A sneak peek at a chapter from the upcoming new and revised edition of Ready, Fire, Aim… 

Understanding the Optimum Selling Strategy

Why It Is Critical for Your Start-Up Business 

In launching a business, the entrepreneur’s first and most important job – among all the many tasks associated with starting a business – is to make the first sale.

You can do everything else. You can rent space, rent furniture, print business cards, and get every sort of certification you will ever need. But until that first sale is made, you have only been spending money and time. You haven’t started a business at all.

And that means that of all the dozens of jobs you must attend to, the job of selling is supreme.

You may not be a natural salesperson. You may not even be interested in selling. Your expertise may be in product development or management or customer service or accounting. But unless you figure out how to bring in that first customer, your business will never get off the ground.

Selling, in other words, is not optional for the Stage One entrepreneur. It’s essential.

And if selling is essential, learning to sell (i.e., developing the knowledge and skills to sell your company’s main product) is an obligation, not a choice.

Introducing: The Optimum Selling Strategy 

I believe that for every business at any given time there is one best way to acquire new customers. And by “best way,” I mean the way that meets the company’s greatest current needs. For a Stage One business, generating positive cash flow is usually – or should be – the greatest need. Therefore, Stage One entrepreneur should be focused on that: how to acquire customers in a way that creates positive cash flow.

By positive cash flow, I mean getting more cash from each sale than you put into getting it. This is not easy. It is easy to acquire customers if you are willing to lose money by acquiring them. But unless your plan is to build a big customer base by losing millions of dollars (a popular idea today, but a very bad one for the average entrepreneur), you have to create a marketing and sales program that brings in more money each month than it spends.

This doesn’t mean that the initial sale itself needs to be profitable. In many businesses, customer acquisition turns profitable only after the second or third sale. But that just means that part of your job is not only to create that first sale but to create a second and third sale to the same customer in as short a time span as possible.

Most entrepreneurs never stop to think about cash flow or long-term profits when they are starting out. They are so excited about their product that they imagine it selling itself. And even experienced intrapreneurs – divisional marketing executives or CEOs – often pay scant attention to selling strategies when they launch new products. They mistakenly assume that one way of selling is just about as good as another.

Nothing could be further from the truth. How you sell your product – the specific decisions you make about presenting and pricing and talking about it – has a huge impact on whether you will be successful.

The product is important but almost never sells itself. To launch the product successfully and take your new business (or product line) from zero to a million dollars (and beyond), you have to discover what I call your optimum selling strategy (OSS). This chapter and the next are devoted to teaching you how to do that.

Discovering the OSS for your product will put your business on the right track. It will make everything that happens afterward easier. Problems will be easier to solve. Obstacles will be easier to overcome. Objectives will be easier to reach. And your business will grow quickly,

You will have a fundamental understanding of the most important secret of your business: how to bring in a steady stream of new customers at an affordable cost. This will allow you to lead your employees with confidence as the business grows, and to help them fix problems if and when they arise.

Change, of course, is a daily fact in business, and markets and marketing are constantly evolving. So the OSS you use to launch your business may not be the one you’ll need later. But in figuring out the OSS for the first time, you will have learned something that won’t likely change over time: the core buying patterns of your core customers.

Before long, you will intuitively understand your core buyer. You will understand where she is, what she wants, what she’s willing to pay for it, and how to speak to her so she will hear you.

The OSS will turn you into a Stage One sales and marketing expert, becoming your secret litmus test to measure new ideas and make wise decisions. This will help you avoid unnecessary sales and marketing mistakes. And that will allow you to focus on the programs and strategies that are likely to work, leveraging otherwise wasted time and money into building your business exponentially faster.

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“I have been up against tough competition all my life. I wouldn’t know how to get along without it.” – Walt Disney

What is the biggest challenge facing internet marketers today? 

This is one of the questions I was asked at a recent Internet Marketing Mastermind.

Many of the attendees were concerned about what they viewed as regulatory “overreach” by social media platforms. Media like Google and Facebook are becoming ever more restrictive in terms of the advertising they will allow, and that is making it very difficult for small companies with limited budgets to get noticed and make sales.

And they are not wrong to be concerned. When you aren’t a brand-name business, you usually have to create aggressive, “noisy” advertising campaigns to attract the attention your business needs. But when the major media won’t let you be “loud and proud” about your products, what can you do?

