The Rule of Three: When to Invest in Your Business
I see an oft-repeated situation with business owners. Typically it involves a spouse or business partner who is very concerned about cutting costs. This concerned person urges the business owner to spend less money, believing that if the business spends less money, then there will be more money left at the end.
Unfortunately the math of small business rarely, if ever, works out that way. It is the businesses that consistently and carefully spend money and invest wisely that make the most money. Many businesses have gone on cost-cutting rampages only to find they are less profitable than before. Why? They crippled themselves by removing profitable business investments.
Now, before I go on, I don't want my remarks to be misinterpreted to say that small business owners should have a green light for spending money. Many people are still feeling the sting of the excesses of the height of the dot com era, when a business’s “burn rate” was a supposed measure of potential success. I have seen relationships that were damaged greatly when a business owner spent with no accountability. Spending must be kept in check, and investments made with caution.
Frugality, a virtue in when it comes to dealing with one’s personal finances, is very often a vice when it comes to business finance. When frugality gets in the way of profitability, the business is moving in the wrong direction.
Businesses need to spend money. They need to focus on investing money. Yet how can a business owner determine whether they are making a wise investment? The principle that I use as a guideline for my clients is the “Rule of Three.”
The Rule of Three says that for every new dollar you spend within your company, you should receive three dollars back to your bottom line. However, what I often see are attempts at living the Rule of One. Imagine this typical example: a sales rep enters your office to sell you on a new form of advertising. As a rationalization for the purchase, they say "all you need to do is get one client from this ad for it to pay for itself.” This is the Rule of One: spend one dollar and get one dollar back. If you do that continuously within your business, you're going to wear yourself out and not make any money at all. The Rule of One is a zero sum game.
Since small businesses have to operate at a much higher profit margin than, say, a Wal-Mart. The Wal-Marts of the world can afford to make a few cents on every dollar. But small businesses have to make wise, shrewd, powerful investments, investments that yield a lot to the bottom line. As a business colleague once said, they “need to throw around nickels like they are manhole covers.” The Rule of Three is the best way to accomplish this. If a small business can spend one dollar and receive three dollars back for every dollar that they spend, than they can spend themselves into tremendous prosperity.windows smartphone
Consider this: in what ways could you spend one dollar and get three dollars back? How about spending $1000 dollars and get $3000 back?
The easiest way to do this is to first figure out what the worth of one new client is to the bottom line of your company. Divide the number you end up with by three, and you now have the CPNC: Cost Per New Client. For instance, if one client is worth $600 to the company's bottom line, then that means the company can spend $200 to acquire that client based upon the Rule of Three. By first learning the CPNC for your company, you can open up the door to spending your way into profitability.
The trick is coming up with creative and profitable ways to spend that money. Need a starting point for your thoughts? Look for ways to spend more money on your existing clients. When you spend money on the customers and do things for them that are unexpected, you build customer loyalty. Customer loyalty breeds more referrals and repeat business. This kind of spending is a powerful investment that will yield results consistently. Customer loyalty is the easiest way for a small business owner to gain new business.
Unless you have large sums of money to devote to an extended advertising campaign, the Rule of Three demands that business owners and small business marketers become creative in making profitable investments with their money. They must find the business’s unique way for making investments that brings in new customers and keeps their current customers coming back for more.
So my message to business owners, their partners, and their spouses is this: be frugal at home, but be profitable at work.