As Formula Five is receiving so much promotion and attention at the moment, I decided to assess the methodology underlying Formula Five (affiliate link) and compare it with other profit improvement models and business coaching frameworks.
Eureka Moment - So That's How You Make Profit
There are no qualifications to be an entrepreneur.
No one teaches you how a business makes a profit and how you can manage for profit improvements.
So when you first meet a profit improvement model or framework, you may experience a Eureka moment that could have Archimedes jumping out of his bath again. You have a process which makes sense of your business and a framework that ties all your actions everything together in a way to improve profit.
Most Accountants Don't Teach Profit Improvement Methods
Although accountants are regarded by many as the most trusted adviser to small businesses, it is unfortunate that many accountants don't help small businesses to understand how to make profit.
All the jargon and the complicated accounting rules and regulations can even disguise the fundamental economic, profit making model of a business, making it more difficult for the entrepreneur to understand how to improve profit.
Formula Five Framework & Marketing
The Formula Five marketing is creating a lot of buzz at the moment. (see the Cash Boosters Video course affiliate link)
It has presented an overall framework for profit improvement with five key components shown below and then takes you through some number examples to show you how, even small changes in the underlying profit drivers can have such a big effect on your profits.
The Formula Five path to profit is:
- Margin Multiplier - increase your gross margin through price increases and communicating value more effectively.
- Sales Stackers - how to sell more to existing customers
- Lead Landslide - how to attract more prospective customers
- Conversion Control - how to convert more leads into customers
- Turbo Thruster - how to improve productivity and effectiveness
Formula Five sounds exactly what it is - a good logical framework for increasing the profit of a business.
Small Changes Create A Compound Profit Improvement
The idea is that, if you can find an extra 15% profit improvement in each Formula Five area, then because everything is interlinked, these fifteen percent improvements compound to double your profit.
Try Profit Improvement Compounding For Yourself
I have prepared a little spreadsheet which lets you enter your current profit and you can see what it could be after Formula Five's standard compounding assumption of 15% together with a more optimistic 25% increase and a more pessimistic 10%.
I have also given you the facility to set your own percentage improvement so you can see the impact on profit of changing all five factors by 12% say or by changing the margin multiplier by 5%, the sales stackers by 25% etc.
This gives you more chance to estimate the profit potential in your business based on your estimates before you begin testing.
But lets take a step back from Formula Five and have a look at the two fundamental profit improvement models Formula Five is based on.
The Accountants Model - Cost / Volume / Profit (also known as the Break Even Model)
I am not going to get too technical here so hang in:
Contribution (or Gross Margin) per unit = Selling Price minus Variable Cost of Goods (or Services) Sold
So if we sell an item for £15 which we buy for £8 and it costs £1 for shipping we have
Selling Price per unit = £15
Variable Cost per unit = £8 plus £1 (since neither cost is necessary if we don't make a sale)
Contribution per unit = £6 = (15-9)
So every unit we sell makes a contribution of £6 to our fixed costs (overheads or SG&A).
Fixed costs are expenses like salaries, rent, telephone, accountancy fees etc - they don't change as a result of us selling more.
So if fixed costs are £6000 per month, then we need to sell 1,000 units to break even. (Fixed costs of £6,000 divided by £6 contribution per unit)
This gives the accounting rules for increasing profit:
- Sell more - the more £6 we get in my example, the more money we make
- Increase the selling price - so if the selling price increases by £1 to £16 and nothing else changes, we now have a contribution per unit sold of £7.
- Reduce the variable cost - again if nothing else changes, this will increase the contribution per unit.
- Reduce the fixed costs
If in the original example, we sold 1,000 units we would break even, if we sell 1,200 units at a contribution of £7 and our fixed costs are reduced to £5,500 then the profit is:
Contribution of (1200 * 7) = 8400
Less fixed costs of 5,500
Profit has increased to £2,900 per month - much better.
So your accountant will tell you that the way to increase prices is to sell more, increase your prices and to reduce your costs.
