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CHRONIC
PROFITABLILITY
How to Make Money All the Time
J A M E S S k I n n E r
r O I C E k r U E g E r
M A r k V I C t O r H A n S E n



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 1
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Chronic Profitability
How to Make Money All the Time

James Skinner, Roice Krueger, and Mark Victor Hansen









“Chronic Profitability” shows you how to build a
company that makes money all the time no matter
what, all because of one simple shift in focus.

___________________________________________
Give this book to anyone you know who runs a
business and wants to make more profit!
www.youpublish.com/ideas
__________________________________________



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 2
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Chronic Profitability
The Authors
JAMES SKINNER is the founder of two global financial
groups that manage billions of dollars of assets. He is
also recognized as one of the world’s foremost business
thinkers and appears regularly on Japanese television.

ROICE KRUEGER co-founded Franklin Covey, the
world’s largest training company, and has supervised
consulting projects for 80 percent of the Fortune 500.

MARK VICTOR HANSEN is the co-creator of the Chicken
Soup for the Soul empire and is the best-selling nonfiction
author of all time. His goal is to make the planet work
for all humanity!

NOTE: Ideas That Can Change Your Life™ is a
collaboration of three of the world’s most amazing
authors, speakers, and thinkers. In this book, the first
person “I” may refer to any of the authors.

To contact the authors for keynote and other
speaking engagements: speaker@youpublish.com




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 3
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Chronic Profitability
Chronically Profitable
The word chronic usually makes you think of sickness, so
it catches your attention. How many of you want to be
chronically profitable, meaning that you make a profit all
the time, no matter what?

A chronic disease is a disease that does not go away
no matter what you do. I want all of your companies
and all of your businesses to be so profitable that you
can’t get the profit to go away no matter what you do.
Would that be good, would that be great, and would
that be extraordinary? Say yes!

You want your company to be so profitable that
it makes money all the time no matter what!

This is called how to make money all the
time—every single month of your business life, no
matter what. We want to make you so profitable, that if
you say “I don’t want to be profitable this month,” we
would say, “So sorry. There is nothing we can do about
it. You are going to be profitable anyway.” Do you like
that?



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 4
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Chronic Profitability

Fixed Costs and Variable Costs
I was the first non-Asian to ever be certified as a
management consultant in Japan. We spent a lot of time
studying traditional management theory. In traditional
management theory you talk a lot about costs. How
many of you have ever heard about costs? That is the
money that you spend doing your business.

Costs are the money you spend doing your
business.

When we study costs, we talk about fixed costs and
variable costs.

A fixed cost is a cost that you incur whether you
conduct any business or not.

A fixed cost is something you have to pay
whether you conduct any business or not.

If you have rented an office, that is a fixed cost.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 5
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Chronic Profitability
It does not matter from the property owner’s
perspective whether you do any business or not; they are
going to charge you rent.

If you hire an employee and they are on a salary,
then their salary is a fixed cost. Whether you sell
anything or not, you still have to pay it.

We have many things that are fixed costs.

We also have variable costs. A variable cost is a cost
that is only incurred when we actually do business.

A variable cost is something you only have to
pay when you conduct business or make a sale.

For example, if I make a shirt for a customer, then
the material cost is a variable cost. It is only incurred if
we are actually making shirts. For each shirt that we
make we incur a new variable cost. If we have
outsourced the tailoring to somebody else, then the
tailoring costs are a variable cost. It is incurred only
when we make a sale.



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 6
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Chronic Profitability

The Break-Even Point
Every business has two kinds of costs: F (fixed costs)
and V (variable costs).

In traditional management theory, when we want to
find out how healthy a company is we calculate what is
called the break-even point. We are going to call that the
BEP.

The break-even point tells you what level of
sales you need to achieve to break even (not lose
any money).

We are going to give you a formula here: Don’t be
too concerned if you don’t understand it right away. We
will make it very simple for you in a minute.

BEP=F/(1-V/S)

What this means is that the break-even point of any
company is equal to the fixed costs divided by 1 minus
the variable costs divided by the sales.



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 7
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Chronic Profitability


You can look at your financial statements and see
what those costs are and what your current level of sales
is.

What this actually means is that if you divide the
fixed costs by the percentage of profit on each sale, you
find out how many sales you have to make in order to
be profitable.

Your fixed costs divided by the percentage of
profit on each sale equals the break-even point.

Let’s do a really simple example.

Say we have a company that has fixed costs of $50.
In other words they have $50 of costs that they incur
whether they do anything or not—rent, fixed salaries,
and equipment leases, and so on.

Now let’s say that for every dollar the company sells,
they have to spend 20 cents in variable costs. In other



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 8
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Chronic Profitability
words, they pay 20¢ on material, sales commissions, and
so forth that are only paid out if the company actually
sells something.

