How to scale up a company in today’s world
In this episode we talk with Verne Harnish about how to scale up a company in today’s world.
- Verne Harnish on LinkedIn
- Scaling Up: A Gazelles Company
- Scaling Up Growth Tools
- Mastering the Rockefeller Habits
- Scaling Up: How a Few Companies Make It…and Why the Rest Don’t
- The Good-Better-Best Approach to Pricing
- Mastering the Complex Sale
- Competitive Strategy: Techniques for Analyzing Industries and Competitors
You’re listening to The Growth Manifesto Podcast, a Zoom video series brought to you by Webprofits – a digital growth consultancy that helps global and national businesses attract, acquire, and retain customers through digital marketing.
Hosted by Alex Cleanthous.
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- Agency: https://www.webprofits.io
- 00:00:57 Verne Harnish’s introduction to the Growth Manifesto Podcast.
- 00:01:29 Verne talks about pricing and why he feels business owners should focus more on it.
- 00:03:02 When it comes to pricing, people are not logical. They are psychological.
- 00:05:44 Verne discusses the “Good-Better-Best Approach to Pricing”.
- 00:07:32 Marketing strategy equals strategy & how most Founders & CEOs are their company’s default Chief Marketing Officers.
- 00:08:29 Go after the customers who value what you bring to the table and use pricing to sort that out.
- 00:12:52 How would you approach pricing your proposal strategy to potential clients?
- 00:14:12 Verne talks about the complex sale and how it requires strong marketing support.
- 00:17:32 At what point should a company start considering pricing strategy?
- 00:20:27 According to Verne, you need both quantitative and qualitative data to guide your company forward.
- 00:25:28 In a Business-to-Business transaction, you may be selling to one person but your service will affect around hundreds.
- 00:28:09 How would you approach prospective companies that you would like to sell your service to?
- 00:31:33 Verne discusses what you should be focusing on in the different stages of your business scaling from $0 to $100 million.
- 00:36:29 Why process improvement is critical in terms of scaling up according to Verne.
- 00:40:27 According to Verne, staff size is a key driver when you need to make certain changes in a company that’s scaling.
- 00:42:12 What are some of the characteristics of the leaders who succeed at scaling from $10 million to $100 million.
- 00:49:24 What advice would you give to companies that are trying to find out the best business approach to succeed in our unpredictable world right now?
- 00:52:44 What are the characteristics of companies that win in our current environment?
Verne Harnish: To me, this is the number one trait that you’ve got this hunger and thirst to learn. It was even that way with Elon Musk. He’s like, “All right, I want to go to the moon. I want to go to Mars.” So he reads these books on making rockets and as the story goes, the guy that wrote the book then Elon reaches out to him and this guy is like… He is literally a rocket scientist, he’s like, “I can’t believe that this entrepreneur is actually picking my brain and talking to me and all of that.” Elon like Mark Cuban, Mark said, “I won in the IT space because I was willing to read the manual and nobody else would and then I just started implementing all those new technologies.” Elon just read a book about how you do rockets. So it comes back to learning.
Alex: Today. We’re talking with Verne Harnish who’s the author of two books. The first book is Mastering the Rockefeller Habits, the second book is Scaling Up. He is the founder and CEO of Scaling Up a Gazelles company, and he’s the founder of the Entrepreneurs’ Organization. Today we’ll be talking about how to scale up a company or how a few companies make it and the rest don’t. And just quickly before we get started, make sure to go ahead and hit that subscribe button so that you get the latest episodes as soon as they’re released. Now let’s get into it. Welcome Verne.
Verne Harnish: Well, glad to be here Alex. And you know what? You know we’re talking, let’s just hit a topic right away and that’s pricing. One of the ones that I think business owners never focus enough on is price. We’re so hung up on the cost side of the business and we have for 50 years because there was actually more demand than supply and so look, if you just kind of showed up you got the business, but now there’s more supply than demand. Now there’s more demand and all the unicorns people always talking about, “All right, how did these companies get to a billion on about half the time it used to take. And one of the things that’s unique is they’re all focused more on the demand side Alex, than they are on the supply side.
They don’t actually supply anything and it’s their deep understanding of the demand side, the customer’s need, where they were just before they’re about to buy your product and they use that knowledge in order to set price. So if you look at the wealthiest guy on the planet next to Putin, Jeff Bezos or Elon Musk who’s right up there right now, price is changing by the minute. My book has varied in price from like $16 and change to it’s sitting at a ridiculous $23 right now and it’s a paperback, but there’s such demand that they know that they can actually command that. And so we’ve really been encouraging business leaders to really focus instead of just licking in their finger and put it in the wind and get more focused on the price side.
And the reason we get it wrong is because we’re selling to people, even in a business-to-business we’re selling to people and, guess what we’ve learned, people are not logical, they’re psychological. And so I’ve got a couple of stories and resources, let me let you jump in there.
Alex: Oh no, no, no. Please let’s start with the stories. Let’s start with the stories straight up because I’ve got a few questions, but I want to hear the story first.
Verne Harnish: Yeah. So the godfather of influence Robert Cialdini, and I do hope all of your listeners and watchers have read his book Influence, his six ways that you act to influence anyone to do anything. And they looked at a wine list at a typical restaurant. I was down at Leon, Mexico a couple of months ago out to lunch with one of our clients and they gave us the wine list and sure enough, it was listed from least expensive to most expensive wine. And what Robert found is all you had to do is reverse the list and put the most expensive at the top and the least expensive and revenue would jump on average about 26%. You didn’t change the wine, you didn’t change the price. And then if you anchored that with two or three really expensive bottles of wine you could pull Alex revenue up like 250%, it’s not logical.