One thing many marketers do is to try to sneak non-compliant copy through the gatekeepers, but this strategy is doomed to fail. Others try to make do by placing ads on secondary and tertiary media and by affiliate marketing and even direct mail. These are all better than nothing, but they don’t add up to enough coverage to grow a business of any size.

Everything that is posted on the internet is subject to scrutiny, and that will not change.

So there is only one sure way to solve the overreach problem, and that is to submit to it. Instead of trying to figure out how to squeeze or sneak their old-direct-mail style “promos” on the internet, they need to learn how to produce campaigns that are honest, authentic, and transparent.

Another thing they must do, and this is equally important, is learn how to create video ads, both short- and long-form, that are high quality, entertaining, and persuasive.

The days of selling millions of dollars’ worth of products with cheesy infomercial-quality ads are fading fast. Thousands – no, millions – of small and large companies are learning how to tell persuasive stories through video advertising. Which means that the buying public is quickly becoming accustomed to higher quality ads. Marketers that cannot or will not get up to speed in terms of the entire video production process (script writing, story boarding, staging, lighting, sound, music, acting, directing, post production, etc.) will soon be left behind.

I’ve been making this case to my clients for at least five or six years. At first, none of them had any interest in trying it. They must have thought I had lost my mind. Then about three years ago, I saw a few feeble attempts. In the last year, I’ve seen a few more. But compared to the average level of video advertising I see commonly on the internet, most of my clients are way behind.

My clients went into the internet enthusiastically when it opened up at the turn of the century. And they benefited immensely from it, using most of the same sort of copy and marketing tactics that they used for decades in selling their products and services through the mail. They were – we were – outliers then. But the internet is no longer a market for outliers. In the coming years, the gold will go to those with the intelligence and creativity to produce advertising that is competitive with the likes of 60 Minutes and Coca Cola.

Let me give you an example – perhaps not the best example, since this is an ad for PragerU, a conservative non-profit. It doesn’t attempt to close the sale. But it does demonstrate that PragerU has decided that they want their ads to look like they were made in Hollywood… and create a Hollywood level of excitement in their prospective viewers.

Click here to see what PragerU is doing.

This is the future of direct marketing. For the present, some will continue to have some success with outdated, low-quality, high-noise ads. But as the months go by, those types of ads will begin to lose their ability to compete with higher quality ads. I hope my clients can get up to speed before it’s too late.

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 “The ultimate purpose of economics, of course, is to understand and promote the enhancement of well-being.”– Ben Bernanke

 What You Should Know About Argentina 

Argentines are sophisticated people. They have always seemed more like Europeans to me than South Americans.

Actually, I can’t pretend to know much about South America. I’ve only spent lengths of time in Uruguay, Brazil, and Colombia. And come to think of it, Uruguayans and Brazilians seem pretty sophisticated too.

But I have spent a lot of time in Argentina. And I like the country. I am a partner in several businesses there, and I’ve bought and sold property with some success. Investing in real estate in Argentina is relatively easy because of the country’s incredible economic swings. Real estate prices rise and fall dramatically. So for an outsider who can pick and choose his timing, it’s not difficult to sit it out when prices are high and buy in when they get cheap.

When I’m in Argentina – a country with such a refined culture – I can’t help but feel bad for the people. In terms of what matters in building wealth – hard work, saving, and learning – they are equal if not superior to Americans.  But because of systemic problems connected to politics, power, and corruption, it’s tough for business builders and entrepreneurs to get any serious traction.

And as anyone that has even a rudimentary understanding of macroeconomics knows, when entrepreneurs can’t grow businesses, nothing else can grow either.

This was true of the Soviet Union. It was true for China until they freed up the private business sector. It was and is true of Cuba. And Venezuela. And Nicaragua. And many more countries that were once prosperous but then laid low by governments that confiscated property, socialized industry, and massively redistributed income.

And that is what happened to Argentina.

In a recent essay, Bill Bonner provided an excellent quick history lesson in the insidious and unintended effects.

“In 1853,” he explained, “the Argentines agreed on a constitution, largely based on the US model. There were the familiar legislative, executive, and judicial branches. There are elected representatives. There are checks and balances. And the president’s office is in a special house, called the Casa Rosada– rose-colored, not white.

“The system worked plausibly well for the first 100 years. By 1914, the Argentines were richer than the French. The expression ‘as rich as an Argentine’ was not followed by laughter, but envy.

