The 4-Hour Workweek (24 page)

This intentional absence has enabled him to create a process-driven instead of founder-driven business. Limiting contact with managers forces the entrepreneur to develop operational rules that enable others to deal with problems themselves instead of calling for help.

This isn’t just for small operations. Applegate Farms sells more than 120 organic and natural meat products to high-end retailers and generates more than $35 million in revenue per year.

It is all possible because McDonnell started with the end in mind.

Behind the Scenes: The Muse Architecture

Orders are nobody can see the Great Oz! Not nobody, not nohow!

—GUARDIAN OF THE EMERALD CITY GATES, The Wizard of Oz

Starting with the end in mind—an organizational map of what the eventual business will look like—is not new.

Infamous deal-maker Wayne Huizenga copied the org chart of McDonald’s to turn Blockbuster into a billion-dollar behemoth, and dozens of titans have done much the same. In our case, it’s the “end in mind” that is different. Our goal isn’t to create a business that is as large as possible, but rather a business that bothers us as little as possible. The architecture has to place us out of the information flow instead of putting us at the top of it.

I didn’t get this right the first time I tried.

In 2003, I was interviewed in my home office for a documentary called As Seen on TV. We were interrupted every 20–30 seconds with beeping e-mail notifications, IM pings, and ringing phones. I couldn’t leave them unanswered, because dozens of decisions depended on me. If I didn’t ensure the trains were running on time and put out the fires, no one would.

The Anatomy of Automation

THE 4-HOUR WORKWEEK VIRTUAL ARCHITECTURE

Splitting the Pie: Outsourcer Economics

Each outsourcer takes a piece of the revenue pie. Here is what the general profit-loss might look like for a hypothetical $80 product sold via phone and developed with the help of an expert, who is paid a royalty. I recommend calculating profit margins using higher-than-anticipated expenses. This will account for unforeseen costs (read: screwups) and miscellaneous fees such as monthly reports, etc.

How do you factor in advertising cost? If a $1,000 ad or $1,000 in PPC produces 50 sales, my advertising cost per order (CPO) is $20. This makes the actual‘ per-unit profit $40.94.

I set a new goal after that experience, and when I was interviewed six months later as a follow-up, one change was more pronounced than all others: silence. I had redesigned the business from the ground up so that I had no phone calls to answer and no e-mail to respond to.

I’m often asked how big my company is—how many people I employ full-time. The answer is one. Most people lose interest at that point. If someone were to ask me how many people run Brain-QUICKEN LLC, on the other hand, the answer is different: between 200 and 300. I am the ghost in the machine.52

From advertisements—print in this example—to a cash deposit in my bank account, the diagram is what a simplified version of my architecture looks like, including some sample costs. If you have developed a product based on the guidelines in the last two chapters, it will plug into this structure hand-in-glove.

Where am I in the diagram? Nowhere.

I am not a tollbooth through which anything needs to pass. I am more like a police officer on the side of the road who can step in if need be, and I use detailed reports from outsourcers to ensure the cogs are moving as intended. I check reports from fulfillment each Monday and monthly reports from the same the first of each month. The latter reports include orders received from the call center, which I can compare to the call center bills to gauge profit. Otherwise, I just check bank accounts online on the first and fifteenth of each month to look for odd deductions. If I find something, one e-mail will fix it, and if not, it’s back to kendo, painting, hiking, or whatever I happen to be doing at the time.

Removing Yourself from the Equation: When and How

The system is the solution.

—AT&T

The diagram should be your rough blueprint for designing a self-sustaining virtual architecture. There could be differences—more or fewer elements—but the main principles are the same:

1. Contract outsourcing companies53 that specialize in one function vs. freelancers whenever possible so that if someone is fired, quits, or doesn’t perform, you can replace them without interrupting your business. Hire trained groups of people who can provide detailed reporting and replace one another as needed.

2. Ensure that all outsourcers are willing to communicate among themselves to solve problems, and give them written permission to make most inexpensive decisions without consulting you first (I started at less than $100 and moved to $400 after two months).

How do you get there? It helps to look at where entrepreneurs typically lose their momentum and stall permanently.

Most entrepreneurs begin with the cheapest tools available, bootstrapping and doing things themselves to get up and running with little cash. This isn’t the problem. In fact, it’s necessary so that the entrepreneurs can train outsourcers later. The problem is that these same entrepreneurs don’t know when and how to replace themselves or their homemade infrastructure with something more scalable.

By “scalable,” I mean a business architecture that can handle 10,000 orders per week as easily as it can handle 10 orders per week. Doing this requires minimizing your decision-making responsibilities, which achieves our goal of time freedom while setting the stage for doubling and tripling income with no change in hours worked.

Call the companies at the end of the chapter to research costs. Plan and budget accordingly to upgrade infrastructure at the following milestones, which I measure in units of product shipped:

Phase I: 0–50 Total Units of Product Shipped

Do it all yourself. Put your phone number on the site for both general questions and order-taking—this is important in the beginning—and take customer calls to determine common questions that you will answer later in an online FAQ. This FAQ will also be the main material for training phone operators and developing sales scripts.

Is PPC, an offline advertisement, or your website too vague or misleading, thus attracting unqualified and time-consuming consumers? If so, change them to answer common questions and make the product benefits (including what it isn’t or doesn’t do) clearer.

Answer all e-mail and save your responses in one folder called “customer service questions.” CC yourself on responses and put the nature of the customers’ questions in the subject lines for future indexing. Personally pack and ship all product to determine the cheapest options for both. Investigate opening a merchant account from your local small bank (easier to get than with a larger bank) for later outsourced credit card processing at higher roll-out volumes.

