Can Your Company Embrace the 7–70 Rule?
By David Paul Carter | Updated on February 9, 2021
Are you upset because margins are slipping impacting your company’s overall profitability? AND, at the same time you want to grow your business more rapidly and more profitably?
Yes — margins are one of the most important Key Performance Indicators (KPIs) for your business. And irrespective of your industry’s average profitability, we believe your company can beat that average by at least a factor of 3.
It’s all about Niche
One industry known for high margins is software. If you want to make software-like margins (something like 70% gross, 20% net) in any industry, you need to identify and dominate a narrow niche — this is called the 7–70 Rule.
Find a niche no bigger than 10% within a broader industry and then own 70% of that niche. For instance, IKEA, at €30 billion in revenue only has 6.9% share of the furniture retail industry. Yet they own 72% of the highly lucrative “flat packed” segment of that industry. What niche do you own within your industry? How do you describe it in a couple words (like “flat packed”)?
The Niche Finds You
So how do you find this lucrative niche within your broader industry? Believe it or not, in most cases the niche finds you. While serving customers in a broader industry study your own data (quantitative and qualitative). You’ll see that there is a specific segment of customers, distribution channels, and products/services where both the sale is easier and the margins higher. The key is letting go of all the other segments and choosing to hyper focus where you seem to be making the most money the easiest. What niche is finding you?
In parallel you want to determine your three brand promises — your differentiation from competitors, what your customers will expect from your products and services.
The best way to determine these promises is to go around and talk to your best customers. Graham Westin and his team did this in the early days of Rackspace. What they discovered is that customers wanted three things:
- The servers to be “up” — so uptime
- The technical help lines to be answered by people — in three rings
- Not to be transferred to someone else
So, Graham had all the automated attendants ripped out and he staffed 24/7 the technical help lines with Level 2 techs so calls wouldn’t need to be transferred. And internally their focus was keeping the servers up and if not, how to resolve the problem in 5 minutes. Rackspace branded this “Fanatical Support” which really addressed the “job customers needed Rackspace to do” beyond just renting server time, which lots of companies do. He ultimately sold the firm for $7 billion.
Why 3 Brand Promises
Robert Cialdini’s research on Influence found that if you want to convince someone to buy your product or service, give them three reasons. Three outperforms two or four and especially ten. And it’s supported by Frances Frei’s book Uncommon Service.
Niche, the 7–70 Rule, and 3 powerful Brand Promises will take your profitability to new levels and help you grow your business more rapidly. Contact me today to develop these levers in your business.
All the best
© 2021 David Paul Carter. All rights reserved.
Material source: Verne Harnish Insights for Scaleups, 19 July 2018.