Malcolm Gladwell, in his book The Tipping Point, described an almost magical moment when an idea, business or trend hits a certain threshold and then spreads like wildfire.
In 2002, Scott Jordan thought he had finally hit that moment. His product, the Scottevest, appeared in a gift guide in Parade Magazine that had been inserted into millions of Sunday papers. Within 30 days, he had more orders than he could ship. Jordan thought this was his tipping point, but it wasn’t. After 60 days, these new orders tapered off and the company went back to its normal volume. Although there was a spike in sales, the coverage in Parade didn’t have a lasting effect. Fast forward to 2011, when Jordan appeared on the reality show Shark Tank. With millions of viewers, he thought this again would be his tipping point, but it wasn’t. (He walked away from $1 million in investment offers.) Although Jordan now runs a successful $10 million travel clothing company, he can’t point to a single event that ensured his future success.
Every small-business owner wants to get to that point where his or her company “has arrived.” They imagine it as a wonderful place where they no longer need to worry about sales, cash flow, people or products. They dream that this tipping point will come in the form of a big famous brand customer, a competitive hire, a revolutionary product or an appearance on a prime time TV show. Unfortunately, for most small-business owners, it never quite seems to come. There isn’t one moment they can point to and say “this is it!”
This isn't necessarily bad news. Successful entrepreneurs don’t look for tipping points, but rather leverage points. A leverage point is the point in your company's business that when sales grow, profits ramp up exponentially. It’s the place where the business is valuable without the participation of the owner. Where's the leverage point in your business?
In a service business, the more billable employees you hire, the more profit you can make if fixed costs remain constant. Typical gross margins are 50 to 60 percent. The cost of services must take into account all people costs, such as salary, taxes, insurance and other benefits. In this case, fixed expenses do not ramp as quickly as these variable costs. Example: Any consulting or other service-oriented business.
Once a product is developed, the variable costs of manufacturing, selling and distributing that product is relatively low. Example: Computer software and video games. After development, each individual download purchase has very little cost associated with it.
A company’s patents or trade secrets act as a high barrier to entry and provides a real sustainable competitive advantage. It makes it much harder for other companies to get into your business because they don’t have access to this "secret sauce." Example: Technology companies or a company like Coca-Cola.
Proprietary Distribution Agreements
Locking up long-term exclusive distribution agreement can be profitable. Exclusivity is where a company agrees to sell one company’s product and not those of its competitors. Example: When AT&T was the first exclusive distributor of the iPhone, many mobile customers switched to get that product.
A business with high customer-switching costs and barriers to exit can be very profitable. This extends the lifetime value of a customer and can ensure future sales from that customer. Example: Companies that provide cable TV, medical devices and accounting software.
What is the leverage point in your business?
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