A business must do two things well to survive and prosper over time:
- Create Happy Customers. A Happy Customer is a customer that loves your products and services, is happy with your prices, comes back often, and refers their friends and colleagues to your business.
- Create Happy Owners. A Happy Owner is an owner that receives healthy and regular distributions of excess cash, is happy with the level of company profits, supports the company’s plan to reinvest and make the company stronger each year, and has confidence in the financial future of the company.
An interesting question to consider is whether you can have a company that is nicely profitable (the foundation for creating Happy Owners) while at the same time charging prices, and providing service levels, that customers are happy with (the foundation for creating Happy Customers).
A Fun Example
Imagine two companies in the same industry. Company A has annual sales of $10,000,000. The owner works in the business and receives compensation of $250,000. Pre-tax profit is $1,500,000. The second company, Company B, has the same $10,000,000 in annual sales. The owner works in the business, but their compensation is $100,000. And they showed a loss for the year of ($300,000).
Which company would you rather own?
Which company would you rather do business with as a customer?
The Owner Perspective
Company A appears to be nicely profitable. And the owner appears to be making a market-based compensation level for working in the business. My assumption is a business like this is probably generating excess cash in addition to reinvesting a portion of their profits to grow and make the business stronger.
Company B is losing money. And the owner, who also runs the business, is not even receiving compensation at a level you would expect in a business doing $10,000,000 in sales. It looks like a business that requires the owner to routinely put money in just to keep the company operating (that’s how you create an unhappy owner).
Which company would you rather own? I would rather own company A.
The Customer Perspective
Now put yourself in the shoes of a customer. Let’s imagine that you are deciding whether to do business with Company A or Company B. The product or service they provide for you is important to your business and you will be buying from them monthly… and their prices are not far apart. And assume that you know what their P&L looks like. You have the information I shared above about their sales and profitability (or lack of profitability).
Of course, there are lots of factors that would go into your decision. Quality of the product and service, price they charge relative to the value you receive and relative to other suppliers, reliability, cost of switching suppliers, and a host of other considerations. As a customer, if I will be buying a product that is important to my business, and I will be buying from them monthly/frequently, I would be worried about “hitching my wagon” to a supplier that appears to be weak financially.
As a customer, which company would you rather do business with? I would rather do business with Company A.
Think of Money as Certificates of Performance
"Pay and profit tell you that you are supplying a need and filling other people's wants… they are the validation of your work."
I love that quote from Rabbi Daniel Lapin, in his book Thou Shall Prosper. Rabbi Lapin believes that making money in business comes from serving your fellow human beings in a way they value and appreciate. In his view, business is almost a spiritual undertaking because it requires that you serve someone in a way they appreciate… or you have no business.
He likes to use Walter William’s description of money as “certificates of performance”. When you provide a product or service that someone wants, they show their appreciation by giving you certificates of performance. Provide value for the customer… and they respond my providing you certificates of performance. It’s a fun and intriguing way to look at the money customers pay you.
Price is Very Important
A central theme in the exercise of evaluating Company A and Company B is the question of “price”. It’s impossible to be nicely profitable if you charge too little for your products and services. And it’s impossible for customers to be happy with your price if you charge too much (relative to the value you provide).
The challenge is providing enough value in the mind of the customer so that they are happy to provide you “certificates of performance” at a level that you need to be nicely profitable.
Profit is something to work hard to grow and improve because expenses are always on the rise (and if the customer is not happy at the price you need to charge, then you need to look very hard at reducing expenses). Think of strong profitability and cash flow as validation that you are providing a valuable service to your customers. It's confirmation that you are on the right track. It's something to be proud of.
Here’s to earning many more certificates of performance in your business and your life.
It’s not easy, but success in business requires us to work hard every day to create Happy Customers and Happy Owners. Financial health in business has its benefits… whether you are the owner of the business or its customer.