In this episode Joe Woodard and Mike Michalowicz discuss growth strategies for small business advisors. Mike Michalowicz is a small business and startup expert and the author of Profit First, The Pumpkin Plan and Surge. During this interview Mike discussing small changes businesses can make to yield surprisingly large…or as he says…"colossal" results. Mike and Joe touch on the principles of his new book called Surge and briefly discuss the power of specialization.
The complete transcript of the Scaling New Heights Podcast with Mike Michalowicz follows below. You can listen to the entire podcast HERE
Joe: Thank you for tuning into this episode of the Scaling New Heights Podcast.
Scaling New Heights is one of the premier accounting technology conferences in the world and
this Podcast Series extends the benefits of the annual conference to the listeners throughout the year, drilling down on the break-outs and main stage presentations covered in previous events, and, in many episodes like today's, interviewing the presenters from past Scaling New Heights.
Today we're going to interview Mike Michalowicz. He's the author of Profit First, The Pumpkin Plan, The Toilet Paper Entrepreneur, and his brand new book Surge. During Scaling New Heights, Mike focused on three key topics - establishing your niche as an accounting practice, marketing your practice, and becoming a trusted advisor. And because these three topics don't have an obvious common denominator, I'm going to take a few minutes before we get started with Mike to connect the dots with you a little bit.
It all comes down to a distinction that Ron Baker and Paul Dunn drew in their book The Firm of the Future. It’s the distinction between efficiency and effectiveness. Accounting firms have been historically obsessed, and I'm going to use the obsessed word, with efficiency, because they knowingly or unknowingly follow a formula that Ron Baker and Paul Dunn provided us and that formula starts with Revenue. Revenue = People Power x Efficiency x Hourly Rate. You can say that profit is also connected to the formula, because as we increase efficiencies as we can reduce the cost of people power and as a result we can increase profitability. And you might say, “Joe, this is a fantastic formula. As a matter of fact, the more efficient we become the more profitable we become, and there's not a problem with that.” Well, there are actually two problems with this formula.
The first problem is an inward-focus about how fast we can perform a service, not necessarily how effective we can be in the performance of that service. You can do a tax return. You can do a tax return faster and faster as you prepare that. You can do bookkeeping services. You can perform a wide range of traditional accounting services and as your systems and processes increase in efficiency, your cost will reduce and theoretically your margins will increase. But in all of that equation, the client's impact isn't a consideration and neither is the value of the impact on the client.
The other problem - it is commoditized, because it is not unique, it is not differentiated. You may be able to do the tax return really, really fast, but somebody in a firm down the street can do it just as well and perhaps just as fast. As this commoditization of your service increases, the market price of your service decreases. And it doesn't matter how efficient you become, you're always riding a short term benefit as marketable price goes down.
Instead Ron Baker and Paul Dunn would challenge us to focus on effectiveness as the key measure, following this formula instead, that Profitability = Intellectual Capital x Price x Effectiveness. What he's saying is, as I increase my intellectual capital, as I establish perhaps a niche, as Mike's going to talk about, and then I become highly specialized in that niche, I can provide unique and differentiated services for my clients, therefore insulating myself from commoditization. But, I can also do price protection through effectiveness if I am unique and differentiated and if I provide a measurable effect on my client, increasing my client's wealth, increasing my client's profitability. Then, I can value price.
So the challenge I would give you today, and we're going to drill down on that challenge very specifically with Mike when we talk about niche, talk about marketing, talk about becoming a trusted advisor. My challenge to you is to stop being primarily concerned about your own firm's profitability and instead be primarily concerned about the profitability of your client. Then, second challenge, because if you don't pair them together, the economic model will fall apart. Charge not a percentage over the cost you incur, that's billing; instead, charge a percentage under the value that you bring, the wealth that you generate. That's value pricing.