And I think it’s a good practice anyway, I was in Shanghai again, I go to China once a year and a year ago we launched this book in Mandarin and my day chair was a guy named Adrian Wall and we can talk about how you need to state your strategy simply, he’s got a very simple strategy, a taste of New York in Shanghai. And so he’s gone to New York City and made friends of these iconic families that have these iconic single brands like Joe’s Pizza, where there’ll be a line out the door even right now because of takeout and he convinced them to let him bring these iconic brands to China and so the first he did was Joe’s Pizza.
And so the year before I had mentioned this pricing thing, so when I saw him about a year ago, he said, “Verne I got to take you down to the pizza restaurant.” And I said, “All right.” And he says, “You’ve got to look at the menu.” He said, “We used to list it from least expensive vegan to most expensive meat lovers.” And he said, “All I did was reverse the list as you suggested, as Robert Cialdini would and we didn’t get 26%, but we got a 15% boost in revenue, didn’t change a slice, didn’t change the price.”
And that’s how psychological it is. If we look at business-to-business two years ago and I’d encourage everyone to Google it or I’m sure you can send the link out, Harvard Business Review had a really stunning piece on pricing called Good-Better-Best and that was really focused on business-to-business and as you read through all of the detail, you find as you get down to the end that Dell EMC now called Dell Technologies, when they went from a single price in terms of a service after sale contract to a good, better, best revenue only jumped 300%. And so we went to that in the crisis when we launched our virtual summits we said, “Let’s not go to a single price,” which we normally had, “let’s do a good, better, best.” And by the way, the difference between good and best was 10X and it was amazing the psychology that we learned and the revenue that we generated by being just that much more sophisticated.
One last example, we have an e-commerce client that in 2019 generated about eight million in EBITDA last year in 2020 by just getting more sophisticated around pricing, we actually brought in Hermann Simons from Simon-Kucher and we caused them to shred literally 2 million catalogs they were getting ready to go out in four days. We said, “Look, this will be suicidal. Shred those catalogs, move your pricing online.” and their EBITDA only increased from 8 million to 40 million, a five-fold increase in profitability just by getting the price right. So I beg folks to get focused on it.
Alex: So where does this fit into the four areas which you talk about in your book because you’ve got people, strategy, execution, and cash? Is this the entire strategy, or does this fit into [crosstalk 00:07:44]?
Verne Harnish: It does. No. No, you’re right. It’s strategy because our view is marketing strategy equals strategy. And in fact, most founder CEOs are the default chief marketing officer of their company like Steve Jobs was for Apple. And if you have a CMO they’re really there to kind of sit side by side with you because what’s more important than the four PS of marketing product, price, place, and promotion. And if you look at those four PS, three of those you’ve got to spend money before you make money, but with price and you add a dollar to the price and in general that’ll go right to the bottom line and it makes you money immediately.
Alex: So good, better, best is what you see on all the software company sites, right? You’ve got the three options, education is another one that you constantly see. Does the better option pretty much always sell the most because you don’t want the most expensive, but you don’t want the cheapest? So is that what you found personally or across the companies which you’ve analyzed?
Verne Harnish: You know what’s interesting in terms of our revenue, there was an equal amount of best and better. And that was one of the things that we’ve learned as we were watching some of our pricing matrices. So I don’t think there’s a fixed rule there, there is something about obviously the anchoring by having that higher price, but where it really plays out… We’re big fans of Northwestern University, Professor Victoria Medvec. She, our view is the best professor teacher of negotiation. She has some small clients like Goldman Sachs and others and one of the things that she really teaches is in a practical sense B2B we’re often asked for a proposal even if have an existing client, it may be, “The five-year renewal we’d like you to resubmit.” and they’re going to go out and get some other counterproposals just to kind of keep you honest.
And what’s fearful if it’s competitive, is that you’ve got these ankle biters. These low bidders that are going to come in, steal the relationship and you know what’s going to happen? Once they’re in, they’re going to start jacking up the price or the customer’s going to suffer. So how do you play this game? And she recommends that you… And we’ve won so many contracts using this technique. She says, you always submit three bids even if it’s an existing customer if you think it’s competitive at all, and what you do is you vary the price based on your strength, your difference. So let’s say it’s response time or design, or the customer service or inventory turns or whatever it is, speed.
Whatever that difference is, what you want to do is you want to shine a spotlight on it and vary price around it. So you want to submit a proposal that matches what you think is going to be the low ball proposal. And then you detail what all they’re not going to get. So one of Cialdini’s principles is do more to avoid a loss than to get a gain. “Hey, we can offer you this price but you’re not going to get same day, you’re not going to get customer service but FAQ’s, you’re not going to get a turnaround and the design but maybe for two weeks, you’re not going to…” Then you say for this price, maybe it’s the better price you’ll get next day response, next day turns, next day design but if you want it in two hours, and this is where data is helpful and you can say in the last five years that we’ve worked with your firm, your people have required a two hour response in order to serve your customers 86% of the time. If you still want that, this is what the price is going to be.
