The most important principles of business strategy are summarized in 4 points:
1. If you want to earn above the cost of capital (if you want to create value), you must get a higher return on your efforts than the average competitor.
2. To get a higher return than the average competitor, you must have an advantage or you must compete in an unusually attractive sector.
3. There are only two ways to get an advantage. Your prices must be higher or your costs, including the cost of your balance sheet and the cost of taxes, must be lower.
4. Unusually attractive sectors are those where the forces of competition are muted. Usually this is because there are few competitors. But there are other reasons, such as legislation or demand growing faster than supply.
Andrew Campbell, Harvard Business Review
These four points focus on one thing—your advantage. An advantage comes in one of three places: you get customers for cheaper, customers are willing to pay more, or your operating costs are lower. Success in business is simple. Acquire success in any (preferably all) of these categories.
1. Getting Customers for Cheaper
Spending less on acquisition costs requires better marketing. No matter where you are in business this can always be optimized. There’s always a new platform with underpriced attention or an optimization available within your current marketing channels.
Most businesses either buy customers or earn customers. Buying customers is traditional marketing. I pay money for media. The media brings in customers. There’s a return whether positive or negative. Earning customers is more labor intensive (and still has costs). I create an organic buzz. The organic buzz bring in customers. The customers generate revenue.
Finding opportunity usually comes from three places. There’s the intrinsic advantage of your company. For example, you were a film student in college, so you can produce amazing video content for an organic YouTube channel. The second is first move advantage. No one in your market is on X platform meaning all the traffic is yours for the taking. The third could easily be a category of either two. This is where your competitors are inefficient. They advertise on Facebook, but poorly.
Study those three places and find the first channel you want to tackle (or optimize). Once you’ve picked that marketing channel your goal is to make it as efficient as possible. Study everything you can find. Implement and optimize it. This is how you drive customer acquisition cost down. Hyper optimization.
After you have done this with one channel do it with a second marketing channel. Then a third.
2. Convince Customers to Pay More
Convincing customers that you are the premium brand is an extremely valuable advantage. Convince them that you are the Nike to your competitor’s New Balance. How do you do this? You create value to the customer.
Value and cost are two separate things. Cost is how much something is to produce or supply. Value is how much the perceived worth is. You can increase the value through marketing tactics or by offering more to each customer. The higher the value the more people will pay.
It really is that simple. The easiest way to be worth more is to provide the most value to your customers. Go the extra mile with every single product. The better the service the higher the value.
If you’re customers don’t understand the value, you’ve failed. It is YOUR job to educate them. Your marketing conveys the value. If they aren’t seeing the value, rework the marketing. Rewrite landing pages. Optimize service packages. Pair your good (service or products) with influencers. Include positive testimonials.
You don’t need to change your price points for this to affect your business. Increasing the value of products will help with lowering acquisition costs as well.
3. Lower Your Operating Costs
Growing a business is increasing revenue. Increasing revenue is often paired with increasing costs. As you need more throughput, costs inevitably go up. While some costs do decrease at scale by unit price (inventory and office supplies), there are always costs that increase. Staffing costs rise. Rent rises. Insurance and legal retainers increase. The key is to make these as efficient as possible.
Efficiency is a topic we could spend years on. Instead we are going to touch on the very basics. Find your processes and expenses that are inefficient. Do you spend money on software you don’t use? Are your SOPs (standard operating procedures) outdated? Are you paying a premium for office supplies because you wait till the last minute to order? Once you’ve found these fix them. Lowering operating costs is the quickest and simplest way to increase cashflow.
Increasing cashflow gives you two possibilities. One pathway is you increase personal cashflow. Owners who are no longer focused on growth should explore this avenue. The second pathway is you increase your advantage. Lower operating costs means you can increase acquisition costs while still maintaining the same margin. While spending less per new customer is a great advantage, being able to spend more than competitors magnifies this advantage.
What should you do with this information?
Your number one goal is to find an advantage and magnify it. This should be your goal everyday. Find a possible advantage. Achieve it. Repeat.
This is the process that allowed us to do $1,000,000 in revenue within 17 months of launching Patrick Adair Designs Direct-to-consumer ecommerce business. It works.