Focusing on Multipliers
How to use the power of leverage in your life and business
This week, the fortune cookie message that came with my takeaway was an interesting one:
It is better to have a hen tomorrow than an egg today.
In this article, I’ll look at ways in which we can apply this quote to our daily lives and businesses.
Both a hen and an egg represent value transactions. An egg can be purchased for a simple one-off exchange, swapping the monetary value for the egg. You then have the option of eating the egg (nutritional value) or selling it to someone else (another monetary exchange of value). But then the egg will no longer create any value for you.
A hen, however, will produce eggs on a regular basis for you, as long as you invest some time and money into it. You have to feed it, look after its health and protect it from predators, but the value of the eggs that it produces should outweigh these costs.
In short, you’re benefitting from the power of leverage, which is the hen’s ability to produce regular eggs.
Therefore, applying this to our daily lives, we should be looking to invest our time and/or money in things that give us a higher return in value on an ongoing basis.
Or, more simply:
Build or collect income-generating assets.
NOTE: I know that financial terms can sound as exciting to some as a university dissertation on the songs of James Blunt so I’ll keep them to a minimum here.
The accounting definition of an asset is something owned by you or your business (a desk, for example) that has a value. The definition isn’t concerned with whether or not the value of that asset increases or reduces over time. Most of the assets that we own naturally depreciate in value.
But a ‘hen’, for the purposes of the fortune cookie message, is an asset that continues to generate income over time. The inherent value of the asset may go up or down, but every so often, you receive income from it.
In this way, a ‘hen’ is a multiplier of value, whereas an ‘egg’ is just an addition of value. Making a habit of seeking multipliers in your life and business will result in an increased rate of growth in those areas.
Let’s examine a few ways that you can do this.
The value of stock market shares and funds can fluctuate over time, but many pay regular dividends as a bonus for holding the shares. These dividends should outweigh the value of any interest the same money could earn in a bank account.
If you purchase a house for the sole purpose of renting it out, the house becomes an income-generating asset. Even if the rental income exceeds the monthly mortgage payment, it will eventually pay for the house and continue to earn money for you.
But an asset can also be a skill you or your staff members have learned that can continue to produce value over time. Once learned, the skill is the means by which you create more value over time. This could be learning to sell your products or services over the phone, or learning new services that you can charge for.
Even a board game can be seen as something that gives an exponential return on its initial purchase price. Once bought, it enables you and your family to spend many (hopefully) enjoyable hours together, developing strategic skills and bringing your family closer together, thus providing a more heightened experience than simply watching TV.
The time you invest in building close friendships, as opposed to casual acquaintances, should pay ongoing dividends both in the quality of time you spend together, and having someone who can help and support you when needed.
Going back to business, products and services can be either ‘eggs’ (something that you produce and sell once without any future return), or ‘hens’ (something that, once produced, continues to create income for you).
Even if you regard your product or service as an ‘egg’, a repeat customer can become a ‘hen’ because they continue to provide income over time. Although each product/service contains its own inherent value, there is ongoing value in the relationship with that repeat customer.
Let’s say that you build websites. Once built, the software behind the website, like the WordPress theme and plugins, will need updating regularly. Your clients may also want minor updates to the website design over time. If the client doesn’t want to do that themselves, you could either charge ad-hoc or sign them up to a monthly or annual service plan, so that you’re generating reliable profit every month.
If you run a car wash or a shop, a loyalty card scheme will generate a number of repeat customers.
Also, a customer may buy more than one particular product or service. They may buy multiple products in one purchase, or buy Product A this month, Product B next month and Product C the month after.
Subscription businesses are the easiest way to generate repeat customers. Let’s say you run an SAAS (Software as a Service) business, such as Dropbox, Monday or Microsoft Office 365. Once you’ve built the product (asset), your ongoing costs will be for adding new features and fixes each month, and customer support, while it generates regular monthly income from your subscriber base.
The hardest work is done up front, in designing, programming, testing, building an initial test user base, and marketing, which is why many SAAS companies need initial investment to get off the ground. It’s then easier to track monthly costs vs income after the first 1-2 years once the software is stable and you’re building your user base of repeat customers, each paying a monthly or annual subscription.
What we’re really talking about is maximising the time/money exchange. The aim is to decrease the expense of your time, or your staff’s time, that is spent focusing on regular fulfilment of a product or service while increasing the income generated by it month by month.
One of the key ways of doing this is leveraging resources available to you, for example by outsourcing work to countries with lower labour costs, or buying white-label products that you can brand.
Some subscription services can be positioned to potentially lose money, but generate sales elsewhere for the business. For example, Pret A Manger currently has a coffee subscription club where you pay £25 a month for up to 5 hot drinks per day, but they know this will increase sales of food and cold drinks. It’s more important to them to increase footfall into their cafes than the money generated by the subscriptions. This strategy is also known as a ‘loss leader’.
Running a YouTube channel needs a lot of work up front, creating videos consistently without any significant return on your time, but if you can eventually grow a large audience you’ll receive regular income from monetisation, and you can sell products or services to that audience. A video that you spend half a day producing can therefore be generating regular income years later.
In my animation business, we focus on producing custom-designed animated explainer videos. Once a video is produced, it doesn’t generate any further value for us, which is why my top focus is on getting as many repeat clients as possible1.
We love to work with agencies and corporations who have multiple needs for animation. We’ve produced 43 videos so far for one client and have many others who have ordered 10-20 videos to date. The value of each relationship runs into tens of thousands of pounds.
When I have a number of clients that I know are going to come back every 2-3 months for a new video, that takes the pressure off having to spend more money on marketing for new customers.
Therefore, building trusted relationships, both by focusing on the best possible customer experience and the quality of the finished product, is the most valuable driver in my business.
So if you’re running a business, or considering running one, how can you build it around products or services that generate repeat income, or failing that, focus on repeat customers?
And what strategies can you implement in your daily life that can produce ongoing returns on your time and money?
When I decided to set up an animation company in 2012, I didn’t even consider the limitations that custom-designed videos would have on the business. Things have worked out well since, but it’s taken a lot more work than if the business had been based around something that could be created once and sold multiple times. The benefit of creating something that’s custom-designed, however, is that you can charge a lot more than white-label videos. Combine this with repeat customers, and you can focus your efforts on order fulfilment instead of marketing.