The primary mission of Fat Margins is to reduce the number of businesses failures.
19 out of 20 new businesses fail – most within three years.
According to Michael Gerber, in his book The E Myth Revisited, over 1,000,000 businesses are started each year in the United States. By the end of the fifth year, 80% of them have failed. By the end of the tenth year, 80% of those that survived the first five are gone. According to Gerber, out of 1,000,000 new businesses started each year, only 40,000 (4%) still exist ten years later.
Dr. Lawrence Steinmetz, the author of How To Sell At Prices Higher Than Your Competitors, says that there are 11,000,000 businesses in the United States.
According to him, approximately 800,000 new businesses are started each year. He goes on to say that half of them will fail in the first year and that half of those that survive the first will fail in the second. Only 25% last beyond two years.
Statistics compiled by the U.S. Small Business Administration show that about 56% of new businesses fail within five years and that no more than 12% survive ten. Other credible sources state that the failure rate is even higher.
What’s worse is that at least 75% of those that manage to stay afloat lead marginal existences, continually fighting to keep their heads above water, never taking-off and becoming successful.
The bottom line is that 85% to 95% of all businesses fail, most sooner than later. The average life span of a business is 7 ½ years. The number of businesses in the United States has hovered around 11,000,000 for at least the past 30 years, meaning that for every new business that’s started, an existing one fails.
These startling statistics come from studies published by the U.S. Dept. of Commerce.
Owning a business is a powerful, yet costly dream for many.
Each year, close to one million people actually muster up the courage to go into business for themselves. Of course, in their dreams, their businesses are always highly successful, providing them with wealth, independence, power, prestige, and personal fulfillment.
Building a profitable and successful business is one of the most rewarding experiences a person can have.
Regrettably, when a business fails, those dreams turn into nightmares. A failed business almost always:
- Costs its owner a substantial amount of money, (often his or her life savings)
- Wastes years of its owner’s life
- Tarnishes its owner’s reputation – from the standpoints of both honesty and competency
- Damages its owner’s relationships with others, often including family members
- Wipes out much of its owner’s self-confidence and sense of self-worth
The odds for achieving business success are stacked against you
Fat Margins produces programs for business owners who want learn how to get their companies off the slippery slope to failure and on to the path that brings long-term profitability. Owners who want to become one of the elite 5% who achieve true business success.
Research and Methodology
The two most common strategies that businesses have traditionally used to maintain and increase profits are to:
- Cut costs
- Working to cut costs generally yields a low rate of return for the hefty amount of time expended. Costs have been squeezed for so long that few savings are left to be found.
- Often the cuts that are made actually reduce quality and service levels to the point that they backfire, costing the company their most loyal and highest profit customers.
- Increase sales volume
- When a company chases after added sales it often results in the acquisition of unprofitable, low margin business.
- Most efforts to increase sales include running promotions, hiring additional sales staff, or cutting prices, all of which are costly and eat up profit margins.
- Combining discounted profit margins with increased selling costs is a surefire way to end up in bankruptcy.
The programs offered by Fat Margins are based on research findings drawn from studies completed by over one hundred top-notch sources including:
- Universities such as Harvard, MIT, and Yale
- Consulting firms such as Bain & Co., McKinsey, and Simon-Kutcher Partners.
- Subject matter experts including Chris Anderson, Dan Ariely, Ron Baker, Jeffrey Gitomer, Seth Godin, Kevin Hogan, Reed Holden, Tom Hopkins, Dan Kahneman, Thomas Nagle, William Poundstone, Al Ries, Jack Trout, Amos Tversky, Ron Zemke, and Zig Ziglar.
These research findings clearly show that most businesses benefit most by concentrating their profit improvement efforts in three areas:
- Better targeting of prospects and increased retention of those prospects that become profitable customers
- Eliminating or restructuring of relationships with unprofitable customers
- Improving pricing skills
Key findings that prove the need for better prospect targeting and customer retention:
- 80% of a company’s sales and 80% of its profit come from about 20% of its customers!
