Blog Post

Part II of the Margin Manifesto

As I wrote “yesterday in Part I”:http://gigaom.com/2007/06/12/the-margin-manifesto-by-tim-ferriss/, the ultimate goal of a start-up is not to acquire more customers, more office space, or even more revenue. The ultimate goal of a start-up is financial: it is to *acquire more profit in the least amount of time, and with the least amount of effort.*

Based on my work CEOs all over the world, I’ve developed what I call my “Margin Manifesto” – a call to action that gives founders permission to do uncommon things in order to achieve consistent profitability in 3 months or less. As I’ve said before, the same Manfesto principles can then be applied to double your profits in the same amount of time! (“Here is a video clip”:http://www.youtube.com/watch?v=2pu172VHCjM from one of my guest lectures to students of Princeton University on the subject.)

Picking up where we left off yesterday, here are the *last 6 commandments in my Margin Manifesto:*

*VI: Repetition is Usually Redundant — Good Advertising Works the First Time*
Use direct response advertising (call-to-action to a phone number or website) that is uniquely trackable – fully accountable advertising — instead of image advertising, unless others are prepurchasing to offset the cost (e.g. “If you prepurchase 288 units, we’ll feature your store/URL/phone exclusively in a full-page ad in….”). Don’t listen to advertising salespeople who tell you that 3, 7, or 27 exposures are needed before someone will act on an advertisement. Well-designed and well-targeted advertising works the first time. If something works partially well (e.g., high response with low percentage conversion to sales, low response with high conversion, etc.), indicating that a strong ROI might be possible with small changes, tweak one controlled variable and micro-test once more. Cancel anything that cannot be justified with a trackable ROI.

*VII: Limit Downside to Ensure Upside — Sacrifice Margin for Safety*
Don’t manufacture product in large quantities to increase margin unless your product and marketing are tested and ready for roll-out without changes. If a limited number of prototypes cost $10 per piece to manufacture and sell for $11 each, that’s fine for the initial testing period, and essential for limiting downside. Sacrifice margin temporarily for the testing phase, if need be, and avoid potentially fatal upfront overcommitments.

*VIII: Negotiate Late — Make Others Negotiate Against Themselves*
Never make a first offer when purchasing. Flinch after the first offer (“$3,000!” followed by pure silence, which uncomfortable salespeople fill by dropping the price once), let people negotiate against themselves (“Is that really the best you can offer?” elicits at least one additional drop in price), then “bracket”. If they end up at $2,000 and you want to pay $1,500, offer $1,250. They’ll counter with approximately $1,750, to which you respond: “I’ll tell you what — let’s just split the difference. I’ll overnight FedEx you a check, and we can call it a day.” The end result? Exactly what you wanted: $1,250.

*IX: Hyperactivity vs. Productivity — 80/20 and Pareto’s Law*
Being busy is not the same as being productive. Forget about the start-up overwork ethic that people wear as a badge of honor—get analytical. The 80/20 principle, also known as Pareto’s Law, dictates that 80% of your desired outcomes are the result of 20% of your activities or inputs. Once per week, stop putting out fires for an afternoon and run the numbers to ensure you’re placing effort in high-yield areas: What 20% of customers/products/regions are producing 80% of the profit? What are the factors that could account for this? Invest in duplicating your few strong areas instead of fixing all of your weaknesses.

*X: The Customer is Not Always Right — “Fire” High-Maintenance Customers*
Not all customers are created equal. Apply the 80/20 principle to time consumption: What 20% of people are consuming 80% of your time? Put high-maintenance, low-profit customers on auto-pilot—process orders but don’t pursue them or check up on them—and “fire” high-maintenance, high-profit customers by sending a memo detailing how a change in business model requires a few new policies: how often and how to communicate, standardized pricing and order process, etc. Indicate that, for those clients whose needs are incompatible with these new policies, you are happy to introduce other providers. “But what if my largest customer consumes all of my time?” Recognize that 1) without time, you cannot scale your company (and, oftentimes, life) beyond that customer, and 2) people, even good people, will unknowingly abuse your time to the extent that you let them. Set good rules for all involved to minimize back-and-forth and meaningless communication.

*XI: Deadlines over Details – Test Reliability Before Capability*
Skills are overrated. Perfect products delivered past deadline kill companies faster than decent products delivered on-time. Test someone’s ability to deliver on a specific and tight deadline before hiring them based on a dazzling portfolio. Products can be fixed as long as you have cash-flow, and bugs are forgiven, but missing deadlines is often fatal. Calvin Coolidge once said that nothing is more common than unsuccessful men with talent; I would add that the second most common is smart people who think their IQ or resume justifies delivering late.

From the edtior: Remember to check out Tim’s best-selling book, “The 4-HourWorkweek”:http://www.thefourhourworkweek.com, which hit #1 on The Wall Street Journal’s list of best-selling business books last week. And see his original “WebWorkerDaily”:http://gigaom.com/collaboration/ essay published on Found|READ “here”:http://gigaom.com/2007/05/09/the-dangerous-myth-of-the-dream-job/.