Harness the power of compounding is the eighth video and article in this series for subscribers only, writes Robert Clay of Marketing Wizdom.
It focuses on the true Power of Compounding. Few entrepreneurs or business leaders use it to their advantage. But every entrepreneur and business leader needs to understand it.
Over the last 20 years I have done considerable research in to what makes businesses market leaders in their niche. In that time I have taught more than 600 established businesses how to harness and apply these principles which has enabled them to outsmart the 98% of businesses that don’t. It works!!!
How to Achieve Virtually Any Result You Want
What if I told you that there’s a way you can achieve virtually any business result you want? You do that by mastering all six of the turbochargers mentioned in my previous articles and videos. And you bake them into the way you grow your business.
It’s all about harnessing the power of compounding. And putting the systems in place to grow your business in all three dimensions simultaneously. Do that and you’ll likely grow your business into an asset worth far more than could be achieved by the usual linear thinking
But before I do that, let me remind you of all six Turbochargers.
Master any one of the six profit turbochargers and you can achieve significant business growth. Apply your efforts to all six and each one has a compounding effect on the others. That could boost your revenues by 175% to 365%.
So, what’s not to like about that!
My last seven videos were all about different ways of working smart in your business. Each one, in its own way, was about harnessing the miraculous power of compounding. And that’s how you can achieve dramatically better business results.
The first video in the series, ‘Where 98% of businesses go wrong…’ was all about the geometry of business growth. It addressed three ways to accelerate your business growth. And at the same it showed you how to reduce your time, effort, manpower, money, stress and expense by about 80%.
The Power of Compounding
The last six videos were all about individual turbochargers. I’m now going to show you how to use them in the profit acceleration formula. But before I do that I’m going to share with you an edited passage from a book I highly recommend: “The Slight Edge” by Jeff Olson. This passage uses stories to illustrate the power of compounding interest.
A Power of Compounding Story – A Fathers Gift
A wealthy man, approaching death, summoned his twin sons. He told them he wanted them to experience the same richness of life that he’d experienced in his time on earth. He explained he couldn’t give them the world as he’d like to. Instead was leaving them both a gift.
He gave them each a wallet to finance their adventures. And what went into the wallet was their choice. In one hand he grasped one million dollars in cash. And in his other hand he held a shiny new penny.
Both sons were offered the same choice: a million dollars in cash, or a single penny. Whatever their choice they had to leave the money in their wallet. It would remain under the care of his butler, for one full month. Anything they didn’t take would be returned to his estate and left to charity.
If they chose to take the million dollars cash, they could draw against it as a credit with his bank. If they chose to take the penny, they could also draw against it. But each day its line of credit was untouched his butler was instructed to double the contents of the wallet, for as long as it was under his care.
A Little Book of Stories …
Finally, he gave them both a little book of stories to pass the evening hours. He asked them to come back the next day to tell him their choice. Then he kissed them both and sent them on their way.
The first son lay in bed that night unable to sleep, so he decided to read the book his father had given them. He noticed the title of the book “The Choice,” embossed in simple gold lettering. It sounded mysterious.
As he flipped through the book he noticed each chapter was less than a page, and the titles seemed to be a random assortment of fables or children’s stories. So he started to read the first story, “The Water Hyacinth.
The Water Hyacinth
There was once a little water hyacinth that grew near the edge of a big pond. It dreamed of seeing the other side of the pond. But when it told the water about these dreams, the water just laughed dismissively. The other side indeed, for a tiny plant that couldn’t even move? Impossible!
The water hyacinth is usually found floating on ponds and lakes in warm climates. What the water didn’t know is that the water hyacinth has a reproductive rate that astonishes botanists. A single plant can produce up to 5,000 seeds. But it prefers to colonise new areas by sending out runner stems that become “daughter plants.” In that way it can rapidly double in size.
When a water hyacinth first appears, nobody is even likely to notice it. In fact it’s so insignificant that for the first two weeks, even though it doubles in size every day, you’d be hard pushed to see it at all.
After 15 days it’s just a tiny blob of lavender-pink on the water’s surface. On day 20, a passer-by might just notice a tiny patch of foliage on the water. On day 29, half the pond’s surface will still be open water. But on day 30, just twenty-four hours later, the entire pond will be totally covered by a rich blanket of purple-pink water hyacinth.