And now a couple of things happen. If you submit three bids, you get it out of the hands of the purchasing agents because they don’t know what to do with this and so they’re going to escalate it and you always want your deal escalated inside the organization. Number two, you’re going to get them to start to question the low bidders, “Wait a second, you didn’t mention anything about this laundry list of other stuff.” and you know they have it, they’re just hoping it doesn’t get brought up and so you’ve caused those conversations to occur. And then number three, if they go ahead and go with the low bidder, you know what it tells you? They don’t value the difference you bring to the marketplace so go find customers who do, and you don’t want all the customers anyway. Most major companies in the world only have 7, 8, 9%, Apple at 2 trillion only has 14% global market share 86% of folks still don’t get their phones and other devices. So go after the customers who value what you bring to the table and use pricing to really sort that out.
Alex: That’s genius, first of all, I have been in business for a long time, and I’ve never heard that for a proposal strategy because it’s always the case where they’re going to be bidding less than you, and they’re going to be offering a lower service in terms of the features and the quality of the service and the support and so on and yet you’re kind of always stuck trying to guess. And so how would you, because I obviously have a bunch of questions but I’m super interested in this topic at the moment, but how would you approach pricing it so that the range between them is sufficient enough to be able to win the deal?
Verne Harnish: Well, it depends on the industry but the range isn’t as much as you would think. They say you can generally premium price by about 13% without really having to justify much more than that. But that’s when you’re kind of comparing apples to apples, if you’ve got just that little bit better but we’ve seen where they’re going to go with you and you’re twice the price, but it’s clear that the value is 4X because you’ve really laid it out clearly. And that leads to another topic if I can and that’s around the complex sale. We just launched a masterclass with Jeff Thull around mastering the complex sale and the reality is all sales have become complex in this environment. And what it suggests is sales one [datto 00:14:32] was you show up and throw up. It was the old talking brochure sales two datto was my dear friend Neil Rackham spin selling where you went in with some very intelligent questions and you kind of got under the hood and help them really see that this massive problem you’ve got is this costly and so a price relative to that is a great value.
But Jeff really suggests that we’re now in sales three datto which is, look they don’t have any time and they probably are clueless to all the problems that they’re suffering because they don’t have your product or service or the quality of your product or service. So you actually have to know more about the problem and its cost to them than they even know. Asking them a bunch of silly questions when they’re clueless is just frustrating and that’s where I want to come back to it. The single most important function in scaling is marketing.
If you had to throw all the others out, it’s first and foremost marketing, and marketing’s not glorified sales support, marketing’s job is to go figure out what are the best customers, who’s got all the money and what is the data behind the problem that we can solve and we want to walk into that client and we want to present that in a way that they’re like, “You seem to know more about us than we do.” and as a result that’s how you really gain trust. And they know that, “Hey, I guarantee you if you know that much already about us, you’re going to solve our problems.” So that’s really sales three datto that requires really strong marketing support.
Alex: And that’s sounds similar to account-based marketing where there’s a focus on a specific, larger organization and their focus. It seems like it’s similar to that the level of research that’s required to be able to present a simple message, right? And so when you talk about marketing, you’re talking about the research to the point of starting the promotion, but as well as the promotion itself but the majority of that time is spent on the research, isn’t it?
Verne Harnish: It is.
Alex: To get it right.
Yeah. And figuring out who is the right customer? And who should we target? And it is an analytical function, that’s why we believe there’s no such thing as a VP of sales and marketing. When we run into a client and they say that they’ve got this human we know right there’s an issue, because I’ve not seen one human being able to do both of sales and marketing well because there are two different personality types and two different skill sets.
Alex: Yeah, right. Yeah, right.I have so many questions for you now Verne. You got me started now. When should a company then even start considering pricing strategy? Is that at a certain stage of growth? Like in the beginning, trying to figure stuff out, you hit the $1 million annual then you’ve got something, at 10 million you’ve got now like an operation, like at what point should pricing strategy start?
Verne Harnish: Yeah. Well, it’s easy to say at the very beginning, but look that’s this idea that what got you here, won’t get you there. And in the beginning, you’re going to just do whatever you can to get to that first million of revenue, you just got to sell like hell and we know that you may have had to get into the market by being the low ball price, or by giving it away, just getting a foot in the door. I mean, we can use every cliche in the book, the challenge is when you do cross that chasm, you forget to lose those bad habits and you continue to think that you have to be the low price competitor in the marketplace while as you scale your pilling up all these other costs and so what ends up really happening is your gross margins get squeezed.
So you may have the revenue, but your margin’s gone and that’s a death now. If there’s a number you got to watch closer than anything else it’s gross margin and because it’s in the middle of the financial statements tends to get ignored by most CEOs and executive teams. So it’s when you have finally figured out after selling to every customer that you think will buy it, who’s going to be your easiest next best customer from a margin perspective and enthusiasm to buy your product or service and then you begin to laser focus on that core customer and now you can begin to play with pricing. But think about it again, the unicorns, let’s take Uber or Lyft a regular taxi is going to charge you the same per eighth of a mile, it may have a night charge or an airport charge, but it’s pretty much the same, Uber and Lyft they’re demand-based pricing.
I remember a year ago you could get a cheap fare down to Denver from Boulder but it was $235 if you want to get back, they knew you needed to get home. And even if you drove down, you’ve left your car and you’ve got to get back and they’re going to charge you for it. And it’s like the airlines, the seats used to be all the same price, now if you’re on an airplane I guarantee you no two people paid the same price for what’s essentially exactly the same product, a seat on that time, on that airplane heading from point A to point B. And I think all of us have got to get more sophisticated in being more demand-based pricing instead of fixed pricing.