“Then, in the 1940s, Juan Perón figured out how to play the urban mob by promising the people more stuff. Over the next decade, he nationalized key industries, began aggressive spending programs, and redistributed wealth on a grand scale.

“Output declined. Inflation increased. It kept increasing until 1980, when prices rose at a rate of 1,000%.

“The inflation (as well as other things, presumably) soured the whole society. Corruption increased. And politics became more of a grotesque entertainment.”

Bill then explained how politics works today in Argentina…

* One political party makes “extravagant and unrealistic promises… gets elected…  [and makes] a mess of the economy.”

* Upset about rising inflation and falling productivity, the populace votes a moderate or conservative into power.

* “The new group tries to correct the errors and oddities of the first group. But this return to reality is shocking and painful to most people.”

* After a few years, the people, frustrated that things haven’t improved as quickly as they had hoped, “re-elect the bamboozlers.”

* “Gradually, it becomes harder and harder to get ahead honestly.” Thieves become rich by making deals with corrupt politicians. Eventually, the first tier of the economy is run by packs of political and private scoundrels.

* And then, in a desperate effort to ward off eventual economic collapse, the government creates fake money. Those on the top benefit from it. The working class suffers.

“It’s great down here,” Bill’s friend in Argentina recently told him. “As long as you have dollars.”

The degradation of Argentina’s money is happening fast. The inflation rate is 55%. A dollar would bring you 30 pesos a year ago. Now, it’s worth 60.

Could this happen to the US if Bernie gets elected? You decide.

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“It’s much easier to fool yourself than to fool others.”– Michael Masterson

 A Quick Little Marketing Lesson: The Problem with “Listening” to Your Customers

“Don’t make assumptions about what your customers really want,” a marketing expert wrote in an industry magazine. “Just call them up or send them a survey. Conduct focus groups. Ask them what they want!”

On the face of it, this advice makes a lot of sense. But if you take it literally, you will likely end up making some very foolish marketing decisions.

Why? Because when asked what they “want,” most people will tell you what they think they want. Or they might say what they think will impress you. Rarely will they tell you what they will actually buy.

I’ve made this point many times. In Ready, Fire, Aim, I argued that customer surveys and focus groups are usually less than helpful for this reason. The truth is, if you give your customers exactly what they say they want, you’ll often end up losing sales… and you won’t know why.

Here is why…

Broadly speaking, there are two kinds of information you can get by asking your customers questions:

  1. demographic information, like age and gender and so on
  2. information about the kind of products and services they want from you

The demographic information is only marginally useful to direct marketers. They already have much more useful information – historical response data – that often supersedes or contradicts demographic assumptions.

And the information you get from your customers about the products and services they want can be misleading. Yes, they’ll tell you what they want or like. But it will be what they want to believe they want or like. Not what they really do.

When it comes to understanding your customers’ buying habits, there is only one way to do it. You have to present different products and offers to them. Then you see which ones get better results. That is the only way to know for sure.

The marketing expert I mentioned above used an analogy to make her point. She said that business is like marriage. If you really want to know what your prospect/spouse is thinking, the solution is simple. “Just ask her.”

Yeah, right.

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The Bizarre Rationale Behind Private Equity Funds 

Vanguard, that folksy company that has so successfully catered to middle-income investors for most of my adult life, is opening a private equity fund.

It’s part of an attempt to “broaden the company’s appeal… to larger investors,” a company spokesperson said.

I understand why they would want to do that. What I don’t understand is why anyone would want to invest in it.

My objection is not about Vanguard but about the asset itself.

A private equity fund is like a mutual fund. But instead of owning stocks, it buys shares of private businesses, including start-ups. When a new business succeeds, there is often a period when their growth is extreme – 100%, 200%, even more in a single year. Link several such years together and you could, in theory, dramatically multiply your money.

So that’s the allure.

What’s the reality? I’ll get to that in a moment. First, let’s talk about fees.

The average actively managed equity fund (your bread-and-butter mutual fund) charges about 1% a year in management fees. That’s $1000 in annual fees for a $100,000 account.

You can pay considerably less than that by investing in an index fund. An index fund is basically a basket of stocks meant to track the ups and downs of the stock market. It’s not actively managed, so the fees are considerably lower. It’s possible to find index funds with an expense ratio of 0.1%. That’s only $100 in fees on a $100,000 account.

Private equity funds typically charge a yearly management fee of 2%, plus an incentive fee of 20% of the profits.

That $2000 in management fees for a $100,000 account plus $200 on every $1000 of profits.