- However, the 20% that provides the sales is NOT the same 20% that provides the profit! In other words, some of the highest volume customers provide little or no profit, while some lower volume customers are highly profitable.
- A 5% reduction in customer turnover will increase a company’s net income by 25% or more
Most customers will pay a 10 – 15% price premium for excellent service.
- A referred prospect is fifty times (not 50%) more likely to buy than a prospect found any other way. Not only that, sales cycle time is also cut in half.
Key findings that prove the need to eliminate unprofitable customer relationships:
- Most companies subsidize 15 – 40% of their customers. That’s right, they actually spend more out-of-pocket to make the sale and maintain the customer than what they take in from the relationship. So, for example, they might spend $3 for every $2 they take in.
- Eliminating relationships with customers that cost more than they’re worth will increase a company’s net income by a minimum of 25%. Companies that that follow this practice often double their net income.
Need proof? Check out the Coast Distributing Company case study.
Key findings that prove the need to improve pricing skills:
- Price is the key determinate of business profitability.
- A 1% increase in price will increase a company’s bottom-line net income by at least 11%.
- 96% of businesses misprice their products and services. 92% set their prices too low and 4% set them too high.
Almost all businesses let large amounts of cash slip through their fingers because they misprice their products and services – usually by not charging as much as they should.
- 80% of companies use price discounting as their primary marketing tool.
Nearly every one of them is going broke. Matching their prices will put your company out of business too. The key to long-term success is to learn how to compete using tactics other than price cutting.
- Less than 25% of a company’s customers buy primarily on price.
- 90% of sales people offer discounts without being asked, needlessly giving away profit.
- 96% of price complaints aren’t about price. They’re an easy, face saving way for a prospect to say no without having to disclose their real reason(s) for not buying.
To see what effect price and cost changes have on your company’s profitability, take a look at the Effect of Price/Cost Change Calculator.
To find out how well your company is currently pricing its products and services, take the Fat Margins Pricing Proficiency Assessment. Again note, a 1% increase in price will increase net income by a minimum of 11%.
A sellable business is a major source of wealth for its owner
A significant, but often overlooked attribute of a successful business is its market value. A business that can be sold for a large pile of cash at a time of its owner’s choice is obviously far more profitable than one than one that has little or no value.
An unprofitable business is worth little more than the liquidation value of its assets minus its debts.
A marginally profitable business may be able to be sold, but the price realized will be little more than the market value of its assets plus possibly a few dollars for its customer list.
To sell for maximum market value a business must be able to command the payment of goodwill. Goodwill will almost always double to sales price of a business. To be able to command the payment of goodwill a business must offer prospective buyers two things:
- Consistent, and better yet, increasing profit.
- The ability for it to run on its own.
Goodwill, which contributes a major portion of the price in a sale (usually more than half), will not be received unless a company is able to demonstrate its ability to consistently maintain, and preferably increase profit over time AND… be able to operate independently, without the day-to-day involvement of its owner.
Prospective buyers who are willing to pay full value for a company are looking for an investment, not a job. They may, or may not, want to work day-to-day in the business they buy. Regardless of whether they do or don’t, they expect that the company will have a management team in place that is capable of operating the business by themselves. Without such a team, no buyer is going to pay for goodwill.
When your business is able to satisfy these two requirements, you’ll be paid far more for it than you will if your company can’t.
To get an idea of your company’s current market value and how much it will appreciate if its profit rises, try the Business Valuation Template and see for yourself.
To summarize, only about 1in 20 businesses ever become truly profitable and achieves long-term success.
The overriding objective of Fat Margins is to support owners as they work to build profitable, sustainable businesses by exposing them to the latest practical and proven strategies and techniques, especially on how to:
- Better target potentially profitable prospects and increase the retention of those prospects that become profitable customers.
- Eliminate or restructure of relationships with unprofitable customers
Improve pricing skills
Regardless of how profitable your business is right now, applying the principles taught by Fat Margins will significantly improve your company’s bottom-line and increase its market value.