Alex: Yeah. And before you spoke about to focus on the gross margin and kind of how important the selection of the customers are. And I think it was Michael Porter and his book Competitive Strategy that spoke about this in so much detail about to know the place that you can compete, where customers are going to pay you an amount of money that will allow you to compete and to scale faster. And so it’s really interesting that process of trying to identify that because now you have to choose and again, it comes back to research again. Again, to research is basically the data and that’s something which you speak about quite a lot is to have that data, is to have that information to guide the company forward.
Verne Harnish: Yeah. And you need just not quantitative data, you need qualitative data. One of the areas that we really push our clients is to literally on a daily and weekly basis, do what you should be doing which is that market-facing activities of talking to customers, talk to employees and shop and competitors. What Sam Walton did in his pickup truck and later his airplane as he was scaling up Walmart. And Sanjeev Mohanty yeah, that’s a story we’ve shared in the book. Sanjeev was given the job of leading Benetton in India already a brand that hasn’t been doing well and it was really bad in his country. They had 104 stores and he’s competing with Levi-Strauss the number one fashion brand in the whole country and so Sanjeev came in and said, “All right, I want to displace Levi Strauss.” This is a crazy notion because it’s kind of this specialty brand that’s going to take on this general brand and then he called us, “Send us a box of books, come on in Verne.”
And the key thing we did is I recognized that he and his team had really lost, had no contact, no sense of what was really happening in the marketplace and what was going on in it’s 104 stores. And so he put a card together at each cash register, had his picture on it, it said, “Look, if you have any problem, concern, idea, complaint, suggestion, email me, and here’s this email address.” And it was mad as much for the employees as it was the customers and to our surprise he was starting to get like 200 a day. Now he’s got hundreds of thousand customers going through, but he’s getting 200 today. So we really did three things that I thought were key. First, put a team together to look at all of those, obviously you want to respond to them. Number two, he looked at the subject line took every one of those emails coming in and it’s like Warren Buffet reading the headlines of the newspapers around the world each morning to give him a feel for what was the psychology of the market.
Sanjeev started to get a real feel for what was dynamically going on every day within his stores, depending on which store and employees or customers. So then number three, he would choose one that caught his attention and he would email the person and say, “Hey, can we have a phone conversation?” and look most folks to have a chance to talk to the CEO of kind of any company that’s a brand was going to relish that. And one of my favorite stories, it was a Saturday and the subject line is, Acid Wash Jeans Falling Apart. Well, obviously that caught his attention and he sees it’s from like one of the top ministers of the country. So it was like, “Hey, there’s an opportunity for me to kind of reach out.” and he does, and they have a great conversation. He built a relationship there and also discovered they must have had a manufacturing problem with that batch and got them pulled off the shelves quickly, but the long story short, he took that so-so brand and it became the number one fashion brand in India in less than 24 months.
In fact, about a year ago he won the Retail Icon Award in India, now who this upset? Levi Strauss. So where is he today? Levi-Strauss they’re like, “All right, that’s the guy that beat us.” And so they hired him and today he runs half the globe for Levi-Strauss. I suspect he will be CEO possibly sometime in the future. First thing he did is he called me up, “Verne need a box of books, when can you get to Bangalore to train our team?” And I was scheduled to be there last April but you know, some things happened but it’s that qualitative gathering of customer and employee input like Apple gets every day in their stores and Roger Hardy did when he created the largest e-commerce deal in the history of Canada, that habit is so critical.
Alex: And so for the complex deals, they are often going to be the business-to-business sales and so you need to get now in touch with more senior decision makers in a company and to interview them or to find a way to find out their challenges, their problems, the things which they want. Have you seen any kind of interesting approaches to get in front of them because they’re probably being kind of hounded every day by every supplier that wants to sell to them? Have you ever like seen any interesting approaches there?
Verne Harnish: Well here we’re really talking about your existing customers and so your existing customers they’re really open to having these conversations because particularly of what you provide them is mission critical, the key is in a business-to-business, even though you sell to one person, your product or service is probably impacting dozens if not hundreds of people inside the organization. And so I remember Raymond Roberts with a company called Citizant, they worked with seven large government agencies in Washington, DC. so in a way they felt like they had seven customers but the first thing we did is we put a thing together called CSI customer satisfaction investigation. We use the theme of the crime series CSI, and they began calling 20 people inside every day inside each of those government agencies that they felt were touched, frontline employees and others that were touched by the technologies that they were building including the citizens that they served, that’s why the company was called Citizant. And it was crazy and I did that for 90 days.
And at the time they were about 20 million in revenue, 15 million, 20, they were on their way to a 100 million, they didn’t know if they can get there after a diet of this for 90 days they said, the big thing we learned is there’s about $87 million of additional business that we could possibly get within our existing seven clients, we don’t have to get an eighth, ninth or 10th. And what a eye opening experience it was, by the way that launched them and they were on their way to a 100 million and then had a chance to exit beautifully which we love to see as well. So it’s existing customers, you’ve got to gather the intel in a different way if it’s a prospect because you’re right there, otherwise you’re going to get bugged a lot.
