Funny Maths.

Son, 

Business is full of ‘Funny Maths’  - special formulas that can work as a guide for you to map your profitability. 

1:  “Two is one, One is None”

A stitch in time, saves nine : This is all about being prepared in advance - having a redundancy strategy in every sense.  It works like this : if you only have one of anything, and it fails, you have none.  In order to have ‘one' of anything, you need to have two - one in use, and one to fit when it fails.  The lost income from downtime when a tool fails almost always exceeds the part cost.

2:  “Measure Twice, Cut Once”

This universal saying applies to many aspects of business, not just the cutting of a piece of timber.  This is a sure-safe way to reduce wastage in production, and low margin when calculating your retail pricing.  As people, we are always confident in our thoughts and actions however, this confidence is not always well placed - we all all make calculation mistakes, and these mistakes will cost money (especially if you cut short).  

3:  “Triplicate of Choice” 

When offering offers to customers, the customer likes to have a choice. Offer too many choices, and the customer gets confused - they will say “I need to think about it”, as well as you need to carry too many stock SKU’s when you have too many choices.  The best way to offer choice is called ‘a Triplicate of Choice’ - like a ‘Bronze, Silver, Gold’ type offer.  If possible, the best offer for you, put in the center as the ‘center offer’ is the one that people are psychologically inclined to be attracted to. 

4:  “Giving-Away Product vs Discounting” 

When you are putting sales campaigns together, you will often see companies offering ’20%OFF, or 30%OFF’.  In our industry, the resellers mark up their prices to offer big percentage discounts (remember when 101 had 25%OFF our MINI STARTER PACK priced at $1499 when our website had it priced at $995).  This method lacks integrity to the customer.  When you want to discount for a ‘SALE’,  it is more profitable to offer ‘free product’ let’s say valued at $100, compared to giving $100 OFF, because the product does not cost you $100. If your COGS is 50%, you could also give away $200 of product for the same financial effect as $100 OFF, but the offer is twice as compelling, so you may have multiples better sales results. 

5:  “Using Store Cards”

Utilizing the above strategy, you can follow the maths on our 2022 BLACK FRIDAY campaign - Spend $2000, Get a $1000 STORE CARD FREE.  When the Store Card is redeemed, the total goods sold is $3000, so the actual discount is maximum 33%. 

6: “Bundling Goods”

The bundling of goods together is a way to make a pack that is more difficult to copy by competitors.  Adding products that are unique to you, or that you have a greater efficiency in delivering, makes the package offers more compelling for potential customers.  Again, the tools that are best to bundle for a WIN-WIN with the customer are the ‘high perceived value, lower cost of goods’ items. 

7:  “Starter Packs”

Starter Packs are a little strange for us as we only have top quality tools. Our competitors use cheaper and inferior fiberglass poles and plastic brushes to make a low-cost-of-entry water fed kit.  I find these are immoral, as the intention of water fed tools should be to increase efficiency of the window cleaner as well as maximize their safety. Fiberglass poles and broom-style-brushes do neither (trying to control a floppy pole loads the ‘control muscles’, potentially leading to a repetitive motion injury).  The cheaper packs are designed to fail or fall short of the needs of the customer (eg. An 18FT pole rather than a 25FT pole)  The only thing we can do for a ‘better value starter pack’ is work with a lower margin.  

8:  “Loyalty Programs”

These belong in the realms where you have a lot of returning customer business, so there is a reward for continually coming back, with a very small % of past sales able to be redeemed in future sales.  This is ideal in travel apps for flights and hotels, but not ideal for folk that buy tools every year or five.  

9: The 80:20 RULE

80% of your income will come from 20% of your customers.  80% of your Customer Service load will come from (a different) 20% of your customers, and so on.  Nearly every aspect of business will, ultimately fit the 80:20 Rule (go to Wikipedia and look up ‘The Pareto Principle’).   You cannot truncate it, or outsmart it - if you try to get rid of the worst 20% of customers (not related to the nut-job people you CHOOSE to refuse to do business with), your business will change slightly, and then it will re-format somehow to match the 80:20 RULE.  

9: VIP Customers

The top 5%, 10%, and 20% of your customers probably deserve discounts more than the ‘Squeaky Wheel’ first-time customer.  I have spoken with several resellers in our industry who have over-priced webstore prices for products compared to other webstores, and they do it  so they can offer the ‘illusion’ of discounted products for VIP Customers.  A top customer might get 15%OFF prices that are marked up 20% more than other stores.  In fact, these reseller margins are ‘normal’ when their VIP customers buy from them.   The best thing to offer your best customers is great (even BOSS PERSONAL) customer service, and maybe, if you ever find ‘the perfect gift’, a gift as appreciation for their VIP loyalty. 

10:  “Distributor Margin” 

When you are costing a product and seeking to determine a retail price, you need to consider that, in the event it is sold through a Distributor, this will cost you 50% of the final sale price (and may resellers require up to 70%).  When selling a high-end product, this becomes difficult to match the ‘middle-of-the-road’ product offers.  In many cases, our cost of production will be higher than the reseller is buying a competitor product that is price pointed.  So .. if your cost of goods is $30, and you want to make 50% mark-up, your minimum sale price is $45, and the Retail Price will be between $90 and $135 (being 50%, or 70% of final sale price to the reseller). 

11:  “Built in Obsolescence”

Many products since WWII have been made to fail.  It was once that a product would last 20 years+, then it was 5 years, 3 years, 1 year, and less.  The lower the required life of the tool, the cheaper the materials to make the tools, and the sooner the customer comes back to replace it.  This is a very stable business model, as the brand gets more regular sales and is able to plan their cashflow as growing each year because they have all previous customers returning every season.  That is : until they buy a tool that is 50% more expensive that lasts several years.   There is a solid business case for consumerism, however, you have to choose whether you are a ‘MAKITA’ or a ‘BLACK & DECKER’ and stick to your plan.  This is the basis of the ‘PRICE vs COST’ discussion.  A $50 brush that you replace 6 times in three years has a PRICE of $50, and a COST of $300 over three years.  If a $200 brush lasts three years, it has a PRICE of $200 and a COST of $200 over three years.

Dad.