Let’s look at how these expense ratios work out under different scenarios…

Scenario One 

In year one, the portfolio appreciates 10% – from $100,000 to $110,000.

In an index fund, your fee would be one-tenth of 1% or $110. You’d be left with $109,890.

In an actively traded mutual fund with a 0.1% expense ratio, your fee would be $1100. You’d be left with $108,900.

And in a private equity fund, you’d pay $2000 for the management fee and another $2000 based on 20% of the $10,000 profit. You’d be left with only $106,000.

Now you might think that the $3000 difference between an actively managed mutual fund and an actively managed private equity fund is a small price to pay for the “privilege” of being able to invest in private start-ups. But before you come to that conclusion, consider how this “mere” 3% difference adds up over a career of investing.

Scenario Two: A Longer View 

The historic return on the market for the past 100 years has been roughly 9% to 11%. Let’s use 10% to make the arithmetic easier.

A hundred grand appreciating at an average of 10% over 40 years will become about $4.5 million.

In an index fund with a 0.01% fee, you’d keep about $4.4 million of that, paying out about $100,000 in fees over 40 years.

In a “regular” actively managed equity mutual fund with an expense ratio of 1%, you’d end up with only $3.1 million. Which means you’ve paid the fund managers $1.3 million in fees.

And in a private equity fund where you’re paying a yearly fee of 2% and 20% on profits, you’d have, at the end of 40 years, something like $1.6 million. Meanwhile, the fund has collected $3 million in fees!

So why would anyone want to invest in a private equity fund?

There’s only one logical answer: Because they expect the fund to exceed what they could get elsewhere. And exceed it by at least 5%.

So, back to that $100,000 over 40 years…

Let’s say that instead of producing the historic average return of 10% a year, the private equity fund got you twice that – 20%, or 16% after all fees and expenses. Then, instead of making the $4.5 million you could have made on an index fund averaging 10%, you’d be left with something like $37 million.

Again, that’s the allure of private equity for investors.

What are the chances of getting those sorts of ROIs over any length of time?

Next to zero.

Private businesses, when they are successful, often double and triple their value over a period of 3 to 4 years. Some of them continue to grow at 20% to 30% for several more years, and again at about 10% for another 5 to 10 years, before settling at 2% to 5%.

If you get enough of these sorts of companies in one basket, you can experience phenomenal results. But it very rarely happens.

There certainly are some private equity funds that do well. But like mutual funds, they are the exceptions. According to Oliver Gottschalg and Ludovic Phalippou, writing in a recent issue of theHarvard Business Review,“PE funds have historically underperformed broad public market indexes by about 3% per year on average.”

So, again, why are people interested in them?

I can think of three possible answers.

  1. Private Equity Funds Are Allowed to Distort Their Performance 

As noted in the HBR article: “Private equity returns are often reported as the internal rate of return (IRR) – the annual yield on an investment – of the underlying cash flows.

“This implicitly assumes that cash proceeds have been reinvested at the IRR over the entire investment period – that if, for example, a PE fund reports a 50% IRR and has returned cash early in its life, the cash was put to work again at a 50% annual return. In reality, investors are unlikely to find such an investment opportunity every time cash is distributed.”

This distorts results immensely. It allows PE funds to project triple-digit returns when the reality is much, much less. For example, the “top performing PE fund in one study showed a yearly profit of an astonishing 464% per year. But when the same projections were run using a still optimistic 12% ROI for those gaps, the yearly ROI dropped to 31%.”

  1. Private Equity Funds Are Prestige Items

A $65,000 Richard Mille watch doesn’t work any better than a $35 Seiko, but it sure buys you a lot more prestige. Private equity funds are prestige products for ostentatious rich people.

And the fact that private equity funds are exclusive – that only “qualified” investors are allowed to invest in them – adds to the prestige.  (A “qualified” investor, commonly referred to as an accredited investor, is an individual/entity that is legally permitted by the SEC to invest in hedge funds, venture capital funds, private equity offerings, and other private placements. These investors need to demonstrate a sufficient income or net worth before they are allowed to purchase unregistered securities.)

  1. Rich People Are Dumb, Arrogant, and Lazy 

Now here’s something you may not know about rich people as investors. Although they aren’t any smarter than non-rich people, they think they are.

Having big houses and lots of money in the bank, they begin to believe what others believe about them – that they have a better understanding of business, economics, finance, and investing than the average person.