The first son imagined the pond, covered with the lush, gorgeous plant. But he was still unsure what it had to do with a ‘choice.’
He decided to read the Next Story, entitled “In the Pail.”
In The Pail
Two frogs ventured into a dairy one day and hopped into a large milk pail. The pail was half filled with fresh cream. They’d never tasted anything so delicious. Soon their bellies were full. Feeling sleepy, they decided to leave but soon realised they were in trouble.
It was easy to hop into the pail, but how would they now get out? The inside of the pail was too slippery to climb. They couldn’t reach the bottom, so they couldn’t step on anything for traction. And they couldn’t hop to safety either. So they began frantically thrashing about, scrabbling for a foothold on the slippery sides.
Finally one cried out, “It’s no use. We’re doomed!”
The other one gasped “no, we can’t give up, who’d have dreamed when we were tadpoles that we’d ever be able to hop about on land? Swim on, brother, and pray for a miracle!”
But the first frog croaked “there are no miracles in the life of a frog. Farewell.” And sadly he sank slowly out of sight.
Never Give Up …
The second frog refused to give up. He continued paddling in the same tiny circle, hoping against hope for a miracle.
An hour later, he was still paddling away. Without even knowing why, and with his brother’s dying words ringing in his ears he wondered desperately “Was my brother right? Are there no miracles in the life of a frog?”
Fatigued, he could paddle no more. And with a whimper of anguish, he let go, ready to face his fate…
Yet to his surprise, unlike his brother, the second frog didn’t sink. He stayed right where he was, as if suspended in midair.
Hesitantly, he stretched out a foot and touched something solid… the milk had been churned into butter!
With a big sigh, he bid a silent farewell to his poor departed brother. Then he scrambled to the top of the big lump of butter and hopped out of the pail.
That night, the first son dreamed of frogs paddling on a bed of flowers, floating on a pond of pennies.
What Happened Next…
Well, the second son lay awake that night, but never opened the book from his father. He was too busy thinking to sleep or read.
As soon as his father held out that $1 million he’d started making big plans for his next thirty-one days.
The next morning, he leapt into action. He told his father his choice. Then he opened the million-dollar line of credit at his father’s bank. And he hired an executive director to help him execute his ambitious plan.
He rented a hotel suite. And for six days he interviewed, then hired a bunch of the sharpest market analysts, financial advisors, and investment experts available.
In the second week the group researched, brainstormed and drafted strategies to transform the second son’s million dollar windfall into a genuine fortune. And by the start of week 3, they were ready to turn the his million into billions.
The Second Son Decided to See What His Brother Was Doing …
A few days later, the second son decided to see what his brother was doing with his million.
To his utter disbelief he discovered that his brother had turned down the million and taken the penny instead, and this is what had happened…
The first son had been to see his father’s butler the following day, who showed him that his lone penny had been joined by another. On day three he saw four pennies. By day four there were eight. And by the end of the week he’d accrued 64c.
After two weeks he’d amassed $81.92, not enough to even buy a decent dinner for two at the hotel where his brother was based.
Now, just a few days into week three, the wallet had grown to $655.35, barely enough to sustain him for a week.
The second son couldn’t believe that his brother had chosen the penny. He told him that it wasn’t too late to visit their father and see if he’d let him change his mind.
Even if he only gave him half a million it would be better than scraping by on what he had now. But the first son wouldn’t hear of it.
Sadly that night, the father died peacefully in his sleep.
Worrying News …
Toward the end of the month, the second son received some worrying news. His executive director informed him that the markets had gone soft. The team’s previous rosy projections would now have to be revised downward. He thanked him and waited anxiously for the next report.
On the morning of day 31, when the sons were due to visit the butler and finally receive their wallets, the executive director came back with his final report.
He started by saying the news was mixed, as some investments had performed quite well, but others had suffered. The good news was that the second son’s one million dollars had been transformed into nearly one and a half million. A 50 percent gain.
And the bad news? Well the team’s expenses, including commissions, taxes, broker fees, interest on the credit line, the bill for the hotel suite, and the executive director’s salary for the month, ended up at just over $1.75 million.