Therefore, their variable cost ratio is 20 percent, or
to put it another way, they have a profit ratio of 80% on
each sale made.

One (one hundred percent) minus 20 percent gives
you 80 percent, so the profit margin on each is 80%.

1-20¢/$1=0.80

To calculate the break-even point, all we have to do
is divide $50 (the amount of fixed costs) by 80% (the
profit margin on each sale).

The break-even point for this company is $62.50

$50/(1-20¢/1$)=$62.50




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 9
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Chronic Profitability
If this company has sales of $62.50, then they will be
profitable and can pay their fixed costs and their variable
costs. That is their break-even point.

Any sales less than that will be a big problem, and
any sales after that will make them money; and since the
profit ratio is quite high, they are going to do quite
nicely if they sell more than $62.50.

So what does all this mean in terms of actually doing
your business?

Improving Your Break-Even Point
What this formula tells us is that if you want to have a
very good business, you want the break-even point to be
very low. Then you don’t have to get that many sales
before you start making money.

If you have to have a lot of sales before you start
making any money and the economy starts to go down,
what happens? You are not making any money anymore.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 10
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Chronic Profitability
As management consultants, we love companies that
don’t have to work very hard to be profitable. Would
you like a company that does not have to work very
hard to be profitable?

To achieve that, what you need to do is decrease
the fixed costs.

If you can take your fixed costs and turn them into
variable costs, your break-even point will go down.

Converting fixed costs into variable costs will
improve your break-even point!

If you have no fixed costs, what is your break-even
point? Zero! So that makes it very simple. If you do not
have any fixed costs, you can’t lose any money. If you
just sit there and don’t do anything, you are not losing
any money. Now you know why everybody is doing
what? Outsourcing.

Outsourcing converts fixed costs to variable
costs improving your company’s break-even point!



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 11
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When you outsource rather than pay somebody
in-house to do it, which is a fixed cost, whatever it is
now becomes a variable cost. Therefore, if your sales go
down, you are still profitable.

I studied this as I was becoming a management
consultant. It is important to understand this formula
and know your break-even point. You want to stick the
formula on your wall and periodically calculate what
amount of sales your company needs to generate to stay
profitable.

Can your sales go down before you drop into the
red? If our sales drop 1 percent, 5 percent or even 20
percent, are we still profitable? It is good to know that
your sales could drop 50 percent and you would still be
making a profit.

Your banker would also like to know your
break-even point, as would your shareholders.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 12
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Chronic Profitability
Periodically calculate the break-even point for
your company!

From Costs to Sales!
However, what I started to realize, as I consulted with
many companies and taught them how to do this, was
that everybody was talking about costs and nobody was
talking about sales. I thought, “Hmmm…. that is
interesting because as an owner of businesses, I am very
concerned about satisfying our customers, making them
happy, getting them to buy something from us, and
meeting their needs, in other words, SALES!”

That is the reason we are here in the first place.
What if we started to study sales at the same level we
studied costs?

I came up with a new idea called fixed sales. Then I
came up with an idea called variable sales. I thought,
“What if we not only thought of our costs as being fixed
or variable but also started looking at our sales and split
them into fixed and variable sales?”




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 13
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Chronic Profitability
If costs can be both fixed and variable, so can
SALES!

A fixed sale is a sale that you do not have to put any
work into to generate. It comes in like clockwork
whether you do anything or not.

Fixed sales are sales that take place whether you
do anything or not!

Is having automatically generated sales a good thing
or a bad thing? It is an extraordinary thing, and you
want to make sure that you have lots of sales that
happen no matter what.

Variable sales, on the other hand, are the sales that
you have to go out and work for.

Every month you have to go out and wear down
your shoe leather, and wear out your ear and your
mouth getting somebody to buy.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 14
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Chronic Profitability
Variable sales are sales that you have to work for
each time.

Are variable sales a good thing or a bad thing? They
are a good thing! Sales are always a good thing. You do
not want to get that confused look and go back to the
company and say that you found that variable sales are a
bad thing so we are stopping all our variable sales now.
Don’t do that! All sales are good.

But if you had your choice, would you rather have
fixed sales or variable sales? Fixed sales, of course.

All sales are good—fixed or variable, but fixed
sales are better!

Calculating Chronic Profitability
From this simple idea, I developed a formula that
calculates Chronic Profitability.

CP=FS*(1-VC/TS)-FC

CP=Chronic Profitability



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 15
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Chronic Profitability
FS=Fixed Sales
VC=Variable Costs
TS=Total Sales
FC=Fixed Costs

What this means is Chronic Profitability is equal to
your fixed sales times your profit margin on each sale
minus your fixed costs.

You want to study this and get used to calculating
your fixed sales and the profit margin on those sales,
and then and subtracting your fixed costs. That tells
you your level of Chronic Profitability.

