Fall in the Mid-Atlantic, depending on your landscaping, is frequently dominated by the gargantuan task of leaf removal. All of that foliage that folks drive up to see eventually falls to the ground, and you either spend all of your waking hours trying to keep up with the leaves, or—as I have finally learned to do—you hire a guy for a couple hundred bucks to handle the problem for you.
Last year, I hired Ernie, a highly recommended lawn guy, to haul my leaves away. The agreement was for $200—the going rate in my area. He arrived promptly, and he made short work of the offending leaves. Ernie is nothing if not a salesman, though, and as he was finishing up, he offered to clean out my gutters—leaf-filled, as they were—for an additional fee. I weighed the additional fee against the hassle of having to get up there myself and agreed.
Ernie went out and got a ladder and a couple of tools, and he noticed, while he was on the roof, that there were some loose shingles on the roof. He offered to fix them (for more money), and we agreed. This time he ran out to the hardware store to pick up the tools he needed and fixed the roof for me. While he was working on the shingles, he noticed that the bricks around my chimney were cracked. You know where it’s going … another upsell. He called a friend to come and help with the masonry work, and by the end of the day, Ernie had, by looking around for other opportunities, sold me on $1,500 worth of services. It was worth every penny for me, but was it worth it for Ernie?
Sabotaging Your Bottom Line
I pictured Ernie in the bar later that night, bragging about how he’d turned a $200 job into one worth $1,500, but when you look at his Cost Of Goods Sold (COGS,) you realize that he didn’t make a whole lot of profit. Ernie is a lawn guy, so he had to purchase new tools, spend valuable time running around getting those tools, purchase supplies and even pay another laborer to finish up the chimney. To add insult to injury, Ernie had to come back the next day to clean my lawn up again after the shingles and the masonry work. He didn’t actually make very much on the jobs he did for me because Ernie wasn’t efficient.
My neighbor across the street had a different guy, Shawn, do his leaves. Shawn charged exactly what Ernie did—$200—but Shawn was able to do five yards in a day, for a total of $1,000. He didn’t have to buy new tools, make trips to the hardware store, or hire a helper. Shawn's profit on his day was far more than Ernie brought home.
While Ernie may have been bragging in the bar, Shawn was the one who bought a round for his friends, because he’d actually made a profit for the day.
The Key to Profitability
So what’s the takeaway from Ernie and Shawn? Get ready, because it’s a big issue. No matter what business you’re in, the key to profitability is efficiency. Why efficiency and not price? Think about it: You can only increase the price so far before the market won’t take it anymore. Take sneakers for an example; people regularly pay $200 or more for a pair of sneakers, but would they pay $7,000? Hell, no. There’s a limit to how high you can jack up a price, and that means that if you want to increase your profitability, you must increase your efficiency.
Lowering your COGS by streamlining, systematizing and reducing your effort or time required to produce your results is how you make more money. Shawn did one thing, but he did it efficiently and with a higher profit margin. Ernie sold his services like a rock star, but his inefficiency ended up costing him a lot in terms of profit. His low margins make his business model unsustainable.
While you may never achieve a perfectly efficient system for making money in your sleep with no effort required, what you can do is chip away at the waste in your company. Whether it’s time or other resources that keep you from realizing more profit, COGS is the key to earning more with less. When considering your top line growth, always address your profit first. Profit first, always.
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