But they don’t.

And since they don’t know much about any of those things – and because they are too lazy to figure it out themselves – they prefer to invest their money in funds.

And, finally, because they are arrogant, they are drawn into the allure of private equity funds. Private equity funds understand that and cater to it.

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“Compound interest is the 8thwonder of the world.”– attributed to Albert Einstein

Principles of Wealth #36* 

Most wealth seekers believe they understand “the miracle of compound interest” – how saved money grows over time. Most see this growth as steady, like the gently ascending slope of a hill. But the curve is nothing like that. And the difference is very important.

Here’s a fact: A single $10,000 investment in a retirement account that appreciates at 10% annually will turn into $1,173,908 in 50 years.

That’s a nice little nest egg, considering it began as a one-time investment of only $10,000. The value seems almost unbelievable, don’t you think?

It’s due to what financial planners call “the miracle of compound interest.”

The beauty of compound interest is that it allows you to earn interest on your interest. And while you have to sweat to earn the money you initially invest, from then on, your money works on your behalf.

But the “miracle ” is often misunderstood. On a chart, the growth would look not like a hill but a rake. It builds very slowly for the first 20 years. It picks up a bit between 20 and 30 years. And it then moves almost vertically. So although the value of your nest egg over 50 years is still miraculously high, the values over 10, 20, 30, and 40 years are much less impressive.

After 20 years, the value is only $67,275. After 30 years, it is only $174,494. It only begins to look like an actual retirement account after 40 years (at $452,592). And it’s not until year 49 that the value breaks through the million-dollar barrier.

When I first discovered the reality of how compound interest works, I was disappointed. It meant that unless you could keep your investment compounding for a long time, nothing miraculous was going to happen.

Let’s assume you put $10,000 in an index fund when you’re 25 and add $2,400 a year to it. Forty years later, when you’re 65, you will have roughly $1.5 million in that account.

But if you don’t start saving for retirement until you are 45, it’s going to be a different story. That same $10,000 initial investment plus the same added $2,400 a year will turn into only about $205,000 when you’re 65.

Yes, the reality of compound interest is both amazing and depressing.

The amazing part is that you can pretty much guarantee that your grandchild will retire a multi-millionaire if only $10,000 is invested in his name in a stock index fund at the time of his birth.

The disappointing part is that anyone that waits until he/she is 40 or older to save for retirement is not going to be able to take advantage of this financial miracle. There is simply not enough time.

But disappointment is better than delusion. Understanding the limitations of compound interest can be a good thing if it spurs you to face reality and develop ancillary plans.

And by ancillary plans, I don’t mean buying more risky stocks. I mean creating additional streams of income and learning how to “live rich” within a budget.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. 

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 “Pull the string, and it will follow wherever you wish. Push it, and it will go nowhere at all.”– Dwight D. Eisenhower

How to Stop Your Boss From Turning You Into a Human Suggestion Box 

I have a reputation for being a pain in the ass. As a founder of or major investor in many businesses, I am constantly sending CEOs memos about new product ideas, new marketing strategies, new management protocols, etc., etc., etc.

The usual response is polite agreement, followed by an explanation of why they are already doing “something like that.” (They rarely are.) Or why they are currently too busy to take it on.

Of course, this doesn’t make me back off. On the contrary, it makes me wonder how on top of their game they really are. And so I keep pushing.

And they dream of a day when I drop dead or at least suffer a stroke that makes it impossible for me to send any more emails.

Here’s the thing. I don’t expect every suggestion I make to be executed. I understand how much CEOs of  growing businesses have to deal with every day. But I am not going to refrain from making suggestions because it stresses them out. My obligation is not to them or their employees. It is to the quality and quantity of products and services the business produces. In other words, my interest is in increasing the value we bring to customers.

Recently, though, one of my CEOs did a very smart thing. Tired of circumventing my emails, she began sending me her suggestions. I think she decided to give me a taste of my own medicine to see how I liked it… and, well, I liked it very much.

Some of her suggestions were terrific and I told her that. More importantly, she demonstrated that she was fully committed to the same goals and objectives I had – to make the business all it could be.

I’ll continue to send suggestions to all my CEOs – but in her case,  I no longer feel the urgency. I’ve been able to relax a bit and enjoy her momentum.

What she did reminded me of something I did about 30 years ago, working for JSN. He was constantly putting monkeys on my back, and I wasted far too much time trying to explain to him why I could only handle so much. Then one day I somehow caught his bug and began coming up with ideas myself. I got so good at it that he stopped pushing me and let me push myself.

