has to be the identification of red flags and points of failure. How to find them. How to fix them. How to assess and absorb the criticism. Because the measure of a healthy e-business is the way they respond to those inevitable failures. And how they become better and better at what they do until they are unequivocally the best.

Fixed Costs

Fixed costs don’t rise as you increase the level of activity in your production. For example, rent might rise but it won’t be affected by the production of five or five-thousand items.

However, fixed costs tend to rise in sharp incremental levels at certain points. While your rent may not be affected by the production of five or five-thousand items there has to be a limit where you need to expand your production space – a bigger warehouse, a larger factory – and rent takes a large step upwards. It doesn’t rise gradually and in that sense it is said to be a fixed cost.

Other fixed costs might be your managerial wage (you pay yourself $120,000 per year regardless of hours worked or items produced), the direct cost of labour is usually fixed, insurance, accounting fees, the machines you use to produce your products, their maintenance… and the cost of the executives’ cars.

Variable Costs

There are also those costs that increase as the level of production activity increases – for example, variable costs would include the components and materials that go into the products, the transport fees, the consumables that were used to create the products and the packaging used to market them.

Variable costs are those that rise as production increases and fall as production decreases.

To slightly confuse the situation there are some semi-fixed (semi-variable) costs that could be identified. An example could be the consumption of electricity – lighting the factory is a fixed cost but heating the metal smelters is a variable cost that depends on the number of batches smelted during a given time period.

The sum of your fixed costs and your variable costs gives you the total operating cost. Understanding those variables can help you make better business decisions… one of which is to calculate your break-even point.

Again, the break-even point is where the total operating cost is covered and your earnings (before interest and tax) are zero dollars. It is the point where you break even and will begin to turn a profit. Obviously, the break-even point is critical in any decision about production quantities and whether to expand or discontinue existing product lines.

Break-Even Analysis

There is a simple equation to work out the break-even point. Note that it must be stated with a time period, as in X number of items per day/week/month.

Break-Even Point = Fixed costs / (Sales revenue per unit – Variable costs per unit)

That is to say if you had a pottery studio with $2,000 per month fixed costs to run… and each set of 12 ceramic cups used $20 of raw materials and 1 hour of labour (at $25 per hour for the potter), with the cups sold for $120 per dozen… the equation would become:

Break-Even Point = $2000 / ($120 – [$20 + $25]) = $2000 / ($120 – $45) = $2000 / $75

Break-Even Point = 26.66 dozen ceramic cups per month

That means that at 26.66 dozen ceramic cups the busines starts to generate earnings. It is the point where you cease to be running at a loss and will begin to turn a profit.

Working out the Contribution Margin

If you look at the last part of that Break-Even Point formula you can also work out the contribution per unit:

Contribution per unit = Sales revenue per unit – Variable costs per unit

In the pottery studio example, the contribution margin is $75 … meaning that $75 per unit contributes to fixed costs per unit. When the amount of fixed costs are covered the contribition margin becomes profit.

The contribution margin is the amount of marginal profit per unit sold.

As a management tool, the contribution margin can be used to measure the degree to which sales growth transposes over to profit growth (also called operating leverage). And, as this article showed, it is also important in the calculation of the break-even point.

The Reason Client Testimonials go onto Websites

Client testimonials are NOT on your website to aid your business. Testimonials are there to aid your customer; “to increase confidence and trust in the new customer’s mind about your business ability to meet their needs and solve their problems”.

Unfortunately I see that most client testimonials in recent years seem to be either puffery without substance, “allegedly true statements” by alleged clients who did not give permission to use their real names on your website, or the testimonials provide a real statement by a real person but lack a traceable name-and-business cohort that I can use to verify the endorsement.

If I am going to hand you thousands of dollars then it would be wise of me to contact your referees and ensure that you are worthy of my trust and investment.

It’s not that difficult a concept… for example, Name + Position Held + Geographic Location. Stick to the truth.

Client testimonials are your website’s referee checking feature. Nothing more. Nothing less.

A Customer’s Ethical Right to Autonomy

If you provide any less information than that example you are depriving another person of their ethical right to autonomy – their ethical right to make free and fully informed decisions. If you have misled, fudged or invented a testimonial that falsely leads that person into a sales conversion then you have intentionally conned them with a falsehood.

That means you are misleading them in an attempt to manipulate their purchasing decision. If you have a fabricated puffery statement then you know it is not a valid testimonial. And if you have a statement you claim was made by a real person who insists you not divulge their name… and you invent a name… that is also denying somebody from making a fully informed choice.

It is the value of a person’s integrity in making a statement about your business service and products that is important. That they are somebody of note, a relevant referee willing to stand by their word with their hand on your shoulder and a confident AND PUBLIC assertion that your business is as good as their word.

Junk Testimonials are Deceptive & Potentially Fraudulent

At this point I would assert something that should have been obvious on the day you considered putting client testimonials onto your business website – it is fraud to misrepresent or misinform somebody for financial advantage. Junk testimonials are an intentional deception.

And sometimes that deception is used as the key to manipulating a sales conversion. For financial advantage.

The Australian Competition and Consumer Commission could interpret your fictitious client testimonials as deceptive conduct under the Trade Practices Act.

The strange part of all this is that your own moral compass should point you to best practice for client testimonials. Tell the truth. If you have integrity then it should reflect in the quality of those testimonials.

And if you have no valid testimonials but are working in a word of mouth industry then consider this idea – you don’t need them. Every time clients recommend you onto others there is your real world endorsement. I can’t oversell that enough. Not everybody needs a testimonial on their website… and if you don’t have any or don’t need any then it only devalues you to manufacture a false equivalent.

You would consider it unethical to produce false referees to an interviewing employer. It’s the same thing. Your customers employ you and client testimonials are a critical part of your interview for that job.

Project contribution bias manifests through comments like – “User Experience isn’t a real job”… “What do marketers do anyway?”… “All the manager does is sit in their office”… “We don’t talk to the multimedia department because we’ve got a feud running.”

This bias is a real problem emanating from an internal organisational pressure to form silos and the corresponding pressure from within those silos to exclude people and information outside the boundary. This fundamental xenophobic attitude is therefore reinforced from outside and inside the silo and makes it particularly difficult to overcome.

Taking a closer look at the three factors – skill-distance, social distance and physical distance – it becomes easier to see the issue. We see it all the time in another manifestation within the organisation. Racism. To some extent, both trace back to an our tribe versus their tribe mentality and both are underpinned by failing to take the time to understand the other tribe.

Skill-distance means the gap between two separate roles. For example, the designer has a wad of core knowledge and experience about a wide range of science underpinning their skillset. A marketer has experience with strategic issues ranging from product creation, supply and distribution through to after-sales satisfaction and that’s also underpinned by theoretical knowledge and experience.

Neither is aware of what they don’t know… their assumptions and biases are free to fill in the gaps.

We therefore employ a biased assumption that all of our knowledge and work is our contribution to the project. While, the little we know or understand about the other is their contribution to the work.

Social distance means the gap between each person or group’s cultural norms and relationship circles. A group of designers will have an entirely separate set of stories, language, rituals, ceremonies, heroes, values, structures and symbols than the accounting department. It’s unlikely they will socially interact either at work or out of hours.

Physical distance means the other person is not visible – a separate office or department, working from separate geographic locations or using tools and equipment that create invisible interactions. Any physical barrier provides physical distance.

However, a smart organisation is working just as hard to break down those silos and emancipate their resources and information assets. It’s not necessarily a stagnant one-way progression.

The important thing to take away from this knowledge is a recognition of those manifestations of project contribution bias and the way these three factors magnify the distortion.