Fuel for your startup...Ever think of end-users?

Hello team. @askmecr will be my account where I will write, share and discuss a rather boring topic for many: business. Please follow along if you're interested. I will share stories I've heard, situations I've been a part of, inspirational quotes I can't live without and other random goodies here. I will share all of this in a rather cryptic way: removing my self from the picture and allowing you the space to find your own inspiration and draw your own conclusions from the material. Welcome to my blog.

Over the next several months, as we develop our business, we're going to look at 23 ways a company can make a profit. I call them profit models. There is nothing sacrosanct about the number 23. We could talk about 20 for-profit models, or maybe 30. But for now, I have picked out 23 that I consider especially interesting and important. And one of the 23 is customer solution profit.

Let me tell you a story about Cybernaut, a company in a very simple business. It sold financial information to money managers. The story starts in 2012. Back then, during my economic research days, I was working with a software company that got into the information business. They were a bunch of rock and rolling financial Buccaneers. They acquired a small firm – I'll call them data beta – that sold financial, corporate, and economic information to money managers, investment banks, corporate libraries, commercial banks, and professional service firms. Not a bad concept, but one that called for smart execution to generate consistent profits. Unfortunately, their execution was sloppy. After two years of 30% revenue increases, they found sales growth hitting the wall. Customers started churning, and profits plummeted. You didn't need a calculator to measure it: profitability was zero. The managers of the business broke up and into warring camps, the mood inside the company was becoming desperate. Then desperation turned into paralysis. Other than acrimonious debate, nothing much got done. Being around the company made me very uncomfortable. Conflict was everywhere, and I hate conflicts. I was the facilitated one meeting with three warring factions set in separate corners, arms crossed, speaking to me and trying to ignore one another. When they did exchange words, they spat comments past each other rather than having a real conversation. Ever been in a meeting like that? I hate those kind of meetings.

The marketing manager said something that captured my attention. She said, "what I'd like to know is how those sons of bitches at Cybernaut in the information business manage to out-compete us? What are they doing differently? How can they handle $24 million worth of business with a staff of 36 people, while we do $40 million with 400 people?"

If we could answer the manager's question, we would understand why data beta was in trouble and what we could do about it.

So I set out to find the answer. I interviewed dozens of customers to get a sense of how cybernaut operated. Piecing together fragments of information from all these conversations, I eventually put together a clear picture of how cybernaut had designed their business. Here's what I learned:

The business information marketplace in which both cybernaut and my client, data beta, were operating involved close to 1000 major customers. But within that arena, to maintain a strong growth curve, cybernaut needed to capture only 20 new customers per year! Knowing this, they developed a powerful approach to make that happen. Once cybernaut identified the company as a potential customer for their operation services, they would send a team of two or three people to work there. They would spend two or three months, sometimes longer, learning everything they would about the customer – how they ran their business, how their systems worked (and didn't work), and what they really cared about. Cybernaut then developed customized information products and services tailored to the specific characteristics and economics of the account. Once they landed the account, they spent a ton of time integrating their product into the customer's systems. During this process, cybernaut's revenues were tiny and their costs were huge. If you looked at the monthly P&L for a particular account, you would see they were losing a ton of money. Costs of $10,000 might be charged against revenues of $3000.

But then things would begin to change. After three months or four months, cybernaut's products would be woven into the daily flow of the customer's operations. Their software would be debugged and working fine. Now cybernaut didn't need three people working full-time on the account. One person could maintain the service, probably part-time. And as the word spread among the client's employees about how powerful cybernaut's data was and how effectively cybernaut's service had been customized to their specific needs, they began taking more and more advantage of it. Cybernaut's monthly costs fell from $10,000-$8000, while monthly revenue started to grow, from 3000 to $5000-$12,000. That was the cybernaut secret. Beautifully simple, no?

I told my client data beta about cybernaut's model. Did they follow it? They went from losing money to a 10% operating profit margin. Their profits rose from zero to $4 million. But what were cybernaut's margins? How much do you think? Let's see...

How much would payroll costs be? These folks would probably be well-paid. Some might make just 60 or 70,000, but a bunch would be in six figures. Benefits usually amount to about 50% of salaries. Give or take. So even well rewarded, the people would cost no more than, say, $200,000 apiece, counting salary, benefits, the whole 9 yards. Multiply it. That makes 8 million in payroll. How much would overhead be? Let's use 10%. Okay, figure 10% of revenue for overhead – $2.4 million. Then there would be licensing fees for the rights to the information being sold. Those might amount to another 10%. Throw in a few more points for other costs… 40% operating margin as a guess – about 10 million bucks, all told. So very, very close. Essentially, data beta came nowhere near what cybernaut accomplished!

But how can that be? I laid out the whole plan for them, didn't I? Can we say that data beta didn't choose to follow the winning strategy, even after they knew it would work? About right. That was one of the worst organizations I've ever encountered. Did you ever work with any other company that simply refused to be successful? It happens all the time. I can give you the complete recipe for the secret sauce, and the chances are good that you still won't use it. It's like, why visit the doctor, then ignore his advice? There's probably no one reason why people seem to prefer failure to success. We know that change can be psychologically threatening- that's part of the answer. In the case of data beta, they may have realized that following the cybernaut model would have taken a lot of hard work – much more than they were accustomed to. That's part of the answer, too.

But I think the ultimate explanation is a simple one. To succeed in business, you have to have a genuine, honest-to-goodness interest in profitability. And most people don't. That's all there is to it.

Hard to believe, right? Maybe I am right. Or maybe I'm wrong. And maybe some people in business just aren't very interested in profitability.

That's all for today. Today's profit model was a simple one. But let me ask you a question: what's the idea?

Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time.

If you answered it like this, then you have it. But here's another question: can you be profitable *without *knowing the customer?

Think about it and let me know in the comments below.
Your assignment for mental exercise is to think about cybernaut's profit curve. And then think about where else the customer solution profit model might apply. Make a list of the possibilities.

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Talk to you soon,

K.

p.s. how I tell these stories and where I draw my inspiration from is irrelevant, what's relevant is how YOU align with your own gut feelings. Trust yourself as if the whole universe depends on it - because it does.