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“I believe we developed language because of our deep, inner need to complain.”– Lily Tomlin

Merriam-Webster’s Words of the Decade

What Do They Tell Us About These Last 10 Years… and What Does It Tell Us About Merriam-Webster? 

One of the grammar and vocabulary blogs I read each day is posted by Merriam-Webster. It’s generally smart and serious. It’s not as much fun as the idiotic Dictionary.com, with that website’s social justice agenda, but it is reliable and sometimes insightful. At least that’s how I always felt until I read their recent pick for 2019’s “Word of the Year.”

Here’s how it works: Once a year, they select one word for the honor – a word that they consider to be “significant for that particular year because of the frequency with which it was looked up compared to previous years.” Putting aside perennial favorites like affectand effect, they look for one that has had multiple spikes in lookups in addition to being more frequently looked up overall.

So in 2019, their Word of the Year was – are you ready?

They

Right. They. The new word for “a single person whose gender identity is nonbinary.”  According to the editors, lookups for theyhad been increasing so much over the last several years that they actually felt that it deserved the award. Here’s how they explained it: “When something so basic to a language as a personal pronoun takes on new meaning, the speakers of the language are going to notice – and they’re going to look to their dictionary for guidance.”

Oh, well.

There are actually two theories about the role of dictionaries in defining words. One theory, the prescriptive theory, argues that words should be defined as they should be used by intelligent, educated speakers. The other theory, the descriptive theory, takes the position that what matters is whether the word is commonly used, not whether it improves or degrades the language.

Take your pick. In either case, the exercise is useful for prompting discussions about shifting cultural values.

To provide fuel for your future debates on the matter, here are the nine previous Merriam-Webster words of the year, along with some of the rationale for their choices…

2010: austerity

“Economic recovery from the Great Recession was the big story at the beginning of this decade. (Indeed, the Word of the Year for 2008, in the immediate shock of the crisis, was bailout, so economic concerns even surpassed a presidential race in terms of public interest in vocabulary.)”

2011: pragmatic

“The word pragmatic seemed to catch the spirit of the times in 2011, at least in politics, where Congress passed measures to control the federal budget and President Obama oversaw explanations and rollout of the recently passed Affordable Care Act.”

2012: socialism and capitalism

“During a presidential election year, it’s no surprise that terms from politics dominated the list in 2012. For the first and only time, we named two Words of the Year: socialism and capitalism. The two words showed such a close parallel rise in our statistics that it seems likely that many dictionary users looked them up sequentially in order to compare them.”

2013: science

“[2013] was a year without a single big story like a presidential election or economic recession, and yet this word’s rise in our data accompanied a national discussion about big issues like faith in science, climate change, and Mars exploration, as well as more focused stories like identifying the DNA of Richard III and assessing the role of Malcolm Gladwell’s successful books in popularizing scientific research.”

2014: culture

Culture conveys a kind of academic attention to systematic behavior and allows us to identify and isolate an idea, issue, or group: we speak of a ‘culture of transparency’ or ‘consumer culture.’ Culture can be either very broad (as in ‘western culture’ or ‘corporate culture’) or very specific (as in ‘postmodern culture’ or ‘Mexican culture’). It seemed that culture moved from the classroom syllabus to the conversation at large in 2014, appearing in headlines and analyses across a wide swath of topics.”

2015: -ism

“In 2015, a group of 7 words all sharing the same suffix – -ism– were looked up with significant frequency, resulting in the choice of -ism itself as the Word for the Year. Socialism was the most looked up of the seven, as presidential candidate Bernie Sanders’ identification as a ‘democratic socialist’ kept the word in the national conversation. The other six -ism words so prominent in the public’s consciousness were fascismracismfeminismcommunismcapitalism, and terrorism.”

2016: surreal

“The word surreal, defined as ‘marked by the intense irrational reality of a dream,’ was Merriam-Webster’s 2016 Word of the Year. Surreal is often looked up in moments of both tragedy and surprise, as people search for just the right word to bring order to abstract thoughts, emotions, or reactions. In 2016 lookups of the word followed the Brussels and Nice terror attacks, the Pulse shooting in Orlando, the coup attempt in Turkey, the Brexit vote, and the U.S. presidential election.”

