Making money, it seems, is all about the velocity of moving it around, so that it can exist in Hong Kong one moment and Wall Street a split second later. – Richard Dooling
In my last post I looked at how taking the time to understand your customer’s customer could help you create a better sales pitch – one based around how you could help them rather than what you could sell them.
I said I would look at risk next, but before that I think I want to look at money.
Your and my money.
And I want to just see how we go about spending it when we’re getting started and whether the way we do that makes sense.
How can you spend your money?
There are many ways to lighten your wallet, but only a few of them result in money coming back to you as well.
It seems to me that there are three good ways and a whole bunch of not-so-good ways.
The first three have varying chances of making a profit while the remainder will usually lose you money.
Let’s see why and how.
Spending on production expenses
One of the conclusions I have come to while writing this blog is that we should start thinking of ourselves as producers.
If you think of yourself as a creative or a writer or a photographer – then you’re thinking about things in terms of what you do.
The only problem with that is no one really cares about you – even your immediate family – who have to pretend like they are interested, but what they’re really doing is waiting for you to finish talking so they can talk about their problems.
I think that when you go into a situation and talk about yourself – your skills, track record, ambitions – people are really not listening at all.
But they get interested – sit up and become alert – when they hear about what’s in it for them, how it relates to what they do and want and are interested in.
If you really want to get their attention you have to start thinking in terms of what they are interested in.
And if you also want their money you have to think in terms of what you’re going to give them – what actual “thing” are you going to hand over.
And then you have to produce that “thing”.
Which is why production is a good mental model for this kind of work – your task as a producer is to take resources and transform them to produce the thing that your customer needs.
Now, this works if you’re your own customer.
If you want to be something – a writer, an actor, a businessperson – then all the thinking in the world will not help.
You have to produce words, acts and products to improve your craft and create a market for your work.
In this kind of situation what you have to do is match your costs to your income, to revenues.
When you have no revenue, keep your costs low, spend as little as possible and focus on producing what your customer needs.
As you start to sell and the revenue comes in, you’ll start to make a profit.
But still, you’re best off investing money only when it’s helping you produce that “thing” your customer wants.
Unless you’re getting something else out of the process.
Test and learn
The one exception to spending money to produce something is when you’re focused on also learning something.
We usually don’t know exactly what needs to be done when we get started on a new project.
There is a period of trial and experimentation and finding out what works and what doesn’t work.
This can take a while – and it will not always make money.
But it will almost always produce learning, if you’re looking out for it.
In this model you’re putting money into a project in the expectation that revenues will come in and you’ll make a profit.
But if you don’t, that’s ok because you will also get some learning out of it.
But you would be wise not to try and get things perfect at this stage – learn to live with imperfections because you can always get rid of them when you’ve learned what’s going to work.
Paying for success
Another spending model you will come across all the time is a commission model – where you pay for success.
The simplest case is when you pay someone for an introduction that later generates some business.
There is usually little or no up front cost but you do have to give the person a share of any income you make as a commission.
What you’re paying for here is a leg up, a little bit of help in climbing a wall, finding that customer, making those sales.
That’s an old and perfectly justifiable way of doing a deal.
Except when it’s not.
There are many business, with financial services among the most egregious, that take commissions on transactions without creating value.
That’s because they make money on the number of transactions that happen – not on the value that is created for you or your customer.
The difference is not always clear cut.
Take estate agents, for example.
If you pay them a commission on sale, are you paying for success?
Well, it turns out that agents aren’t interested in what you make – they want a sale to happen as quickly as possible – because that’s how their incentives work.
You’re better off paying for what they do for you – advertising your property and showing it – rather than linking it to the sale.
Production costs rather than success based commission, in other words.
But as you can see the distinctions get hard fast.
Which is why hoping and praying is a big thing
All the other ways of spending money seem to fall best into a hope and pray category.
Advertising and marketing can be viewed as test and learn in some cases but all too often it’s hope and pray.
Every single get rich quick scheme is in this category.
As are all the ads you see for whatever magical course is on your media feed for the day.
Not for the people promoting the scheme, of course – for them these are legitimate production cots, or a test and learn model.
But if you put your money into something hoping for a fast return, then you’re in this camp.
And the one thing to realise is that if you don’t fully understand how it works then you’re best off staying far far away.
Put your money to work in the right way.
Focus on what you get
The first three ways to spend your money produce something.
They produce a “thing” that people want, learning for you or sales and results.
They also keep you costs low – which is crucial when getting started on any project.
And they help speed up the process of getting results – another crucial element.
But what you have to do is learn to recognise the ways that don’t do that – that trip you up, cost you more and waste your time.
Those ways you have to avoid – you need to see the risks and get around them.
If you can’t manage your own risks, how will you manage them for your customer?
We’ll carry on with this topic the next time.
You’ll find the YouTube version here with some additional hand-drawn footage.