Alex: So what if it is a prospect and you’re trying to get into these kind of more complex sales and you want to give them your three pricing strategy approach just in case like it’s off, right? How would you approach prospective companies?
Verne Harnish: Yeah it’s interesting, you can intuit a lot of stuff by looking at their job postings on LinkedIn and other data scraping so I think [inaudible 00:28:32] in Barcelona they’re an SCM shop and how many SCM firms are there? Like one on every street corner.
Verne Harnish: They decided first they wanted to be the luxury in that space and first they do everything different. They only hire PhDs in physics and mathematics. They’re bringing like a wall street [inaudible 00:28:54] approach to the SCM space, which means that they don’t maximize 10,000 or a 100,000 keywords, they’ll maximize upwards to a million plus. And so what they do before they go into like cars.com, which I can tell you they land up to $4 million a month account and they want it on their first meeting.
They were up against 23 other competitors, they want it on their first meeting is they go out and they scrape the internet for what they’re already doing in SCM and intuiting the results they must be getting and the traffic they’re getting and all of that data analytics and they walk in with a report this big, that shows the tens of millions that they’re spilling because they’re not maximizing enough and then they do some simulations and show what could be and I’m telling you, they know more. And what they’ve learned is they can only go out to clients that span between two and eight million a month.
If it’s more than that, then the company thinks they’re smarter than them and they get embarrassed by the information. If it’s less than 2 million, it’s not enough key words for them to really work their magic. So they’ve even learned what is their ideal core customer in this process, but that’s kind of the backdoor way that you gather this intel. The other one is through your sales teams. One of the questions that we encourage sales people to ask when they’re out on a customer call or talking to customer, even in your own team is what do you hear about our competitors?
And I remember I’m calling Bill Ritchie one day, a client of ours and good friend and just checking in with him because I try to call one customer every week and I’m like, “So Bill, what are you hearing from our competitors?” and he goes, “Well, Verne it’s interesting you asked, I got this proposal in from…” and it’s amazing how if you can find people that do business with the company that you want to go pitch, often they can give you real insights in to that organization. So there’s different ways that you can get kind of… Remember all wars in all markets are won through intel, whoever has the best intel wins and that’s what we’re talking about here.
Alex: That’s great. That’s great. Such a good point, thank you for that. I do want to come back to your point before about when you go from 0 to 1 and from 1 to 10 and from 10 to a 100 plus, you need to shed the old habits, the things that got you to that stage they’re not going to get you to the next stage. And so what are the key stages? Let’s start with that and then the habits that people need to shed.
Verne Harnish: Yeah. It’s interesting. It’s less revenue though there’s a correlation versus number of employees. And so 76% of the companies in the U.S. and I think those numbers are mirrored in other parts of the world, 76% of the companies in the United States are run by the lone entrepreneur. They don’t even have a second employee, they’re a solo entrepreneur, and we like to kid some of those companies are even overstaffed. In other words, they want ought to just go out of business, they’d get a job, but that’s the bulk of companies. Then you’ve get up to kind of about 10, which generally is a million in revenue. What it takes for you to get into EO the Entrepreneurs’ Organization, and what’s interesting is between zero and a million if you look at the four key numbers, revenue, gross margin, profit, and cash I often ask audiences between zero and a million, which one of those four is most important and a lot of them guess cash because you’re always cash strapped, but not really it’s revenue you just got to piece together as many deals as you can to get some momentum, to get off the launch pad and cash, are you kidding?
Hopefully one of your partners keeps her day job or you’re married to somebody who’s still working or you’ve borrowed from friends, families, and [fools 00:33:22] or whatever the case is, you’re just going to try to piece it together, hold it together, tape it together until you get to a million. So revenue is sell like hell is the thing, from a million then to 10 million the next one that kicks in is actually cash because growth sucks cash a million to 10 is 10 X-ing and for you to 10X again, you got to go from 10 million to a 100 million and that gets you into rarefied space.
So the million to 10 is when you really want to figure out your cash model, how are we actually going to fuel this thing? Through customer deposits or… through membership fees or advanced deposits, or by offering or collecting the entire monthly a year in advance, how are you going to go about… or you got deep pockets like John Ratliff did with his bank in order to grow through acquisition. So, but you’re expected between 1,000,000 and 10 to figure out the cashflow model. Then from 10 million to 50 million, the focus is gross margin because as I mentioned, about 10 million or 50 employees and you know everybody’s name, once you start getting above about 50, it gets crazy and you start piling on costs and you got some middle-management and now you’re getting price pressure because you’ve proven that there’s this market for what you do and now competitors are coming in and your margins really start to get squeezed.
And by the way, they squeeze about 4%. So if you’re running 53% gross margin, it drops to 49. It doesn’t seem like much, but 4% of 10 million is 400,000 and that’s the money that you need for that better computer system or to get a upgraded CFO or bring in some more talent in general or training and development or better office space. And you need that and at 50 million, that’s an extra 2 million the bottom line. So what we like to see is really push companies to get an extra 4% gross margin and a lot of it through pricing and clever pricing strategies instead of lose that 4% so it’s an 8% that is real money. And then at 50 million, not that profit hasn’t been important all along it sure wasn’t important at Amazon for a long time, but where you earn, we like to say the medium box is creating a consistent profitability.
