I had dinner last night with a guy who trains dogs. He used to train dogs for an hourly fee but decided to shift his model from selling time to selling a product. Now he markets a set of pre-recorded dog training videos through his web site and earns more than a million dollars a year selling something people buy while he sleeps.
Selling a product, rather than your time, offers a fantastic leap in lifestyle benefits and makes your company more sellable. When I recently surveyed merger and acquisition (M&A) professionals about what makes a business attractive to a strategic acquirer, virtually all of them agreed that a company’s potential growth is second only to profitability among the factors that make the company a must-buy in the eyes of an acquirer.
But the term “growth potential” is a little nebulous, so I asked the M&A guys to go a layer deeper and explain how buyers assess a company’s scalability. The most important question they ask themselves is: “Could your business be five times bigger without adding five times the cost or complexity?”
Customization is the five times killer
If you customize what you sell, it means people are involved, which makes it impossible to scale quickly.
In my research business, we started out offering to customize the reports we sold, but it robbed our business of its leverage. Once we standardized and stopped offering to tailor reports, we were able to scale up.
Yes, we lost a few customers who were used to the custom reports, but we added many more new subscribers because we weren’t wasting our time and money customizing and could invest those resources in hiring sales people.
Often the need to customize comes from ten percent of your pickiest clients. If it is time for you to say goodbye to the customers who want their Big Mac without the pickles, follow these three steps:
1. Narrow your target market. Part of the reason you have to customize may be that your audience is too wide. Decrease the diameter of your bull’s eye until you can identify a group of people who like what you sell off-the-shelf and develop a discrete offer for your ideal customer.
2. Productize. When customers buy services or time, they are accustomed to being able to provide input. At the same time, everyone is used to buying products off-the-shelf. The trick is to brand your stuff consistently so customers start to see it as a tangible product instead of a squishy service.
3. Say no. When customers ask for special tweaks, explain that your offering has been time-tested for X number of years to render the best results. Explain that you’ve honed your formula and – just like the twelve herbs and spices or the secret for getting the caramel inside the chocolaty pockets – you’re not willing to change something that has been proven to work. I have found that most people respect your intellectual integrity and go along with your standard offering. The one or two who insist on special favours are not worth the hit your valuation will take when you’re ready to sell.
PS. One available spot at my “Sellability” workshop
One of the 16 attendees at my upcoming Sellability Workshop in Chicago on September 28 & 29 just cancelled. This session is not for everyone (attendees must have between $500,000 — $7,000,000 in annual sales), but if you want his spot, this is your opportunity. First come, first serve, and I have no plans to repeat the session. What you’ll learn is the “inside baseball” on selling your company for a premium from people who have actually done it. Apply here.
(photo courtesy of Flickr/pamhule)
Hi John, great piece. The dog story is an excellent example on a traditionally low per hour-job that scales beautifully – thank you for sharing.
I’ve got a thought on customization. Would there be any circumstance where you would actually encourage customization?
I was thinking: for example, if it can be done without extra cost once its’s set up – maybe through a computer program – or if it could be offered to a much higher price to keep pickier clients (interesting if they add substantially to the revenue/profit)?
Would be interested in your thoughts on this!
Isabelle:
Thanks. My concern about customization is that nine times out of ten, it sucks the owner into the project because s/he is usually the most technically competent person on the team.
If you can offer customization and have it delivered by the rank and file employee, then yes, I think it can work. Starbucks, for example, offers a lot of customization but they figured out how to get their front line staff to deliver. I think part of the Starbucks magic is that, even though there are a lot of possibilities, most are based around a couple of key ingredients: espresso, milk, hit water, tea.
How about you, do you think you can scale customization?
Good points, John. Would it be possible to treat services the Starbucks way, too? Customization doesn’t necessarily mean starting from scratch to adapt yourself to the customers needs – it could be about options.
Let’s say that you’ve got a basic service, stripped from extras and then the customer can add what they need more than that? For example, building a simple website is the basic, and customers can then add to have social media integrated, set up a blog, set up email, etc – just by clicking “add to basket”. That would mean that the customers choose what aspects of the service they need and want, and does not cause any more work or involvement for the provider.
Though, I suppose it could be argued that in my example, these are just different services purchased together. These were my thoughts for now – I’ll give it a think and come back.
Isabelle: I think what you propose could work. The acid test would be if any of the “ad on” services trigger the owner’s involvement. If they do, that would be a sign you’ve gone too far with extras and customizations. My 2.
your blog posts are really good! more please!
Hi John, great articles – just read your book (and just getting into e-myth planning too- brilliant, truly) I have 20 years’ experience in the IT industry and looking at merging with another IT company (we are both one-man bands).
I want to take the opportunity of the merger to reduce our service portfolio to focus on one core technology (Microsoft Windows Small Business Server) with common products around the core (Support/ Upgrade/Install). How narrowly focused do we need to be with the PRODUCT?
I will be looking at setting up strategic partnerships with local providers for satellite services so we get a referral fee/on-going commission.
Following on from your reply to Isabelle, is the simple test whether the owner(s) are involved with product delivery ?
I welcome your input.. Thank you.
Rory;
Yes, I think if you can add a service your customers want without having the owner personally involved, it makes sense. Best of luck!