Of course, there are some limitations to the model. Fixed costs don't stay fixed across all volumes but it gives you a good model for evaluating incremental change.
Fine in theory but how do you sell more and increase your prices?
Which is why we move on to...
Jay Abraham's Three Ways To Grow A Business Model
Jay Abraham is probably the most famous (and highest paid) marketing expert and profit optimiser in the world and he looked at sales in a different way.
In his famous three ways to grow a business, Jay separated sales into three components:
- The number of customers
- The average amount they buy in a transaction
- The number of times they before each year
Very simple but it helped people to focus on:
- How to have more customers - a common preoccupation anyway but your customers next year equals the number you have at the moment minus the number you will lose plus the number you will gain, which depended on the number of new prospects you attracted and the proportion you converted into customers.
- How to increase the value that a customer spends
- How to persuade/encourage the customer to buy more often.
In good times, this focus on increasing sales usually leads to increased profits but I was always taught to look beyond sales and that the contribution or gross margin was the real revenue for the business.
In fact in the UK, where sales is often called turnover we have a saying "Turnover is vanity, profit is sanity, cash is reality."
So I adapted Jay Abraham's model (published in How To Increase Profit) and changed the sales value of the transaction to profit so that changes in contribution can be tracked. I then deducted the fourth component of profit, your fixed costs (overheads, SG&A) to make sure profit increased.
Back To Formula Five
Can you see how the Formula Five is derived from these two profit improvement models?
We have the Margin Multiplier from the accountants model and Sales Stackers, Lead Landslide and Conversion Control based on Jay Abraham's model.
The final formula, Turbo Thrusters, is really reverting back to the accountants model to answer the question "how do we increase productivity, efficiency and effectiveness?"
This derivation doesn't invalidate Formula Five (affiliate link) at all in my view as the two models that have stood the test of time and are arithmetically correct.
So How Does Formula Five Compare To Other Profit Improvement Frameworks?
Before looking at the profit improvement frameworks from Action Coach, E Myth and Scott Hallman which are probably the main worldwide rivals, indulge me while I explain my own approaches and compare it to Formula Five.
I will also look at Rich Schefren's Business Growth System as that was the first major coaching program targeted at Internet based businesses.
The Eight Pillars Of Business Prosperity
This is my own model for business and profit improvement based on:
- Your key numbers - how you measure, improve, learn and manage for profit and cash
- Your vision for the business and how you translate that into your own priorities and actions
- Your market position and how you differentiate yourself from your competitors
- Generating leads
- Converting leads into first time customers
- Creating repeat customers who buy from you regularly and refer your business to others
- Leading your team - working with employees, outsourced subcontractors, suppliers and joint venture partners
- Systemising your business so that it works reliably, predictably and at low cost.
Eight Pillars vs Formula Five
When you compare this with Formula Five, you can see some common themes.
While I like to get my measurements in place upfront, Formula Five introduces the key measures into each module. Just a difference in emphasis but I like to be very clear about the baseline performance across the entire business.
The entire principle of compounding is that everything is linked together in a complex system so I prefer to identify the business model upfront and have all the profit improvement drivers identified as measures at the beginning.
That way, both the client and I know, whether actions are creating profit improvement.
Then you can see how my market positioning matches up with Formula Five's Margin Multiplier as that is based on establishing an improved value proposition and how do you position yourself - based on the benefits and outcomes you deliver and the price you charge.
Leads, conversions and creating repeat customers match up like for like.
That leads three areas to be covered by Turbo Thrusters - vision to time priorities, leading your team and systemising your business.
I don't have a product to sell, so the only way you can access my Eight Pillars coaching is through one to one coaching and group coaching for UK clients.
Hidden Profit Coaching
However one thing that I have learnt, and rectified with my Hidden Profits coaching, is that you can try to cover too much, too quickly so it delays action.
In my Hidden Profit Coaching I concentrate on one subject - referrals, upsells, bundling etc - and help clients sharpen up performance and increase profits there before moving on to the next stage.