By 15 million you’re expected to have this thing so figured out that you can create a consistent profitability in a wildly inconsistent market or world, like what we’ve just experienced. And that’s when you know that you have a deep understanding and control of the business that you’re running. So revenue, then cash, then gross margin, and then profit in terms of focus and those are just some of the things that change the evolutions and revolutions as the organization scales.
Alex: Super interesting. I like your pricing strategy point of you can get it through pricing strategy because I think the first thing that people would think about is we’ll have to change something in terms of how we operate, what you just said just before is with more sophisticated pricing you can actually just get that increase in gross margin immediately just by being able to present price like in a way that Robert Cialdini suggested, just give them the option. That’s really interesting.
Verne Harnish: The other place is then on process, the other issue with scale-ups that we deal with is they get so focused on trying to get these great running functions. You know, we’ve finally got a well-oiled marketing machine and sales and operations and HR and IT and finance, but what they don’t realize is that’s not how the customer experiences the company. The way it’s experienced is through processes that cut across those functions and I have to say that as entrepreneurs we’re sloppy. And the first place we’re sloppy is we have a tendency just to throw bodies at the problem. We just throw people at it and as a result, that’s why our gross margins get crushed and the complexity goes up.
So I’ll tell you a quick story there. So Ken Sim who ran for mayor of Vancouver lost 5,000 votes. My buddy [Kelvin Dom 00:38:00] who I was just talking with has been coaching him and he’s going to go back at it again and see if he can make up those 900 and some votes and become mayor. But he founded a company called Nurse Next Door and it’s one of our fastest growing franchises in North America. It’s one of these businesses where you have an elderly parent, you’d rather have a nurse come to their home than put them in a nursing home. And so he’s doubling in size and at the point where he had like 28 employees at headquarters, hundreds of nurses in the field, his head of payroll comes into his office and this is what happens to entrepreneurs every day, his head of payroll comes in and says, “Ken, I’m buried. I’m trying to keep track of these hundreds of nurses and get their time cards and get them paid. And I’m working 80-hour weeks and you want to double the company again in size. I need some help.”
Now, any rational CEO is just going to say, “Well, go get somebody.” but not Ken. Ken goes, “All right, let’s bring in a lean consultant.” and I’ll give you a long story short a year later, they doubled in size anyway you want to measure. Yeah, their head count dropped actually from 28 at headquarters to 23, they didn’t fire anybody they lost a couple through natural attrition that happens when you’re growing at that
rate and couple other said, “Hey, I’m just going out in the field.” And the great day was when his head of payroll comes in and says, “Ken, not going to believe it but I can barely find 30 hours now to keep me busy. What else can I work on?” And that’s what you want. They literally were doing twice the work in less than half the time.
It was a Forex and it wasn’t just in payroll they would struggle Alex in trying to bring on one new franchisee a month. Once they streamlined the process of doing that they could bring on five a month without breaking a sweat. And so we literally have this much slop inside most of our organizations because we’ve just been throwing bodies and not cleaning out the hallway closets and garages, which is the analogy I use for process. You clean the garage, you clean the closet, give it six months it’s jumped up again and you need a bigger closet, which is going to crush your gross margin or clean it out. And so that’s why process improvement is critical.
Alex: And I noticed that at the different stages of staff size what it took to get to 1 million is different to what it takes to get to 10 million in terms of however you made it happen is messy. It’s just messy and then you get to a point when it doesn’t work anymore and you have to change because it cannot support that size of revenue in terms of the older systems. And so there are key points that that happens and is that at staff sizes? Is it by 10 staff, 25 staff at 50 staff where you need to change how the staff are actually communicating with across the teams and the processes around it? Is that kind of what needs to happen that there’s certain shifts that happen at certain stages of growth?
Verne Harnish: It is. And a lot of it has to do with the team size. It’s why Jeff Bezos often kids about the two pizza team, but you really don’t want a team getting bigger than what two pizzas can feed. We’ve learned that the ideal team size is about four to five people and if you start to add that fifth, sixth, seventh, all it does is drive productivity down and costs up. And so those are the kind of things in organizational design and others that you want to be cognizant of. And what’s interesting is most folks haven’t been educated around just these kinds of fundamentals and that’s what you end up learning the hard way is what happens. So yeah, staff size as the size and the number of people really is a key driver of when you need to make certain changes.
Alex: Let’s jump to the people who lead these organizations, yeah. That what are some of the characteristics of the leaders who succeed at scaling from 10 million to a 100 million? That’s a special individual usually and it’s a special team obviously, but if the founder later or whatever, right? Then things don’t happen then and so what are some of the characteristics of those people who succeed?
Verne Harnish: I can’t say this as scientific at all, but what we’ve observed and we’ve actually now select based on it is first and foremost, they’re learners. Leaders are readers. It was in my second book Greatest Business Decisions I highlighted a very important routine of Bill Gates, which was his think week. He had this tower of guilt like everyone else does, these books that people send you pile up and read this article, watch this YouTube video it just flows in. I’ve already thrown a lot at your audience and so Bill would twice a year go hide out for a week, 18 hours a day, seven days straight he would plow through these PhD manuscripts, white papers. His teams would write on certain topics, books, articles, his record was 112. He actually kept track of it, measured it. 112 books, manuscripts, PhD, thesis, white papers. And it was out of those that came the key ideas that it continued to keep and to me, this is the most important word that kept Bill and Microsoft relevant.