What to Actually Do!
Would you like to be chronically profitable? There are
only three things that you can do to make it happen.

The formula is nice, but it can get complicated and
tied up in your brain; and besides, you only need to
know what to actually do.

Would that be useful?



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 16
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If you do or if you don’t get the formula, you’re still
going to get the result.

Even if you don’t understand the formula, you
can still get the result you want!

Chronic Profitability is something I like to establish
immediately in every company I ever own. I can go on
vacation, I know the sales are coming in, the margins are
there and it is a done deal.

Here are the three things you can do to be
chronically profitable:

Step 1: Decrease Your Fixed Costs
The lower your fixed costs, the higher your Chronic
Profitability. Therefore, you want to start thinking about
ways to decrease your fixed costs.

Reducing fixed costs is a good thing. It lowers your
break-even point and improves your Chronic
Profitability.



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 17
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The whole trend of the economic world today is that
fixed costs are dead.

In our e-book business, we have just two fixed costs:
the servers and our web master. Everything else is
variable.

We know that if we can keep fixed costs low, we will
always be Chronically Profitable.

Step 2: Increase the Profit Margin on Each Sale
Even if it is a fixed sale, it still has to be a profitable sale.
Having fixed sales that you lose money on does not
generate Chronic Profitability. It generates chronic
losses.

You have the fixed costs you want to go down and
the profit margin you want to go up. You want a higher
margin on each sale.

This part is not complicated.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 18
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Step 3: Increase Your Fixed Sales
You now know what to do. You decrease fixed costs,
and you improve your profit margin on each sale. The
next part, however, is key. I could be a televangelist on
this next part.

We have created what we call the “suffering ratio.”
The amount you suffer every month at work is equal to
your variable sales divided by your total sales—in other
words, the proportion of sales that you need to make
again every month.

Suffering=Variable Sales/Total Sales

You worked all last month, finally got some sales,
and then you have to go out and do it all over again!

That is called suffering.

The opposite of suffering is your “ecstasy ratio.”
Now, your ecstasy ratio is equal to your fixed sales
divided by your total sales.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 19
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Ecstasy=Fixed Sales/Total Sales

That means that I already did it so I don’t have to
show up anymore.

How many of you are starting to like this idea? Is
this triggering some thinking in your brain about how
you may want to change your business?

Lots of Ways to Get It Done
Now we are going to go through each of the three steps
in sequence. We are going to give a whole bunch of
ideas about ways you can make Chronic Profitability
happen in your business. Would that be useful?

What you need to know is how to do it in your
business right now, because you are no longer in
business school; you are in business reality.

Getting Rid of Fixed Costs
The first thing I want to focus on is fixed costs. What
are some ways that you can get rid of your fixed costs?



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 20
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Chronic Profitability
You thought I was going to teach you. Now you actually
have to think for yourself.

So how can you get rid of your fixed costs? What
can you do?

You can outsource.

I want you to write down on paper, “Outsource
everything, including yourself.” You think I am joking.
How do you outsource yourself? You can become a
vendor that provides services to your company on a
contract basis instead of being an employee.

It is not just other people who can be vendors; you
can be a vendor. I believe that in the future, everyone
will be an independent vendor. We are moving from a
dependent paradigm to an independent and
interdependent paradigm.

In the future, every individual will be his or her
own business!




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 21
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Chronic Profitability
The dependent paradigm is the paradigm of parent
and child, which says, “I will take care of you, but you
must do what I say.”

This is the traditional paradigm of the
employee/employer relationship. Do you know what
they call the employee/employer relationship in the law?
The law of masters and servants. Is that shocking? That
is what it is called.

We are moving away from a masters-and-servants
paradigm.

The reason is that companies can no longer be the
parent, because of global competition.

The fact is technology is advancing so rapidly that
entire industries now become irrelevant and companies
can no longer guarantee they will be able to take care of
you forever.

Industry says, “You know we can work together
while it is profitable to do so, but I don’t know what is



© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 22
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going to happen three years from now. I really don’t.
We could be in the business of making whips and
buggies, and somebody could invent an automobile. We
could become completely irrelevant, and in this case I
can’t take care of you.

So now we need to be independent. You need to be
able to take care of yourself. But we can work together,
which is called interdependency. We can work together
while it is profitable for us to do so. We are moving to a
different paradigm.” So we are all outsourced.

You need to be independent, because now we
are all outsourced!

Let me put this to you in just a little different way
and build on it. This is a powerful phenomenon
happening throughout the world. If the company is the
parent and the parent is becoming less stable, then the
child cannot depend on the parent, so the child must
quickly become independent, meaning that they can
provide for themselves. The company is required to
outsource, and the child must become independent.



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Yes, we all must become adults very, very quickly
now. We must become economical adults who are able
to be responsible and work together in a responsible
manner. The social contract has shifted, for better or
worse.

