March 28, 2011
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Not too long ago, I was having a conversation with an event organizer about his revenue model. He told me that he hires speakers, paying them a flat fee for their time, and then launches an aggressive marketing campaign to put butts in seats.
He also told me that most of his events lose money.
Why?
His business has significant fixed costs. Therefore, he needs to continually be at maximum capacity in order to just break even.
To assist him in overcoming this challenge, I shared some simple yet powerful advice that I had personally received while traveling in Asia a few years back:
“Before you can multiple, you must first learn to divide.”
Because small businesses are always trying to control costs, our natural tendency is to avoid sharing any of the profits. We want to keep it all to ourselves, since there is often so little profit to begin with. However, if you wish to be successful, find a way to take a smaller slice of a bigger pie.
In the example of the event organizer, instead of paying a fixed fee as his current model dictates, he could pay speakers a percentage of the ticket sales. This puts the speaker’s skin in the game. More attendees, equals more money for the presenter. He or she now has a vested interested in the success of the event potentially creating a bigger pie to share.
Instead of a high fixed advertising model, find a way of sharing ticket revenues with those who sell tickets. This could be done through online affiliate programs where the website that drives the traffic gets a percentage of the value of the tickets sold. Or you can give commissions to people who make the sale.
In another example, a friend of mine runs a successful family-owned restaurant. Although she had been profitable in the past, her margins were razor thin. For the last couple of years, economic conditions have reduced her revenues, further eroding her margins.
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What was her solution?
Instead of simply cutting costs, she found ways of increasing revenues by partnering with people who charge her only when her business is growing.
She uses iDine® and OpenTable to drive traffic to her restaurant. Although they take a percentage of every customer that they deliver, the extra traffic helps to cover her large fixed costs.
It is natural for a small business to be conservative with their finances. But sometimes the best way to make money is to first give some away. Unless your fixed costs are low and you are continually at capacity, it makes sense (and more importantly dollars) to find creative ways of partnering and sharing your wealth with others.
Professional speakers do this, giving bureaus a 25 percent commission on speeches they book. Internet marketers do this when they create programs that reward affiliates 50 percent of the sales that are generated through their own marketing efforts.
Of course there is a risk of cannibalization. If someone had planned on purchasing your products or services directly and now opts to buy through one of these other distributions channels, it can have an effect on your margins. However, overall, this model allows you to grow your customer base exponentially by forging these new channels.
From time to time, when I book a speaking gig directly, I will pass the lead onto a bureau. Although this means I make 25 percent less for that speech, I now have built a relationship with someone who has a vested interest in marketing me in the future.
When you help someone else make money, they will inevitably want to help you do the same. Influence experts call this “reciprocity.”
I have recently partnered with an individual who is developing iPhone apps and other tools using my intellectual property. The plan is for him to take a percentage of the sales generated by these products while minimizing my upfront cost. This not only reduces my investment and overall risk, but it also increases his interest in seeing our efforts be successful. If the products do as well as he expects, he will make 10 times what I would have paid him for his time.
Take a look at your fixed costs. Investigate all of your investments. Is there someone else who might be interested in moving those fixed costs to a variable cost where they are paid on success? In doing so, they might earn more money in the long run, and so will you.
Remember, before you can multiply, you must first learn to divide.
Stephen Shapiro is the author of Personality Poker: The Playing Card Tool for Driving High Performance Teamwork and Innovation (Penguin Portfolio). You can read over 500 articles at SteveShapiro.com, play the free Personality Poker video game, or follow him on Twitter.
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Thursday Bram 1 year 1 months and 30 days ago
I've used affiliate sales effectively in the past and I think they're great. It is crucial, however, to run the numbers on each individual decision: I've sold products that I might have been able to sell more of if I had offered an affiliate commission, but I simply couldn't make enough of those products to be worthwhile at the margin I would receive after affiliate sales.