Now, let's tie it all together. Mike is going to talk to you, and has talked to all of our attendees at Scaling New Heights, about establishing your niche. Through the establishment of a niche you can invest in intellectual capital with intentionality and with focus and you can do so in a way that the cost benefit ratio pans out, because there is a cost to accumulating that capital. But you can also differentiate yourself, and therefore insulate yourself from commoditization, and make yourself more marketable. With this increase in intellectual capital, you position yourself to have a measurable impact on the client.
I want to focus for just a second on the marketing piece. You might want to too quickly dismiss Mike and his book Surge, saying, “I don't want to grow my practice.” But marketing is not primarily about increasing the size of your client base. Yes, you're going to hear Mike talk about that on today's Podcast and if you read his book, there are going to be principles there for you to increase the number of clients of that you service. But it's not primarily about growing the size of your clients. Marketing is primarily about having the clients you want. Let me explain.
We keep clients that we know are not a good fit for our practice, and we keep them because we are economically married to the relationship. If we eliminate too many of those clients, we will begin to fracture the foundation of our firm, we will disrupt the teams that we have built and perhaps even the entire infrastructure of the practice. We just simply need the cash flow. We need the profitability, because maybe it's not a good fit, but we have figured out how to make it profitable. So we keep the client and we're miserable - the bad client. But if we are always marketing, we are generating a line of the kind of clients we want at the front door.
That is if our marketing is intentional. If we're marketing for the ideal client - the client the fits our niche and the client where we know we can have a measurable impact, where we can increase their wealth, they’re teachable, they’re coachable, they're moldable clay, and they need the kind of intellectual capital that we can offer. If you will market with intentionality, that line of clients, that line of ideal clients waiting at your front door will give you both the courage and the economic freedom to move the clients that aren't a good fit out the back door.
So, effectiveness trumps efficiency. And with effectiveness, and to be effective, we must establish our niche, we must have the client base we want, which is the output of continual marketing, and we must be focused on increasing our clients’ wealth through trusted advisory services. And that leads us to our conversation with Mike Michalowicz.
Joe: Mike, welcome to the podcast!
Mike: Joe! Thank you so much for having me!
Joe: All right, so you knocked it out of the park on our main stage just a little bit ago at Scaling New Heights. Rave reviews - the audience was talking about it all the way for the rest of the day. And I’ve extracted out about four different topics you addressed during your keynote presentation and I want to focus on those.
Mike: OK. Absolutely.
Joe: So, you talked in your main stage presentation about the intersection of three elements that can trigger colossal growth. What are those three elements?
Mike: The first part is being unique. If we want to grow a colossal business, we have to realize it has to not be better than the competition, it needs to be different than the competition. And the key element is to leverage our own uniqueness, what makes us different. And we should exploit that in our business, make our business a platform for it.
But the uniqueness alone isn't enough. It needs to intersect with repeating demand. Do you have customers that come back to you repeatedly for that service? Because through their action, they are validating that they value you. So, are you unique? Are there customers that need it and desire it repeatedly from you.
But then the third element in this, where so many businesses fall short, is the systemization or automation of that process. Meaning if you can attract prospects and customers, convert them to clients, collect revenue from them, provide that exceptional service, and have them raving about it - all while you sleep. That's systemization. Because now you have the elements – you’re unique, people want it, and you don't have to do it. That’s a business that can grow colossally.
Joe: That's very well said!
Now I'm going to go to another area of your presentation. I'm going to play hopscotch with some of your topics that I thought were really cool. You said something that surprised me and it surprised everybody else. You told businesses to stop trying to fix their weaknesses. And they’re struggling as a result of that, but isn’t that what we're supposed to do? Why shouldn’t they?
Mike: Right. And that's what’s so funny, because that's what we're all told to do - just figure out where we're broken and repair it. But the thing is, I’ve studied now hundreds of businesses, through all the books I've written, and done case studies. And what I found consistently was that successful businesses, ones that grow almost seemingly effortlessly compared to the ones who struggle, was the fact that the colossal businesses focused on strengths and amplified them. And the realization was that weaknesses can be improved on or fixed, but only by inches, where strengths can be multiplied by miles. And this points back to that first question you asked about – what are the three elements. Being unique is a strength. And it's too bad that so many businesses ignore that. We go to try to fix things, to stay at the same level as our competition, or at least stay at pace with them, but we ignore the fact that we if we amplify our uniqueness, we become a stand out, we become special.