Phase II: >10 Units Shipped Per Week

Add the extensive FAQ to your website and continue to add answers to common questions as received. Find local fulfillment companies in the yellow pages under “fulfillment services” or “mailing services.” If you cannot find one there or at www.mfsanet.org, call local printers and ask them for recommendations. Narrow the field to those (often the smallest) who will agree not to charge you setup fees and monthly minimums. If this isn’t possible, ask for at least 50% off both and then request that the setup fee be applied as an advance against shipping or their other fees.

Limit the candidates further to those who can respond to order status e-mail (ideal) or phone calls from customers. The e-mail from your “customer service” folder will be provided as copy-and-paste responses, especially those related to order status and refund requests.54

To lower or eliminate miscellaneous fees, explain that you are a start-up and that your budget is small. Tell them you need the cash for advertising that will drive more shipments. If needed, mention the competitive companies that you are considering and pit them against one another, using lower pricing or concessions from one to get larger discounts and bonuses from the others.

Before making your final selection, ask for at least three client references and use the following to elicit the negatives: “I understand they’re good, but everyone has weaknesses. If you had to point out where you’ve had some issues and what they’re not the best at, what would you say? Can you please describe an incident or a disagreement? I expect these with all companies, so it’s no big deal, and it’s confidential, of course.”

Ask for “net-30 terms”—payment for services 30 days after they’re rendered—after one month of prompt payment for their services. It is easier to negotiate all of the above points with smaller operations that need the business. Have your contract manufacturer ship product directly to the fulfillment house once you have decided on one and put the fulfillment house’s e-mail (you can use an e-mail address at your domain and forward it) or phone number on the online “thank you” page for order status questions.

Phase III: >20 Units Shipped Per Week

Now you will have the cash flow to afford the setup fees and the monthly minimums that bigger, more sophisticated outsourcers will ask for. Call the end-to-end fulfillment houses that handle it all—from order status to returns and refunds. Interview them about costs and ask them for referrals to call centers and credit card processors they’ve collaborated with for file transfers and problem solving. Don’t assemble an architecture of strangers—there will be programming costs and mistakes, both of which are expensive.

Set up an account with the credit card processor first, for which you will need your own merchant account. This is critical, as the fulfillment house can only handle refunds and declined cards for transactions they process themselves through an outsourced credit card processor.

Optionally, set up an account with one of the call centers your new fulfillment center recommends. These will often have toll-free numbers you can use instead of purchasing your own. Look at the percentage split of online to phone orders during testing and consider carefully if the extra revenue from the latter is worth the hassle. It often isn’t. Those who call to order will generally order online if given no other option.

Before signing on with a call center, get several 800 numbers they answer for current clients and make test calls, asking difficult product-related questions and gauging sales abilities. Call each number at least three times (morning, afternoon, and evening) and note the make-or-break factor: wait time. The phone should be answered within three to four rings, and if you are put on hold, the shorter the wait the better. More than 15 seconds will result in too many abandoned calls and waste advertising dollars.

The Art of Undecision: Fewer Options = More Revenue

Companies go out of business when they make the wrong decisions or, just as important, make too many decisions. The latter creates complexity.

—MIKE MAPLES, cofounder of Motive Communications (IPO to $260 million market cap), founding executive of Tivoli (sold to IBM for $750 million), and investor in companies such as Digg.com

Joseph Sugarman is the marketing genius behind dozens of direct-response and retail successes, including the BluBlocker sunglasses phenomenon. Prior to his string of home runs on television (he sold 20,000 pairs of BluBlockers within 15 minutes of his first QVC appearance), his domain was print media, where he made millions and built an empire called JS&A Group. He was once recruited to design an advertisement for a manufacturer’s watch line. The manufacturer wanted to feature nine different watches in the ad, and Joe recommended featuring just one. The client insisted and Joe offered to do both and test them in the same issue of The Wall Street Journal. The result? The one-watch offer outsold the nine-watch offer 6-to-1.55

Henry Ford once said, referring to his Model-T, the bestselling car of all time,56 “The customer can have any color he wants, so long as it’s black.” He understood something that businesspeople seem to have forgotten: Serving the customer (“customer service”) is not becoming a personal concierge and catering to their every whim and want. Customer service is providing an excellent product at an acceptable price and solving legitimate problems (lost packages, replacements, refunds, etc.) in the fastest manner possible. That’s it.

The more options you offer the customer, the more indecision you create and the fewer orders you receive—it is a disservice all around. Furthermore, the more options you offer the customer, the more manufacturing and customer service burden you create for yourself.

The art of “undecision” refers to minimizing the number of decisions your customers can or need to make. Here are a few methods that I and other NR have used to reduce service overhead 20–80%:

Offer one or two purchase options (“basic” and “premium,” for example) and no more.

Do not offer multiple shipping options. Offer one fast method instead and charge a premium.

Do not offer overnight or expedited shipping (it is possible to refer them to a reseller who does, as is true with all of these points), as these shipping methods will produce hundreds of anxious phone calls.

Eliminate phone orders completely and direct all prospects to online ordering. This seems outrageous until you realize that success stories like Amazon.com have depended on it as a fundamental cost-saver to survive and thrive.

Do not offer international shipments. Spending 10 minutes per order filling out customs forms and then dealing with customer complaints when the product costs 20–100% more with tariffs and duties is about as fun as headbutting a curb. It’s about as profitable, too.

Some of these policies hint at what is perhaps the biggest time-saver of all: customer filtering.

Not All Customers Are Created Equal

Once you reach Phase III and have some cash flow, it’s time to re-evaluate your customers and thin the herd. There are good and bad versions of all things: good food, bad food; good movies, bad movies; good sex, bad sex; and, yes, good customers and bad customers.