I am merely describing the world as we work and
live in it. Personally, I believe that it is a good thing
because it causes us human beings to grow instead of
forcing other people into dependency. I happen to like
the paradigm that says “I have to earn my keep.” I am
good with that. But I am not going to make a moral
judgment on it overall. I understand that there are many
social issues involved.

We all must become economic adults!

Now what other ways can you reduce your fixed
costs?

Outsourcing is not the only way.




© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 24
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Think hard.

You can reduce your rent, downgrade your offices.
Eeeewww! you might say.

You know, Peter Lynch, one of the greatest stock
investors of all time, says that when he goes to visit a
company and it is in very flash offices, he runs for the
door.

Why?

Because they are not going to be chronically what?
Profitable.

They have got to work really hard just to pay the
rent.

You are not in the business of making your landlord
wealthy. You are in the business of making you and your
shareholders and your employees wealthy.




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That is another way to decrease fixed cost. How else
can you do it?

Lease instead of buy? Nice try. See, everybody
thinks leasing is a V, but it is actually an F. You are tied
to that contract, so it is a fixed cost. You can pretend
that it is variable, but guess what? It has to be paid every
month.

When I set up my last company in Japan, I would
not let the employees purchase or lease a copy machine.
I told them that every time they wanted to make a copy,
they had to go to 7-Eleven. Now that is a variable cost.

Every time that they wanted to make a copy, they
had to put a coin in the slot. Guess what? They didn’t
make very many copies.

Seriously.

That is called driving fixed cost all the way out.
Does that make sense? Use equipment that is used only
on a when-needed basis: That is variable cost.



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How else can you get rid of your fixed costs? You
can downsize and get rid of all your fixed costs entirely.
Which fixed costs? Salaries. So what is a way you can
take a fixed salary cost and turn it into a variable cost?
You can pay your people in stock options—which are
only going to be valuable if your people make you a
bunch of money. Or you can give them a commission or
a percentage of profits. You can create a larger bonus
pool and a lesser salary, but then the bonus pool
depends on the profits. So unless you are profitable, you
don’t have to pay them. Would that increase your
Chronic Profitability, yes or no? Yes. You need to have
many ways to do it.

Drive fixed costs all the way out!

Improving Your Margin
Now let’s look at improving your profit margin.

There are many ways to do this. What are some of
the ones you can think of?




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Increase the prices. That is a really terrific one. Does
it actually work? It does. There are some products that
will sell better when the price is raised. It is really
interesting. You increase the price and more people
want to buy.

You want to find your ideal price point that gives
you the maximum margin you can get.

Here is an example: In 1984 Tony Robbins put
together his Personal Power® infomercial with my first
client, Bill Guthy. Bill tested the price point at $89, $129,
and $179. They sold more at $179, because there was a
higher perceived value. If you want Personal Power®,
that’s what you paid; today the product sells millions of
copies a year worldwide. It is important that you check
the price by what the client thinks the value is.

What else can you do to improve the margins? If
you don’t know, I am concerned. Aren’t these the
questions you need to be asking yourself every day?




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One way to improve margins is to improve the
quality.

Now I want you to understand that improving the
quality is very profound, because improving quality does
what to costs? It reduces the costs. You need to
understand this: Higher quality costs less!

Higher quality costs less!

This is the one single paradigm shift that Deming
taught the Japanese that created the entire postwar
economical miracle. He went in and said, “I am going to
tell you the big secret.” They said, “What is that?” He
said, “The big secret is higher quality costs less.” They
all fell out of their chairs.

Now, Deming wouldn’t do any seminar that didn’t
have 500 CEOs in the room. If the CEO wouldn’t come,
he wouldn’t let anybody in the company come. He said
that otherwise it was a complete waste of because they
needed to change the whole management paradigm.




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He said higher quality costs less because, number
one, you don’t have to process the claims. Claim
processing is devilishly expensive and time consuming.
Number two, no rework. Devilishly expensive. Number
three, less marketing costs. Because, if it is higher quality,
you start to get word of mouth and you start to drive the
marketing cost outside the organization instead of inside.
Lower selling cost, lower marketing cost, less rework.
And less waste—because when you start to drive quality
into a process, you waste fewer materials. It actually
drives the cost down.

Not only does it bring the price point up, but you do
it while driving the cost down. Does that make sense?

So the formula for success, since we are doing a
formula-based discussion here, is very interesting. This
is what the very best companies do.

They take the quality and raise it up. And when they
raise the quality, what that does that do to the cost? The
cost goes down. And when the cost goes down, what
happens to the profitability? It goes up. And when the



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profitability goes up, what does the company do with
the profitability?