2017: feminism

“Feminism, defined in this dictionary as ‘the theory of the political, economic, and social equality of the sexes’ and ‘organized activity on behalf of women’s rights and interests,’ was the Word of the Year in 2017. Although feminism is frequently a top lookup, 2017 was a banner year for the word: from the Women’s Marches in January to the ongoing revelations that fueled the #MeToo movement, the word feminism was in the ether that year – and in the search bar of dictionary users.”

2018: justice

“The Word of the Year in 2018 was justice, a term at the center of many of our national debates that year – debates about racial justice, social justice, criminal justice, economic justice. The question of just what exactly we mean when we use the word justice was part of the discussion. Particular technical uses of justice were also prominent, as references to the Justice Department (often referred to simply as ‘Justice’) were a constant in the news, and confirmation hearings for a new Supreme Court justice had the nation’s attention.”

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“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”– Henry Ford

Masterson’s Law: Why You Should “Fire” 10% of Your Customer Base 

You own a fledgling business. Let’s say it’s a donut shop. You’re renting a storefront with a work area, counter service, and table space for 30 customers.

After month one, you see a trend. About 80% of your customers come in from 7:00 to 9:00 am. And during those hours, every one of the 30 seats in your shop is taken.

Since there’s no room to add more seats, the arithmetic of your business is simple. If you want to increase profits (and you should), you must find a way to maximize the spending of those 30 peak-hour customers.

Following strategies used in other donut shops that you visit, you begin offering two-for-one deals on your highest-margin items to ratchet up the donuts-per-customer spending. You give even steeper discounts on take-out purchases to increase traffic from customers that won’t be occupying those valuable seats.

Sales go up by 20%. You feel good about that. Additional efforts give diminishing returns. The obvious option is to rent out the store adjacent to yours and expand into that. But you don’t have the cash to do so. And anyway, you aren’t sure you’d get enough extra business to justify the added rent.

It feels like you are stuck. But then one day you notice something.

Six of your “best’ customers, nice gray-haired ladies that arrive every morning after early morning church services, seem to be spending noticeably less than other customers. And they are staying longer.

You take note of their purchases for a week and discover that their buying habits are extremely regular. As a group, they order three inexpensive “old fashioned” donuts and six small coffees – one coffee and half a donut each. And since they are among the first to arrive, they occupy the most desirable table by the corner window and remain there, chatting happily, until 8:30.

You know from analyzing the overall spending during those hours that your average peak-hour eat-in customer buys one medium-sized coffee and 1.75 donuts for an average cost of $6. Furthermore, these average customers stay for only 15 minutes.

In other words, the clacking church ladies are spending half what they “should be” spending and staying six times longer. That’s a huge difference!

In dollar terms, it’s astonishing: $18 versus $216 for the table!

Nice as they might be, you realize that the church ladies are robbing you blind.

Pareto’s Law – also known as the 80/20 rule – tells us that 20% of a customer base will provide 80% of a business’s profit. I’ve owned or run or consulted with hundreds of businesses in dozens of industries in my career, and I’ve yet to encounter one in which this doesn’t apply.

However, I have observed that there is another percentage that is equally reliable and yet rarely discussed: Ten percent of every customer base is costing the business money.

Let’s call it Masterson’s Law in homage to Michael Masterson, an earlier pseudonymous incarnation of yours truly.

How does this come into play?

As Jay Abraham used to tell me when we worked together 30 years ago, there are only three ways to increase profits: 1. Increase the number of customers. 2. Increase the number of purchases they make. 3. Increase the amount they spend per purchase.

The valuable space the church ladies are using for 90 minutes a day is having a significantly negative impact on all three of these potential ways to increase profits.

This is not a minor problem. It is hurting your business and limiting its growth, costing you access to customers that will put dollars to the bottom line. You can’t ignore it. You have to do something.

But what can you do?

You might try to get rid of the church ladies by treating them poorly or by imposing new rules that are aimed directly at them – maybe a prohibition against “sharing.”

But implementing such measures will likely be seen as “unfriendly” by all of your customers, including the golden 20% responsible for 80% of your profits. If they see it that way, they might take their business to another donut shop. And that you definitely do not want.

The solution is to find “friendly” ways to discourage your profit-draining customers. One way to do that is to put up a carefully worded sign suggesting that during peak hours customers should be considerate of their fellow donut eaters and refrain from occupying a table for more than a half-hour. Since the stated objective is to improve the experience of “everyone,” such a request should have the desired effect.