This is something you need to watch with Formula Five because you can be overwhelmed with ideas when you look at each module and there is a danger of mental overload. That's why Paul Lemberg is encouraging you to pick low hanging fruit so that you take action before moving into the next main Formula.
Action Coach And The Business Chassis
Action Coach are the world's largest firm of business coaches and a franchise, founded by entrepreneur Brad Sugars.
He has explained the Action Coach approach based around the Business Chassis in at least two books - The Business Coach and Instant Cashflow (links take you to my book reviews) and you will immediately see similarities with Formula Five.
The Action Coach Business Chassis focuses on five main drivers of profit improvement:
- Number of leads
- Percentage converted
- Average sales value
- Number of times a customer buys
- Profit margin
And it works like this:
Leads x Conversion rate = Customers
Customers x Number of Transactions x Average Sales Value = Revenue
Revenue x Profit Margin = Profit
I am sure you can see the similarities with Jay Abraham's three ways to grow a business model.
Arithmetically I have some concerns with Action Coach's Business Chassis but, as I have just read the Brad Sugars books, it may be my understanding.
You see in many businesses, leads x customer conversions don't equal total customers, it equals new customers which needs to be added to customers you had before less any you have lost.
Second, the profit margin doesn't handle the difference between fixed and variable costs and that difference is key.
In addition to working with the Business Chassis, Action Coach focus on team development and systemisation of your business.
Action Coach Business Chassis v Formula Five
There is the same focus in the Business Chassis as Formula Five on attracting leads, converting leads into customers, selling more to those customers and increasing profit margins.
If you want to know more about Action Coach's approach, Instant Cashflow is the better book by far as it gives outline guidance on 282 ways to improve one profit driver or another.
From what I have seen and heard, Action Coach charge a premium price for their business coaching delivered through their franchisees, many of whom have come from sales backgrounds.
E Myth Mastery
I know more about the main E Myth business coaching / profit improvement program as I have bought the first two sets of modules 1 to 7 and 8 to 14 which covers getting control of your business and growing it. Both provide big opportunities for profit improvement.
Michael Gerber is very much one of the founders of the small business coaching industry, and in his own way has been just as influential as Jay Abraham on me and other coaches.
E Myth have built in a bit more flexibility in their approach since I bought my modules but the program is still based on what Michael Gerber defined as the Seven Centers of Management Attention:
- Leadership - developing your vision for the business
- Marketing - understanding your best customers
- Money - manage your cash flow and profit
- Management - bring together the right team
- Lead generation
- Lead conversion
- Client fulfilment
So again you can see the common themes with Formula Five but the content is very different.
When I looked at the E Myth Mastery system, I saw it as the slow way to business and profit improvement. It is based very much on correcting the foundations first before reaching out to the market. A good approach if you can afford to wait for these improvements to take effect.
Of all the frameworks I have seen, the E Myth approach is the one that is the least influenced by Jay Abraham, and as the author of the new Jay Abraham Addict blog, I see that as a weakness.
E Myth coaching used to be delivered by independent certified E Myth coaches but I have been told that it has been brought in house.
Michael Gerber's mission was to create the "McDonald's of small business consulting" by designing a system so strong that it can be operated by less expensive staff, it is very competitively priced but people write to me with stories of inexperienced coaches who can't move away from the system.
Scott Hallman Small Business Growth Club
When I bought membership into Scott Hallman's Small Business Growth Club (affiliate link), it was a complete revelation to me and I can't stop raving about it.
It forced me to stop and consider exactly what I was bringing to my clients over and above ideas, training and some "how to's" and this is my favourite third party business development and profit improvement program.
Like me, Scott is influenced by Jay Abraham, Michael Gerber and Jay Levinson (Guerrilla Marketing) but before he became one of the world's leading business coaches, he was a hugely successful entrepreneur.
Scott has taken Jay Abraham's ideas and turned them into detailed, step by step systems for easy, effective and quick implementation.
The Small Business Growth Club is based around the original Power of One product which has twelve very tightly scripted and focused modules which has been extended by recordings of teleseminar / coaching sessions between Scott and his business coaching clients.