So, the colossal businesses… they don't ignore weaknesses, meaning they don't let damaging things happen, they don't negatively affect customers, they get them in the ballpark. There's no question there. But they take all their extra energy and time to focus on something they're doing phenomenally well already and amplify it even more. That's how you stand out.
Joe: And I really like what you said about miles versus inches. I've had some financial advisors say, “Stop fixing the bottom of the line. Fix the top of the line.” And they don't mean ignore “Profit First”, that’s a foundational principal of your entire philosophy. That’s not what they’re saying. What they are saying is, you’re moving ants around down here trying to make net income change, and really, if you just focused on those services that will generate the higher yield or tweak your price point, you could skew this thing way up without disproportionally skewing overhead up. And I think that's kind of what you're getting at there. If it's a weakness or if it's an overhead, I guess overhead issues and processes form a weakness. That's where you can move the needle the most. Intriguing.
OK, so hopscotch continues. I’m going to another topic. You talked about frequency. What is frequency and what impact does it have on marketing the business?
Mike: It was funny, as I was delivering the speech on stage, I saw people connecting with us and the laughter is a good sign that we all can relate to it. Because when we can laugh about something, it's because it’s something we've experienced ourselves. And what I talked about on stage was the frequency of how we see things, meaning the more frequently we see something, the more we inherently trust it. I shared a story about my own personal experience around that and it gave a few people some chuckles.
Here’s the goal. For us to capture a portion of the client's mind, we must be trusted. Everyone knows that - it's the “know, like and trust”. But for them to like you and to trust you, they need to see you frequently. And I think that's the part that so many people miss out on. We think that that one e-mail or the one cold call or the one letter or the one mention of our name is enough to get the sale. And absolutely it’s not. We have to appear in front of our best prospects over and over and over again. It's the frequency that converts to “know, like and trust”.
Now, here's the key I was trying to explain on stage. If you go after everybody, you're going after nobody, because you can't get in front of everybody all the time. You have to pick that repeating customer and demand we talked about earlier. Where are those best customers of yours congregating? For me and one of my companies, I had a technology company and I was selling to hedge funds. I didn't go to the Chamber of Commerce meetings. I didn't go to the accounting conferences. They're wonderful, but they weren’t where my customers were congregating. I only went to the hedge fund conferences and I was the only IT guy appearing there. So it's obvious, over a very short period of time, by appearing there, I started to become the known guy for computers. And people were like, “Oh look. Mike’s here again.” And guess what? The business started coming right to me, because I appeared frequently where my best customers were congregating. That’s everyone’s objective – to grow.
Joe: Can I add to that? I really like what you talked about, about it not being an email and about it being a very meaningful conversation. Because you know the frequency principle can be applied to client relationship nurturing. We have to be in front of our clients more. And in a digital world, we can have web meetings and you can shoot off e-mails and texts and there are even some other collaborative IM tools that are all nice about this sort of ordinary mundane things. But my CPA meets with me face to face at least once every 30 days, 12 times a year, and only 12 times a year. But it is so meaningful when he does.
And this is the key, Mike, he doesn't just meet with me to go over the same things we could bullet out in an email. He makes sure that those bullets are taken care of before that meeting takes place, so he can measure everything, from my mental health to my stress levels to the condition of my business to where I am with my people. He never takes me to lunch without walking my halls first, because he wants to get a read on the stress levels of the whole of the team. Now that is a consultant that I will never walk away from, because I know he cares. And he adds value and I get that face time. So, it's frequency to get new business and I would add frequency to keep business.