If the church ladies are socially conscious, they will decide to find another, less-busy donut shop to enjoy their morning ritual. If they don’t, you could try something more radical, such as implementing a minimum charge for table seating. So long as it is a bit less than the average customer spend ($6 per person), there shouldn’t be any fallout.

An additional and slightly more radical tactic would be to raise prices across the board. Bump up the prices by 10% or 15%, but then offer your  good customers VIP discounts that keep their cost of coffee and donuts to the level it has always been.

With that corner table open for good customers, you’ll be making an extra $200 a day. Then you can go back to improving the customer experience for the top 20%, who will no doubt reward you with additional spending.

We’ve been talking about a donut shop, but Masterson’s Law applies to every business. And the larger the business, the more profound the effect.

My main client is in the middle of a campaign to renovate its marketing strategies towards a philosophy of customer acquisition that favors the top 20% while discouraging the bottom 10%. In this case, we are gradually raising prices for our premium services while ending advertising campaigns that are inadvertently drawing in customers that don’t have the financial resources to benefit from those services.

It’s not snobbery. It’s quite the opposite. It’s being considerate of would-be customers that can’t benefit from our best services. By revamping our advertising, we can discourage them from spending money with us that will not ultimately get them what they need – a basic financial education that they can get from the library or the internet.

Putting up a higher barrier of entry will reduce our revenues and perhaps even our profits for a year or two. But in the long run, it will enable us to provide more and better services to customers that those services can truly help.

How does this apply to you and your business?

Some percentage of your customer base – and you won’t go far wrong by assuming it’s 10% – is costing you money. They are slowing down your sales process, clogging up your customer service lines, demanding refunds almost reflexively, and ratcheting up your chargeback rates because their credit history is bad.

They aren’t bad people. But they are bad for you. By keeping them away from your business, they will find another one more suited to their wants and needs. And your business will be able to grow more profitably while serving your best customers in the best possible way.

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“It’s hard to know the truth about people by how they look or even what they say, but you can discover a good deal by rummaging through their belongings.”– Michael Masterson

Honesty, Honestly 

Ralph, a protégé of mine, once told me that he was taking a class in “radical” honesty to help him communicate with his son. One exercise that the instructor recommended was for them stand face-to-face, naked, and talk about their “issues.” He was eager to try it.

“Good luck with that,” I thought….

Hugo, a friend of mine, was in a bind. He had been offered a good job working for Leopold, another friend of mine. He intended to take the job, but had done some research and discovered that Leopold had a reputation for being difficult. He asked me if I thought he had a moral obligation to tell Leopold what was being said about him.

“Bad idea,” I said. “Leopold is a smart man, and I’m sure that he is aware of his reputation. He’s interested in you as an employee, not as a personal consultant.”

“I think I’m going to do it anyway,” Hugo said.

And you can imagine how that went….

The day after their marriage counseling appointment, Suzanne says to David, “You are an idiot.”

“We’re not supposed to speak like that to one another, “ David reminds her. “Just express your feelings, like Dr. Berns said. “Just speak honestly about how you feel.”

“You’re right,” Suzanne says. “I’m sorry. I feel like you’re an idiot.”

Six months later, they were divorced….

A digital marketing guru republishes a blog post he wrote that “got more responses than any other email I’ve ever written.”

It’s about a phone conversation he had with his mother when he was in college. He was working from his apartment doing affiliate marketing. She was “nagging” him “non-stop” to get a “real job.” The conversation got tense. She accused him of “scamming people on the internet for money.” He felt like “a knife had been twisted in [his] back.”

“Fuck you! Don’t fucking talk to me!” he yelled.” And then he hung up. “I was trying so hard to make it. And my mother was just shitting all over me.”

He says he still has anger for her, but he’s “come to realize that’s just who she is.”

His truth….

Honesty is a false god. It is not a virtue. It is at best the illusion of virtue. Most of the time, honesty is inwardly focused and self-indulgent. It is an escape hatch that allows us to sneak away from our deeper moral responsibilities.

Most people know this in their bones. But because there is so much philosophical pollution in our thinking today, it is seldom if ever acknowledged.

There is something more trustworthy than honesty, and that is truth. Not my truth or your truth, but the truth. A truth that is verifiable. A truth that is universal. A truth that is incontrovertible.

Telling the truth takes courage. Telling your truth – i.e., being honest about your half-baked thoughts and feelings – takes no courage at all.

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