The core is still in the Power of One sessions:
- The Power of ONE - The Ultimate Business Growth System™
- How to Effortlessly Get 30% of Your Customers to Dramatically Increase their Average Purchase (and your profits as well)
- Condition Your Customers to Purchase 20% More Often, While Keeping Them Loyal to Your Business
- Start to Finish Total Customer Satisfaction - Ten Opportunities to Increase Customers Retention by 50% or More
- How to Create 'Active' Referral Systems to Double or Triple Your Referrals Effortlessly
- How to Increase Revenue 10%-50% by Providing Your Customers with a Continuous Stream of Products and Services They Need and Want
- The Power of Strategic Endorsement™ — How to Double Your Sales Force Without Spending a Dime
- Reduce Your Cost of Acquiring New Customers by 50%-80% Through the Use of a Laser Marketing System™
- How to Use The Power of Compelling Incentives to Lure Your Prospects Away From Your Competitors
- How to Package Synergistic Products/Services to Increase Profits 25%-30%
- Creating Competitive Advantages to Differentiate You from Your Competitors
- Creating a Compelling Competitive Advantage to Make Your Business the Logical Choice
But the extra sessions have broadened the scope and impact of the Small Business Growth Club so that it is organised in three different streams depending on where you need to prioritise:
- Generate new business
- Manage / implement
- Optimize profits
Small Business Growth Club vs Formula Five
You again have the focus on your value proposition which Scott refers to as crafting your compelling competitive advantage, developing sales with existing customers, attracting new prospects with the laser marketing system, referrals and strategic endorsements and systemising your business and managing your time.
Where the gold membership of the Small Business Growth Club would fall down in comparison with Formula Five is that Scott Hallman doesn't focus on the sales training / lead conversion areas but that is where the Chet Holmes material makes this package so compelling in the Platinum version.
Both programs are packed with ideas and tips but the scope of Formula Five is wider but the Small Business Growth Club goes into more depth and essentially also provides much more detail on how to implement.
It may seem strange but I think that because they are both inspired by Jay Abraham and Michael Gerber, they actually complement each other. I can imagine someone buying both and zig-zagging as they introduce simple programs (Formula Five), see they work and want to enhance that area (SBGC) and then move onto another area (Formula Five).
Does that make sense?
It replicates what a client would do in one to one coaching with me.
I'll explain the basic concepts and we will design a simple trial program to test and hopefully provide quick wins and then we will a) improve the program and extend it to more customers and products before moving on to another quick win.
Other Profit Improvement Models
From the offline world I could add a comparison with the Accelerated Business Growth System from Peter Thomson, regarded as the UK's leading growth specialist and Mitch Axelrod, (responsible for creating $2 billions of extra sales) with his New Game of Selling but this article is already very long.
I see both as particularly strong in the sales training / converting leads into sales.
I should also mention Guerrilla Marketing as Jay Conrad Levinson is another founding father of the small business marketing/coaching industry.
Guerrilla Marketing does not have a big conceptual framework but is a mindset and a collection of techniques and tactics. It is focused on a few core principles:
- Marketing is everything you do in your business
- Focus on profit not sales
- The profit is in the ongoing relationship with your customers
- You must build an assortment of lead generation sources.
But Guerrilla Marketing does help you get your marketing mindset right, develop the right marketing message and use multiple marketing media.
However as Former Five is being marketed through and to Internet marketers through StomperNet I do want to contrast it with Rich Schefren's Business Growth System coaching.
Rich Schefren Business Growth Club Coaching
I went through this program in 2007 since Rich Schefren was building a big reputation and I was becoming increasingly interested in Internet marketing. Again this was a revelation since it showed me just what can be delivered to the mass market and over the Internet on a very cost effective basis.
The Business Growth Coaching program is an eleven or twelve module course (I have never seen the mystery module 12) so I am excluding it from this list:
- Finding the real entrepreneur in you
- Developing and using the right capabilities
- Marketing - finding your unique position
- How to create a mafia offer by offering a unique value proposition
- The most powerful marketing strategies - adjusting your back ending marketing to your customers' behaviours
- How to overcome your constraints
- How to measure your business performance
- How to systemise your business so it is on autopilot
- How to manage projects
- How to build your team
- How to bring everything together and manage your time
Looking at my notes, I had forgotten how good the Business Growth System (affiliate link) was although it does have an element of Internet only advice. I must go through it again.