The first thing they do is invest in higher quality.
The second thing they do is give the customer a lower
price, out of the increased profitability. And the third
thing they do is reward their employees, their
shareholders, and all the other stakeholders in their
business with a larger dividend.

Can anybody say TOYOTA? This is how they do it.
They drive the quality up, which drives the cost down,
which increases the profit margin, which allows them to
give a lower price, even-higher quality, and a bigger
shareholders’ dividend. Start doing this for a couple of
years and nobody will be able to catch up.

Quality↑=Cost↓=Profit↑
Profit↑=Quality↑+ Price↓+ Profit↑

How else can you improve the margins? You can
negotiate better terms of business with your suppliers. I



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am not only talking about price, although part of it is
price.

In the value equation, you have four elements:
quality, cost, delivery, and service, or QSDC. So,
getting a better delivery schedule can allow you to drive
down your inventory, which will improve your margin
and return on capital.

Also, you can improve your operational efficiency.

I started out as an industrial engineer. One of the
first factories I went to was an automotive parts factory.
I followed the forklifts around for two days. This
factory was having one forklift accident a week. Does
that drive any cost into your business? Yes. Not to
mention the fact that they drove forklifts all over the
factory, which did not add value. It is a non-value-added
process.

We created a whole new layout for the factory and
got rid of most of the forklifts just by following them
around and finding out how things really needed to



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Chronic Profitability
move through the factory. The factory radically
improved its operating efficiency.

Here’s another example. Say an employee is doing
one process that is taking 20 seconds. The guy next to
him is doing a process that takes 40 seconds. What you
do is get two people doing the process that takes 40
seconds and you get twice the output by increasing the
manpower by only a third. There are all sorts of things
you can do to increase the operating efficiency.

Another thing you can do is decrease waste of all
kinds. Decrease waste in time, materials, and energy. All
these things will improve your margin.

Creating Fixed Sales
Now for the big one (a little drum roll please): We have
decreased the fixed cost. We have improved the margin,
and now we want to increase the fixed sales.

Let’s talk about some different ways you can create
fixed sales in your organization. Remember that fixed



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sales lead to Chronic Profitability—making money all
the time no matter what.

Without the fixed sales, it doesn’t matter what you
multiply or subtract at the end; you are not going to
have the Chronic Profitability that you desire.

Now we are at the crux of the equation.

How do you get fixed sales?

Contracts. You can have ongoing purchase order
agreements that they are going to purchase $X amount
from you every month. It then becomes a fixed sale.
Using our training company as an example, we built
training programs that were integrated into
organizations as part of their systems. Whenever a
manager was promoted, they had to go through our
training. That is a fixed sale. We knew they were going
to come in every year. When it gets to be promotion
time, those guys are going up the ladder and we are
getting the order. Is that good or is that good? That is
good.



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You want to start looking into ongoing purchase
agreements or how to get yourself systematized so your
products and services are part of the system of your
client.

What other kinds of things are fixed sales?
Exclusivity. You have an agreement that they purchase
exclusively from you, and you know that they have to
purchase.

What else?

Word of mouth? Word of mouth is not a fixed sale;
nice try. Word of mouth is not a fixed sale because you
don’t know if it is going to happen or not. It is nice. I
like word of mouth. Word of mouth is better than
having to do it myself, but it is not fixed. I want
something that I can put a number on, and I know what
is coming in.

Subscriptions. Yes! Yes! Yes! Subscriptions.
Memberships. Do you know that if everybody who has



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a membership at your sports club actually showed up,
the club would be toast? But they get those
memberships, and they take money out of the bank
account every month. They get $80, $100 a month out
of the bank account whether you go to the sports club
or not, and they don’t have to sell you anymore. That
stuff just keeps coming. It is a fixed sale.

What else? How about multilevel marketing? Only
certain parts of multilevel marketing become fixed sales.
I am going to give you the operative word that can be
used in multilevel marketing: “auto-ship.”

“Auto-ship” means that we are going to ship this
product to you every single week or every single month,
depending on the periodicity of the product. We do not
need a new order from you; you have ordered an
“auto-ship.” It comes; we charge your credit card.
Everybody say “Auto-ship.”

How else can you get a fixed sale? Joint ventures?
Partnerships? What kind? I have had a lot of



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Chronic Profitability
partnerships that did not generate me any fixed revenue.
Licensees and franchises. Yes. Everybody say “yes.”

Let me give you the profit margins on franchises.
This is what you really need to know. I used to manage a
franchise business and for every dollar that we brought
in, our fixed cost was six cents. You like the margin?

So franchising and licensing is an awesome business.
Now sometimes you are not going to get that same ratio.
If you are not getting that same ratio, you need to hire
Roice as a consultant. But you can get your margin to at
least 40 percent. You ought to be looking at 40 percent
coming in.