Mike: Yeah, I want to hire him. I wish my accountant did that, but doesn't and the vast majority of the competition of the listeners of this podcast - your competition - doesn't do it. The only question is - Do you do it? And if you do, it makes you stand out. It makes you stand out.
Joe: That's right, absolutely, and it provides so much more value. And that guy, and hopefully he is not listening to this podcast, but he could go and double his rates tomorrow and I'd pay it.
Mike Yeah, he better not be listening!
Mike: Do it to the next guy and not you!
There was another Main Stage moment there where you talked about firing the bad clients and dumping the non-profitable services. We hear a lot about firing bad clients. We forget that it's the sort of “products” we sell too that we need to be constantly evaluating. So it’s what we do, who we do it for. And you provided some very unique perspective on that. Can you drill down?
Mike: There's a concept that I coined. I call it the Pareto Overlap. Now there’s the Pareto Principle, commonly called the 80/20 rule. Twenty percent of our clients yield eighty percent of our profits. But there's another kind of paradigm that we don't think about. Twenty percent of our service offering yield eighty percent of our profits. Sometimes those great customers, the ones who do a lot of revenue with us, are actually buying unprofitable service offerings. So, we don't want more of that. And sometimes our weak clients, the ones that are very difficult to do business with, sometimes buy profitable offerings. But there is also a small group of our best customers who are buying our best products; the most profitable clients buying the most profitable products. It’s at that intersection of those two that we want to focus on.
But there's also, at the very bottom of the heap, the worst clients. And what I define by worst, I mean they don't pay on time, or they don't pay at all, they dispute bills, they are never satisfied, you have to re-do work. Those clients are buying unprofitable services. That means we have people that are difficult to do business with and aren’t making us money. We have to have the courage to get rid of them.
Here’s the benefit. It avails time, it avails resources. Actually, I’ve seen in many cases where you get rid of some really unfit clients and profitability will jump right away if you reallocate your resources. But then the one element that so people few people talk about is the emotional space that one client that’s weighing on you when you try to fall asleep and the first thing you think of when you wake up in the morning. That emotional time is such a distraction because it doesn't allow you to think innovatively, to think future-forward for your business, if you're looking at what's going on this one client. Getting rid of just one or two of those absolutely unfit clients can do wonders for a business.
Joe: I'll add to that, because you are absolutely right on the psychological drain. I have a measurement in my practice. We do socials where we get to know our team members’ families. If a team member's spouse knows the first name of one of our clients, it’s time to fire that client. That's a pretty good measurement, because it means that they've been leaned on at home, they've been bled on at home. All the worry is spilled over into the home and now it's starting to drag everyone on my team down, the way you just described, it could a business owner down. One bad client can actually change the entire culture of a firm. It has a cascading effect.
Mike: There's no question about it. Think about who they’ve talked about around the office, “Oh no, so-n-so called again.” And there’s this negativity, right? No one wants to do business with them; it's kind of passing the hot potato. It really drains down the office. Conversely, think about the celebrations that go on when you land that big client or that big product or have that big day - all the high fives around the office. That energy is then delivered to your clients for the remainder of that day and professionally going forward, until you have that bad moment again. So our goal is to alleviate those distractions; it can have this residual or ripple effect out to other clients and that's not good.
Joe: I agree with that Mike, and I'll tell you there's one more thing too about this whole bad client situation. Ron Baker puts some color on this, and he wasn’t necessarily talking about bad clients, he was talking it from a different perspective. But he said your client is your product; your service is not your product and definitely an hour is not your product - your client is your product. It's just a question of how good of a product are you going to produce and I thought it was very profound. But then I sort of extrapolated back from that and said, “Well, if my product is my client, and my client is made up of really bad raw materials, I can't make a good product. My hands are tied.” And it's just another reason. It’s just a dead-end relationship and it is time to let it go.
We could talk about this on and on and maybe we will in a future podcast, but you have a brand new book out and I'm very excited about it. I want to make sure you have a chance to tell everybody about it. It's called Surge. What's the concept of Surge?