Once again you can see similar issues come up as in Formula Five with the development of your value proposition, attracting and converting buyers, developing your back end and then making it all happen.
Like the E Myth Mastery, the Business Growth System is about getting the fundamentals right and won't give you the quick wins that Formula Five will.
Summary of Profit Improvement Models
I don't know anyone else who has studied the various models of profit improvement as comprehensively as I have.
I have tried to show you that there are differences in approach but also similarities on which all business success is based, whether offline or online.
Some approaches go for immediate profit impact - the Small Business Growth Club, my Hidden Profit Coaching, the Action Coach Business Chassis and Formula Five - while others make sure the fundamentals are right - E Myth, Business Growth System.
You also have the one-to-one coaching and group coaching provided by Action Coach, E Myth and me contrasting with the delivered by computer but little or no individual attention of the Small Business Growth Club and the Business Growth System.
I am not yet sure whether Formula Five will have a personal coaching option as an upsell. I wouldn't be surprised if it did.
- Jay Abraham - I am not sure if he still takes private clients but the last I heard he was charging $5,000 per hour (minimum two hours) for a telephone consultation - but when you are at the top you can charge these high rates.
- Superstar coaches - Scott Hallman does still work with personal clients although they pay $1,250 an hour and I believe Paul Lemberg takes one-to-one clients
- Good business coaches - experienced, knowledgeable, passionate and committed. This will include the best of the franchise coaches as well as independents like me.
- E Myth coaching - proven system but delivered by more junior coaches who know the system.
- Internet delivered programs or shipped products - Small Business Growth System, Formula Five, Accelerated Business Growth System
- Short courses although the cost can vary from about level 3 down.
- Shorter audio/video business training programs.
- Books and ebooks
There is no shortage of business advice in the market so it is a question of finding the right advice for you.
Benefits Of Personal Coaching
As soon as you start involving people, costs shoot up but there are major advantages to personal coaching:
- You have someone to hold you accountable - difficult to do yourself
- It focuses your mind - you make a commitment to someone else and you don't want to be seen as slacking or a non-achiever
- You get customised advice. The more special your business or situation, the more you need to adapt away from the standard.
- You get feedback. You may think an idea is great, someone else may see obvious flaws or not be so convinced about your compelling offer.
- You get help if you are struggling to understand something. We all learn in different ways and at different rates.
- Because you pay more, you are more willing to take action. I know it sounds crazy. A great idea is a great idea but if you are paying Jay Abraham £5,000 per hour and he says "You should ..." you are going to take notice. It's the same with Scott Hallman and Paul Lemberg. But if a friend comes up with the same idea in a bar, are you really going to implement with the same intensity?
I believe in action and you have to find your best route to taking purposeful action to increasing your profits. That may be working with a business coach, one-to-one or it may be enough to buy one or more of the excellent packages available.
Your Catalyst To Success
It's not enough to know, you have to do so what will it take to move you into action.
What will be your catalyst to success?
What will give you the ideas to improve your business and the commitment and determination to take action?
Do you need the personal accountability that coaching provides, the "done for you" services of a consultant or can you take your ideas from the most successful, "superstar" business advisers.
Check out the Small Business Growth Club and Formula Five (affiliate links).
Which is best?
I haven't finished working through Formula Five and I don't know how much it will cost.
I'm just glad I have them both.
Like this article?
Disclosure - I am an affiliate for Formula Five and if you buy after clicking through from my link I earn a commission for the introduction. I was given a copy of Formula Five to review.
I am also an affiliate for the Small Business Growth System and again would receive a commission if you buy after clicking through from my link. I pay for my own membership.
I am also an affiliate for the Business Growth System and would receive a commission if you buy. I bought my own subscription.