And that’s what you’re trying to do is maintain relevancy to your marketplace both as a leader and as a company providing products and services that are relevant to the current conditions. Eric Smith said the key when Michael Milken asked him on stage and I’d shared the stage with him, “How did you keep up with the Google boys?” He said, “I shut my Blackberry off and read a book or two.” I don’t know if you saw blackberries coming back in terms of stock price so it’s not even an antiquated example. Mark Cuban, who I just emailed and asked for kind of a favor, Mark this crazy billionaire that (whom) we think may run for president of the United States and whatever, I’ve known him since his early days running a little IT company in Dallas. And I didn’t know until I read his book that since his 20s he is read on average three hours every day and all he’s doing is looking for one idea that can help 150 plus companies he either owns or is invested in.
Even Mark Zuckerberg picked up on Bill Gates habit, and Bill’s got his 50 books he always puts out every year a book a week, Mark is at a book every two weeks, but it was Warren buffet when on the 50th anniversary of Berkshire Hathaway they asked his partner Charlie Munger, “So Charlie how has Warren done it? How did he crush the market by a factor of 10 for 5 decades?” His last decade hasn’t been that great, but we’ll see and Charlie didn’t hesitate a moment. He goes, “It’s because of Warren’s no matter advanced age his number one priority on quiet reading and thinking time.” And we think that’s absolutely one of the most important key performance indicators of leaders within organizations.
So to me, this is the number one trait that you’ve got this hunger and thirst to learn. It was even that way with Elon Musk. He’s like, “All right, I want to go to the moon. I want to go to Mars.” So he reads these books on making rockets. And as the story goes, the guy that wrote the book, then Elon reaches out to him and this guy is like… He’s literally a rocket scientist, he’s like, “I can’t believe that this entrepreneur is actually picking my brain and talking to me and all of that.” Elon, like Mark Cuban, Mark says, “I won in the IT space because I was willing to read the manual and nobody else would. And then I just started implementing all those new technologies.” Elon just read a book about how you do rockets. So it, it comes back to learning.
Alex: So learning is the key point there because I was thinking, “Oh, there must be other characteristics.” but I’m sure there are but I think that if you are continuing to learn, you’re continuing to grow you and you’re opening up the context of the thinking that is brought to the table every day. And as long as you take action, which I think people who read a lot of these types of books do, that’s the key because it’s the fact that people have to change actually who they are at certain stages of their growth and it’s hard to just do it. It’s so much easier to have other kind of external inputs kind of help you to get there so I think that’s a fabulous point.
Verne Harnish: [crosstalk 00:47:35] I would add, so when Scott Fuqua endorsed my book Atlassian, Mike and Scott they were in my first workshop I ever hosted in Sydney in 2005 back then they only had 50 employees if you could imagine and today 3,500, and last I checked market cap of 56 billion on the way to… even touching 60 billion now, the guys [inaudible 00:48:01] 75% of the company, you guys know that story better than anybody in Australia. But when he endorsed the book he said, “Really the two key characteristics were discipline,” so you really have to be disciplined, “and focus.” And they seem to be such trite concepts and journalistic concepts but that’s what we really unpacked in that first book Mastering the Rockefeller Habits.[inaudible 00:48:31] really saw John D Rockefeller, the wealthiest guy in the history of the planet still today and measure a percent GDP, first and foremost being an accountant by training, he was super disciplined and then it’s his ability to know not the 10, not the 5, but the 1 thing…
Alex: The one thing.
Alex: Yeah, I would agree with that. Sometimes it is hard to focus, I’m sure that everybody knows that especially in the world that we live in today. Let’s talk about that world quickly just before we wrap up. In today’s world, which is full of uncertainty and which is full of challenges and where there is change happening in how consumers are spending and buying and what they are finding important and there’s so much changing, but what advice would you give to companies that are trying to figure out the best approach right now? The best thing to do right now to set themselves up for the next two to five years depending on how long this thing goes for.
And so if you’re going to build something physically, a building, there are two things that are critical. You got to get the piers down to bedrock, you got to really know what is solid foundation, got to build it on that. And then you got to get the roof on as quick as possible. And once those two things exist, you can kind of take your time if you need to build out the interior and the equivalent of that is what we call the sweat, your core strengths. What is it you’re really good at? And then by understanding that then you know how to pivot and number two, what are your core weaknesses so that you avoid going and doing stupid stuff. It may look great, but you have no competency around it that’s the foundation upon which you have to build the future plan.
And then what’s the equivalent of roof? It’s what we call the trends. All right, where are the trends? Not in your industry but in general and then you want to match your core competencies to those trends and say, “All right, now what’s the real opportunity that’s available?” And so that’s really an exercise that we’ve been taking again, hundreds of companies through to great success.
Alex: Yeah, that’s great. And so where can people find that information?
Verne Harnish: You can go to scalingup.com and the name of the book, and you’re going to see a picture of the book right in the banner and next to it are some free links. There’s free chapters, our barriers chapter, a chapter on how to do strategic planning with the sample one page strategic plan and you’re going to see a link to the growth tools. And there are 19 languages, just click on that. You do have to kind of give us your name and stuff so we can track it, but it’s free in all those languages, and you’re going to see the sweat and our other tools that we’re well-known for right there in a pack that you can use for free, we are an open source company.
Alex: Yep, and fantastic information I can highly attest to. With the change happening right now not everybody can win, that’s just how it goes in competition in business. And so what are the going to be the characteristics of the companies that win?