Mike: I think the only guy more excited about it than you - is me! I'm really pumped about it.
This came from a reader of mine who read my book The Pumpkin Plan. They said, “I love the idea of growing a business and so forth. The key that's missing is - how do you time the market? Because there all the things we can do to facilitate growth, but how do we make sure we’re in the right place at the right time?” The question intrigued me, because I thought if we could time the stock market, you or I could literally become wealthier than Warren Buffett overnight, if we knew what was going to happen only a few minutes from now. So I started investigating and the reality is there is no magic bullet. You can't time the stock market and you can't time small business positioning either, but you can improve the odds radically. And so this book is an exploration of it.
Who I studied was Brian Smith predominantly, he's the founder of UGG boots, and what steps Brian went through to put UGG in front of the market. What they did was no surprise. That little Venn diagram I shared of uniqueness, best customers with repeating demand, and systemization - that's the model he followed. But, there were certain strategies he followed that identified the upcoming trends in the market he was pursuing. I outline all that in Surge and I truly believe any business can greatly improve the odds of being in the right place at the right time.
Joe: That’s fantastic. I would encourage everyone to go out and purchase the book. It is fantastic. I’m a big believer. As a matter of fact, I'm so excited about it that right after you described the concepts to me, I said, “Mike, we have got to teach this inside of Woodard Institute.” You graciously agreed and now we're going to be offering the principles of Surge as a marketing course inside of Woodard Institute. You can learn more about that marketing course and you can learn more about Mike Michalowicz, the teacher of it, at Woodard.com/Institute.
I want to go back to Profit First for a second by way of wrapping up. It is one of your foundational books and it became so high impact, especially for the accounting community and they’re really focused on the numbers, you formed a community around Profit First. Can you wrap up by telling us a little bit about that?
Mike: Sure. Thank you. When I wrote Profit First, the readers started reaching out saying, “Who's the accountant or who's the bookkeeper who will help me implement this on a professional level?” Because I wrote the book for entrepreneurs. It got to the point now that we have at least five inquiries a day. I’m looking at our KPIs and yesterday it was seven. Every day, someone is inquiring. I sat and my first response was, “I don’t know.” I didn't even think about this. Very quickly, within a few weeks, I found someone who's willing to do it, it was my bookkeeper, and I said, “Would you be willing to coach this and then expand it?” Today, we have well over 100 active bookkeepers and accountants and it isn’t enough to cover the demand.
The reason it's not enough is traditional accounting and bookkeeping, as you know and as you preach, is going away. We have to move to a new model, a contemplative model. The biggest need entrepreneurs have is to increase their profitability, to increase their bottom line. This is the method to getting it done. So folks, the people who join Profit First Professionals, the accountants and bookkeepers, get trained in this methodology and then ultimately certified so that they can deliver this product, this service, to their clients, the entrepreneurs out there that are dying for it.
Joe: It is a fantastic program and I've taken a hard look at. A lot of the members of our Woodard Institute have embraced this program and they come back telling me it is just knocking the doors off. Can you throw out the website - where can our listeners learn more about it?
Mike: Please, check us out at ProfitFirstProfessionals.com and there's all the details about the program. If it’s something you’re interested in, then just fill out a quick form and we will start a conversation to see if it’s a mutual friend.
Joe: That sounds great. Mike, it is fantastic having you here. We only got to touch on and skim the surface on Surge and there’s a lot in that book. Maybe we can have you on a future podcast and just focus on Surge. That would be fun.
Mike: I’d love to!
Joe All right! Probably more coming up from Mike in a future episode. Mike, thanks so much for being here, great conversation.
Mike: Thank you.
Joe: Thank you for tuning into today's podcast and our conversation with Mike Michalowicz. For more information about today's episode, to explore other episodes in this podcast series, or to learn more about our annual conference, visit Woodard.com.
As always we encourage you to stay tuned in, stay connected, never stop learning, and Scale New Heights.