The second son was $250,000 in the red. Not only was he NOT rich, he actually owed a fortune.
In a panic he rushed over to his brother, and had an even larger shock. His brother’s wallet had accrued over $1M on day 28. On day 29, it reached the $2.5 million mark and by day 30, it had exceeded five million. Today, when the wallet was handed over by the butler, it contained a whopping $10,737,418.24.
This is the Power of Compounding!
It was the very same force that covered the pond’s surface with water hyacinth, and churned the frog’s cream into butter. Because of that powerful force he was now worth more than ten million dollars. Whereas the second son, who took the supposedly obvious option and chose the million dollars, was now broke and deeply in debt.
This story perfectly illustrates the power of compounding. It’s the same force that you can use to multiply your business results, if you focus on the right things in your business.
Understanding the Profit Acceleration Formula
The first part of the profit acceleration formula is getting more customers. Let’s assume you currently generate 4,000 leads a year and that 15% buy from you. That’d give you 600 new customers.
The second part of the profit acceleration formula is getting more spend per customer. If each customer spends an average of £200, and buys twice a year, your average spend per customer will be £400.
The third part of the profit acceleration formula is getting more profit per sale. If your gross margin is 60% and selling costs account for another 20%, you’ll be left with a 40% overall margin.
600 new customers who each spend an average of £400 will give you £240,000 in new revenues. Multiply THAT by your 40% margin and you’d have £96,000 in additional profit.
How a 10% Increase Gives a 175% boost in profits
OK, so let us look at the power of compounding. And let’s see how the numbers compound if you boost each of the six areas by just 10%:
In the first part of the profit acceleration formula, getting more customers, you’d generate 4,400 leads. And 16.5% buy from you, which gives you 726 new customers, up from the original 600.
The second part of the profit acceleration formula is getting more spend per customer. If each customer now spends an average of £220, and buys 2.2 times a year on average, your average spend per customer will go up to £484, from the original £400.
The third part of the profit acceleration formula is getting more profit per sale. If your gross margin now goes up to 66% and your selling costs fall to 18% by making a 10% improvement in each area, your overall margin will go up to 48%, from the original 40%
Multiply your 726 new customers by their average spend of £484 and you revenues will be £351,384, up from your previous £240,000.
In other words, it will increase your revenues by nearly 50%. Multiply THOSE revenues by your 48% margin and you’ll end up with £168,480 in additional profit, up from £96,000 previously.
That simple 10% turbo-boost in each of the six areas doesn’t just give you 10% or even 60% better profits. It boosts your profits by an extraordinary 175%.
Best of all, it’s actually very easy to boost your business by 10% in all six areas.
How a 25% Increase Gives a 365% boost in profits
You can easily achieve a 10% turboboost. And in many businesses it’s also not that hard to achieve a 25% turboboost in all six areas. That could boost your profits by 365%
That’s approaching FOUR TIMES the profits from making an easily accomplished 25% improvement in each of the six areas. And that’s the power of compounding at work.
Once you understand how each of the six profit turbochargers has a compounding effect on the others, you’ll be streets ahead of 98% of businesses. Most businesses, relatively speaking, get nowhere due to focusing on the wrong things.
What Would Your Numbers Be?
Why not take a few minutes now and see the power of compounding at work. Substitute the figures shown above with the equivalent figures for your own business. Then work out the effect of a 10% or even a 25% turbo-boost in each of the six areas.
As always, your goal should be to get your business working harder and harder for you on an ongoing basis. And put the systems in place that’ll allow you to build your business into an asset worth many times more than could ever be delivered by the usual linear thinking and arithmetic growth.
Now that’s something to think about!
What Ideas Have You Had to Make More Profitable Sales? Please Comment Below
Please share with us below the ways in which you already harness the power of compounding in your business. What else could you do? Let’s have your thoughts, observations and ideas in a comment below.
Also comment if you’ve found this article on the power of compounding helpful. And if you can contribute any of your own ideas, insights, perspectives and experiences, please add your comment below.
Finally, let us know below if you have any questions relating to the power of compounding. Or if there are any specific topics you’d like us to cover in future videos and articles.
I’m Robert Clay. Thank you for joining me today. I look forward to sharing my next article and video with you.