In our case we would create a training program and
nurture it, develop it, and make it grow in the United
States. We created a profitable model and would just
wait for the telephone to ring, because people would call
up and say, “We would like to represent your product in
our country.” We didn’t have sales costs because we
didn’t have out looking for licensees. We did have some



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Chronic Profitability
legal cost involved, which I guess is a variable cost in
this case because you do that each time.

So you would have a one-time variable cost. In your
company you might have a product that you would ship
out, which could also be a variable cost. But what we
would do in our case was outsource, so the companies
could actually produce the materials in their country.
They didn’t have to buy them from us, and they simply
sent us a royalty check. Then what we would have is an
accounting cost and we would have a service cost of the
individual on telephone and so forth. You could work
on that type of margin.

In one organization, I decided to completely
outsource myself from them. I said, “Look, I have such
a profitable model, why don’t you just pay me a
percentage of that profit?” So I licensed to the company
to license for them. Got it? Then I just developed an
income stream. I said, “Not only do I want that income
for the time that I am working with you, but when I
retire I would like to have it five years in the future.”



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Chronic Profitability
And they bought the deal. Got it? This is a powerful
concept.

Think licensing. It is what I call the multiplier effect.
It is how to multiply your organization and what you are
doing.

In Chicken Soup for the Soul—we became inundated
with people who wanted to license with us because our
name is a brand. This is why I said your title is
everything in a book or a product or a subject.

For example, Diamond Pet Foods came to us. I do
not make the pet food or anything, but we get 15
percent off the top on the $2 million sales a month this
company makes. That is $300,000. Jack gets half: 7.5
percent. I get 7.5 percent. This is a pure-profit business.
I could retire just on that.

We just gave you another $1 million in value from
these ideas!




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There are many levels of licensing. Licensing is a
young business. The first guy in licensing was Walt
Disney. He started licensing the Disney characters and
images.

Then there’s George Lucas and Steven Spielberg
Lucas said to Spielberg, “We ought to be licensing all
that stuff you are doing with E.T.” Look what happened.
In Spielberg’s book he says he made $800 million on
E.T. and $1.5 billion on licensing.

Bottom line: You have rentals, interest, annuities,
and trail fees on introductions. You can generate all
kinds of fixed sales.

Summary: All You Need to Know
So that is basically all you need to know. You have to
lower your fixed costs. You have to improve your
margins. You have to increase your fixed sales. And
you will be chronically profitable.

You need to work on it and find lots of ways to do it.
You want to have lots of ways to reduce your fixed costs,



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lots of ways to improve your margins, and lots of ways
to generate fixed sales that come in every day, every
week, every month, and every year. Because you want to
have lots of Chronic Profitability to minimize your
suffering and maximize your ecstasy!

With best wishes,

James Skinner, Roice Krueger, Mark Victor Hansen

___________________________________________
For more ideas on business or to send this book to
members of your team:
www.youpublish.com/ideas
To contact the authors for a speaking engagement:
speaker@youpublish.com
___________________________________________

Ideas That Can Change Your Life

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www.youpublish.com /ideas

Chronic Profitability
How to Make Money All the Time James Skinner, Roice Krueger, and Mark Victor Hansen

“Chronic Profitability” shows you how to build a company that makes money all the time no matter what, all because of one simple shift in focus. ___________________________________________ Give this book to anyone you know who runs a business and wants to make more profit! www.youpublish.com/ideas __________________________________________

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Chronic Profitability
www.youpublish.com /ideas

The Authors JAMES SKINNER is the founder of two global financial groups that manage billions of dollars of assets. He is also recognized as one of the world’s foremost business thinkers and appears regularly on Japanese television. ROICE KRUEGER co-founded Franklin Covey, the world’s largest training company, and has supervised consulting projects for 80 percent of the Fortune 500. MARK VICTOR HANSEN is the co-creator of the Chicken Soup for the Soul empire and is the best-selling nonfiction author of all time. His goal is to make the planet work for all humanity! NOTE: Ideas That Can Change Your Life™ is a collaboration of three of the world’s most amazing authors, speakers, and thinkers. In this book, the first person “I” may refer to any of the authors. To contact the authors for keynote and other speaking engagements: speaker@youpublish.com

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Chronic Profitability
www.youpublish.com /ideas

Chronically Profitable The word chronic usually makes you think of sickness, so it catches your attention. How many of you want to be chronically profitable, meaning that you make a profit all the time, no matter what? A chronic disease is a disease that does not go away no matter what you do. I want all of your companies and all of your businesses to be so profitable that you can’t get the profit to go away no matter what you do. Would that be good, would that be great, and would that be extraordinary? Say yes! You want your company to be so profitable that it makes money all the time no matter what! This is called how to make money all the time—every single month of your business life, no matter what. We want to make you so profitable, that if you say “I don’t want to be profitable this month,” we would say, “So sorry. There is nothing we can do about it. You are going to be profitable anyway.” Do you like that?

© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 3

In traditional management theory you talk a lot about costs. Roice Krueger. we talk about fixed costs and variable costs.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. We spent a lot of time studying traditional management theory. If you have rented an office. that is a fixed cost. All rights reserved. 4 . A fixed cost is something you have to pay whether you conduct any business or not. How many of you have ever heard about costs? That is the money that you spend doing your business. Costs are the money you spend doing your business. When we study costs. and Mark Victor Hansen. James Skinner. A fixed cost is a cost that you incur whether you conduct any business or not.youpublish. © 2007.com /ideas Fixed Costs and Variable Costs I was the first non-Asian to ever be certified as a management consultant in Japan.

Ideas That Can Change Your Life ™ in Business Chronic Profitability www.youpublish. if I make a shirt for a customer. Whether you sell anything or not. © 2007. It is only incurred if we are actually making shirts. James Skinner. 5 . For each shirt that we make we incur a new variable cost. you still have to pay it. We also have variable costs. We have many things that are fixed costs. then the material cost is a variable cost. For example. It is incurred only when we make a sale. If we have outsourced the tailoring to somebody else. A variable cost is a cost that is only incurred when we actually do business. Roice Krueger. If you hire an employee and they are on a salary. they are going to charge you rent. All rights reserved. A variable cost is something you only have to pay when you conduct business or make a sale.com /ideas It does not matter from the property owner’s perspective whether you do any business or not. then the tailoring costs are a variable cost. then their salary is a fixed cost. and Mark Victor Hansen.

The break-even point tells you what level of sales you need to achieve to break even (not lose any money).Ideas That Can Change Your Life ™ in Business Chronic Profitability www. when we want to find out how healthy a company is we calculate what is called the break-even point. We will make it very simple for you in a minute. BEP=F/(1-V/S) What this means is that the break-even point of any company is equal to the fixed costs divided by 1 minus the variable costs divided by the sales. We are going to give you a formula here: Don’t be too concerned if you don’t understand it right away. James Skinner.youpublish. Roice Krueger. In traditional management theory. We are going to call that the BEP. and Mark Victor Hansen.com /ideas The Break-Even Point Every business has two kinds of costs: F (fixed costs) and V (variable costs). 6 . © 2007. All rights reserved.

Say we have a company that has fixed costs of $50. and so on. you find out how many sales you have to make in order to be profitable. Your fixed costs divided by the percentage of profit on each sale equals the break-even point. and equipment leases. and Mark Victor Hansen. they have to spend 20 cents in variable costs. 7 . In other words they have $50 of costs that they incur whether they do anything or not—rent. James Skinner. All rights reserved.youpublish. In other © 2007. Now let’s say that for every dollar the company sells.com /ideas You can look at your financial statements and see what those costs are and what your current level of sales is.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. Let’s do a really simple example. fixed salaries. What this actually means is that if you divide the fixed costs by the percentage of profit on each sale. Roice Krueger.

James Skinner. sales commissions. and so forth that are only paid out if the company actually sells something.youpublish.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. All rights reserved. One (one hundred percent) minus 20 percent gives you 80 percent. they pay 20¢ on material. and Mark Victor Hansen. all we have to do is divide $50 (the amount of fixed costs) by 80% (the profit margin on each sale). so the profit margin on each is 80%. 8 . Therefore.80 To calculate the break-even point.com /ideas words. The break-even point for this company is $62. they have a profit ratio of 80% on each sale made. 1-20¢/$1=0.50 © 2007. Roice Krueger. or to put it another way.50 $50/(1-20¢/1$)=$62. their variable cost ratio is 20 percent.

If you have to have a lot of sales before you start making any money and the economy starts to go down. James Skinner. © 2007. Roice Krueger. what happens? You are not making any money anymore. All rights reserved. and any sales after that will make them money. Any sales less than that will be a big problem. they are going to do quite nicely if they sell more than $62.com /ideas If this company has sales of $62. then they will be profitable and can pay their fixed costs and their variable costs.youpublish.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. That is their break-even point. you want the break-even point to be very low.50. and Mark Victor Hansen. and since the profit ratio is quite high. So what does all this mean in terms of actually doing your business? Improving Your Break-Even Point What this formula tells us is that if you want to have a very good business.50. Then you don’t have to get that many sales before you start making money. 9 .

what is your break-even point? Zero! So that makes it very simple. and Mark Victor Hansen. If you can take your fixed costs and turn them into variable costs. James Skinner. your break-even point will go down. Outsourcing converts fixed costs to variable costs improving your company’s break-even point! © 2007. you can’t lose any money. If you do not have any fixed costs. Now you know why everybody is doing what? Outsourcing. what you need to do is decrease the fixed costs. 10 . Converting fixed costs into variable costs will improve your break-even point! If you have no fixed costs. Roice Krueger. we love companies that don’t have to work very hard to be profitable. you are not losing any money. All rights reserved.youpublish. If you just sit there and don’t do anything.com /ideas As management consultants.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. Would you like a company that does not have to work very hard to be profitable? To achieve that.