Verne Harnish: Well, it’s first, they have a mentality of winning versus playing not to lose. You want to continue to play to win. And by the way, we’ve all seen it with our favorite sports teams here they’ve got a significant lead and then what do they do? They start playing prevent defense. They change their game and they get slaughtered, they end up losing that soccer match or whatever it might be at the very end. So you’ve got to continue to play to win so that’s number one. Number two, I do think we need to keep all this in perspective. The global GDP was only about 34 trillion in the year 2000, it was just 20 years ago. 2019 it was 88 trillion and it was on its way to tripling and even if it were to collapse by 25% and it hasn’t anywhere in the world, you’re still looking at a GDP that’s twice what it was just 20 years ago.
There are so much business to be had that I think it’s only those who give up and that’s why this ability to persevere, if you want to add one of those characteristics of the people, because bad stuff always happens.
Verne Harnish: Always. Always. Always.
Alex: That’s the one consistent in business, I can definitely say that.
Verne Harnish: We’ve got a friend right now going through it and if she doesn’t get like 150 grand by tonight, and we’re all like scrambling to help her out, but she’s going to get it done because that’s who she is as an entrepreneur. And to me the folks that are getting through this, and it’s a piece of advice that I still think we’re practicing because really I don’t even know if Stumpy’s might have to close tonight because of something that happens that the governor announces, that’s how crazy the world we are in.
Alex: And Stumpy’s for the people who didn’t hear the pre-show chat is?
Verne Harnish: I’ve taken my daughter to [inaudible 00:55:13] named place called Stumpy’s owned by an EO Philly member where you do axe throwing.
Alex: Okay, cool. Otherwise that would have been a strange example like in all the other examples [crosstalk 00:55:21] Stumpy’s.
Verne Harnish: [inaudible 00:55:24] we’re going to go through axes tonight.
Verne Harnish: And I think it’s a good practice anyway and that is to just be clear, everybody in the company including yourself, what is the number one thing I have to get done just in the next hour? Like for me it was like, “All right.” and I literally look at my day that way in terms of chunks of hours. And then I said, “I just have to get this across the finish line in the next hour. And then I got to get this across the finish line in the next hour. And then I’m going to look up and see what the heck has happened next, and then I’ll decide the next hour.” so that’s number one. And then number two, and Susan David we had on one of our virtual summit she made a really strong point that most of us are suffering PTSD and we don’t even realize it, we have been shell shocked.
And she gave me kind of a quick test and sure enough I was suffering some of the symptoms of PTSD and around sleep and all kinds of stuff. And she said very specifically how you can deal with that is pick three times in the day, it’s best if you can just make it a routine and do something fun for yourself. So I have this dirty little secret, I actually liked to play solitaire. So I literally have given myself permission when I got done with that hour of accomplishment to just take a break and play a couple of games of solitaire. I know you’re a piano player I could take you around the corner I got my keyboard right over here, sit down and play something.
Right now I’m learning salsa. And so I’ll get up and I’ll practice a little bit [crosstalk 00:57:12] salsa yeah, and doing just something for yourself two or three times during the day really allows you to kind of push through all of this pain. So I’m being very literal about this process and who explained it a little bit to us was Nate, one of the co-founders of Airbnb. They described how when this crisis hit, they lost a billion bucks like overnight cancellations and so the first thing they did is they all went into, and our competitors don’t teach this and it drives me crazy, they went into the daily huddle. That routine and many companies in the crisis went to twice a day. Their senior team met every day, seven days a week and that was the key they said to be able to get through all that and as you know, about a month and a half ago they went public.
Alex: Yeah. And that daily huddle, I mean like I said at the very start that the book actually has influenced the success of Web Profits. We’ve had the daily huddle since we attended your conference in Leichhardt or something 2007 or 8 and every day since then and it’s helped us… Except for weekends but we’re not doing weekends, but every weekday and it’s been super, super helpful. But just to summarize the first part to win in this challenging environment is to play, to win. The second part is to complete stuff, just to complete something constantly. The third is to reward yourself because there’s enough stress out there anyway and it’s something to look forward to.
And I think what’s been interesting is that the world is continuing, the world hasn’t just stopped and just like your point about the GDP, that’s really fascinating. Like the money is still there, it may be changing kind of how it’s being spent or produced, but it’s still there.
Verne Harnish: You got it. Yeah, and we’ve got more people continually coming into the middle market around the planet. Right now we only have about 4.2 billion of the 7.7 billion, we can still have three and a half billion worth of people yet to bring into the middle class, which just opens up an increasing pie for everybody. I think that’s the great news.
Alex: Verne that’s a fantastic point to finish on. Thank you so much for coming onto the podcast today. For the people that are listening, check out that website that we spoke about earlier, subscribe to get all the tools, his content is fantastic. It does change companies in terms of how they operate. I mean, I’m sure you’ve heard about him, but if not, you should purchase the books, they’re fantastic and they’re highly recommended. I can’t speak highly enough of you. I thank you so much for coming on the podcast Verne and it’s been pleasure.
Verne Harnish: Alex, thank you so much.
Alex: Fantastic mate, see you later. Bye
Verne Harnish: Bye.
Alex: Thanks for listening to the growth manifesto podcast. If you enjoyed the episode, please give us a five-star rating on iTunes. For more episodes, please visit growthmanifesto.com/podcast. And if you need help driving growth for your company, please get in touch with us at webprofits.io.
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