First Principles

First principles. I’ve heard the term since I was a kid, since – as a Mormon – we have something called The Articles Of Faith. The 4th article of faith, that I memorized when I was still in my single digits, states:

We believe that the first principles and ordinances of the Gospel are: first, Faith in the Lord Jesus Christ; second, Repentance; third, Baptism by immersion for the remissionof sins; fourth, Laying on of hands for the gift of the Holy Ghost.

I have heard the term “first principles” tossed around the internet and that podcast universe over the last year or so with increasing frequency as well.

It wasn’t until recently that I realized exactly how badly I’ve failed to follow a few crucial first principles.

If you get anything out of this post, I hope that a) if you hold me in too-high regard, this fixes that, and b) learn vicariously from my poor choices.

Here are a few things I’ve failed to remember, in no particular order:

Supply And Demand

I never took Econ class in college, but I’ve read enough books and have done enough other reading to know some of the basic principles. Namely, supply and demand. In short, the concept explains the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. Put another way, if your business is struggling, you can look at supply and demand.

The best year our company has had we did just under $200k in top line income. Not bad, not great. However, last year we did under $100k.

Really not great.

Given that we have two families we’re trying to support here, and we’d like to have some profit margin to grow the company with and have some breathing room, that doesn’t work very well.

Rather than looking at supply and demand, I didn’t really do anything. We relied too much on certain clients coming through on their projects, which failed to happen, but the bigger problem was that we had way too much supply and almost no demand.

When you’re a service business, like video production, your supply is basically how much work you can produce in a given amount of time. With just two of us working a fairly standard 40ish hour work week, we can do between 2 and 5 projects a month, depending on the scope of the project. One a week is a pretty great spot to live in, as two in a week means we’re putting in 60-70 hours that week to get it all done.

If supply and demand states that you can only charge $10,000 per project, and you’re only getting one project a month, you’re gonna end the year just clearing the six figure mark. Again, great for one person, not great for two.

It wasn’t until just this month that I realized how bad our problem was. We have NO system in place to generate leads that turn into new clients and new work. All supply and no demand means no money. That’s what happened over the last few months. (And this is coming from a self-professed systems guy…)

So, we’re rebuilding our business to allow for money to be put into generating leads and a more steady stream of new business that we really haven’t ever experienced. We’ve always relied on word of mouth or referrals or whatever came our way, and that obviously can get you in a lot of trouble.

The Domino Theory

Gary Keller and Jay Papasan wrote a highly-recommended business book called The One Thing that I read a few years ago. Immediatly upon finishing it I swore that I would never forget the domino theory explained within its pages.

I failed.

The domino theory states that a domino can knock over another domino up to 1.5x its size. You extrapolate that out and you get this:

(His reaction is my favorite part)

Now, in the book, it uses this theory to help you understand how to achieve huge goals. For example, I have the (wildly audacious by many standards) goal of growing Telekinesis Entertainment into a $100 Million a year business.

I have no idea how to do that.

However, going back to the domino theory, if you work back from a wildly audiacious goal, you can see how it can be achieved if you just start with what you CAN do and work up from there. Place a small domino, say, get to $500,000/yr (~$40,000/mo) down first and knock that down/achieve that goal, then move to the next. You can use the math of 1.5x for the next goal, or double, or whatever works. After just 13 steps you’re nearly at $100M.

I had the big domino, but had spent no time thinking about what all of the dominoes that lead up to that huge goal were. There’s no way you can knock a domino the size of the empire state building over on your own, but if you start with a regular size domino and add a few behind it that are 1.5x the one before it, you get this:

My problems were two fold: 1) I wasn’t doing anything that could be considered a “small domino”. Fail. 2) I had lost sight of the “big domino” super goal of $100M in revenue, so the things I was doing on a daily basis weren’t getting me any closer to reaching that goal.

When I went out to lunch with a friend yesterday, he asked me, point blank, “what’s your big massive goal?”, and honestly, I had to take a minute to think about it and make sure that was still the goal I wanted to achieve. But the hesitation was telling. I’d lost sight of the goal and that’s a problem.

Profit Margin

I’ll keep this one short at the risk of being long winded with this post. If you’ve ever watched an episode of Shark Tank, the show where entrepreneurs and inventors pitch a business or a product to a panel of investors, you’ll know that one commonly asked question is “what does it cost?”

The investors are really digging down to what kind of profit margin there is, because that will inform how quickly they can expect to be paid back. 10% profit margin? No deal. I’ll never see my money again.

70%? Now we’re talkin! Profit margin is the amount of money between what it costs you to make something or provide a service, and what you sell it for. The larger that margin, the better. Some businesses live or die by hitting a target margin, like the restaurant or the clothing business. If you get to close to the line, it just won’t work.

Other businesses can do just fine at a very small profit margin. Lifestyle businesses notoriously are terrible investments because the owners of the business aren’t looking to scale it into a billion-dollar behemoth, they’re happy making $100k per year and taking all of the income directly into their personal bank accounts. 0 profit margin.

What I’ve known and believed for years is that a healthy profit margin for my industry would be above 25%. Last year, it was zero. Honestly, we probably lost money last year when you dig a little deeper.

Knowledge Does Not = Power

The takeaway is this: you may know what to do. You may have read the books, and the blogs, and listened to the podcasts and gone to the seminars. But all that knowledge, without proper action, is useless. Knowledge doesn’t pay the bills.

You have to make decisions that are informed by that knowledge. You have to take action, move forward, fail sometimes but learn from it and try again, or you’ll never succeed. When life gives you that reminder it’s usually unpleasant, but the only way forward is to learn from it, adjust your actions, and keep trying.

That’s what I’m doing now, and I hope it works out better this time around.

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