You want to stick the formula on your wall and periodically calculate what amount of sales your company needs to generate to stay profitable. Your banker would also like to know your break-even point. All rights reserved.youpublish. Can your sales go down before you drop into the red? If our sales drop 1 percent. 11 . © 2007. whatever it is now becomes a variable cost. and Mark Victor Hansen. as would your shareholders. if your sales go down. are we still profitable? It is good to know that your sales could drop 50 percent and you would still be making a profit. It is important to understand this formula and know your break-even point. I studied this as I was becoming a management consultant. you are still profitable. Therefore. Roice Krueger. which is a fixed cost. 5 percent or even 20 percent. James Skinner.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.com /ideas When you outsource rather than pay somebody in-house to do it.

making them happy. I thought. as I consulted with many companies and taught them how to do this. All rights reserved. 12 . was that everybody was talking about costs and nobody was talking about sales. that is interesting because as an owner of businesses. and Mark Victor Hansen. Roice Krueger. I thought. “What if we not only thought of our costs as being fixed or variable but also started looking at our sales and split them into fixed and variable sales?” © 2007. I am very concerned about satisfying our customers. Then I came up with an idea called variable sales. in other words. and meeting their needs. what I started to realize.youpublish.com /ideas Periodically calculate the break-even point for your company! From Costs to Sales! However. getting them to buy something from us. James Skinner.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. “Hmmm…. SALES!” That is the reason we are here in the first place. What if we started to study sales at the same level we studied costs? I came up with a new idea called fixed sales.

13 . and you want to make sure that you have lots of sales that happen no matter what. Fixed sales are sales that take place whether you do anything or not! Is having automatically generated sales a good thing or a bad thing? It is an extraordinary thing. It comes in like clockwork whether you do anything or not. Every month you have to go out and wear down your shoe leather. and Mark Victor Hansen.youpublish. so can SALES! A fixed sale is a sale that you do not have to put any work into to generate. are the sales that you have to go out and work for. and wear out your ear and your mouth getting somebody to buy. on the other hand. James Skinner.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. © 2007. Roice Krueger. All rights reserved. Variable sales.com /ideas If costs can be both fixed and variable.

All sales are good—fixed or variable. Are variable sales a good thing or a bad thing? They are a good thing! Sales are always a good thing. 14 . CP=FS*(1-VC/TS)-FC CP=Chronic Profitability © 2007. would you rather have fixed sales or variable sales? Fixed sales. You do not want to get that confused look and go back to the company and say that you found that variable sales are a bad thing so we are stopping all our variable sales now. James Skinner.youpublish. Don’t do that! All sales are good.com /ideas Variable sales are sales that you have to work for each time. All rights reserved. and Mark Victor Hansen. of course. But if you had your choice. Roice Krueger. but fixed sales are better! Calculating Chronic Profitability From this simple idea. I developed a formula that calculates Chronic Profitability.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.

and Mark Victor Hansen. and besides. Would that be useful? © 2007.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.youpublish. James Skinner.com /ideas FS=Fixed Sales VC=Variable Costs TS=Total Sales FC=Fixed Costs What this means is Chronic Profitability is equal to your fixed sales times your profit margin on each sale minus your fixed costs. What to Actually Do! Would you like to be chronically profitable? There are only three things that you can do to make it happen. That tells you your level of Chronic Profitability. but it can get complicated and tied up in your brain. You want to study this and get used to calculating your fixed sales and the profit margin on those sales. The formula is nice. 15 . All rights reserved. and then and subtracting your fixed costs. Roice Krueger. you only need to know what to actually do.

you want to start thinking about ways to decrease your fixed costs. It lowers your break-even point and improves your Chronic Profitability. © 2007. Therefore. you’re still going to get the result. Even if you don’t understand the formula. and Mark Victor Hansen.com /ideas If you do or if you don’t get the formula. the margins are there and it is a done deal. I can go on vacation. Roice Krueger. All rights reserved. James Skinner. I know the sales are coming in. you can still get the result you want! Chronic Profitability is something I like to establish immediately in every company I ever own.youpublish. the higher your Chronic Profitability.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. Here are the three things you can do to be chronically profitable: Step 1: Decrease Your Fixed Costs The lower your fixed costs. 16 . Reducing fixed costs is a good thing.

Step 2: Increase the Profit Margin on Each Sale Even if it is a fixed sale.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. In our e-book business. it still has to be a profitable sale. and Mark Victor Hansen. Roice Krueger.com /ideas The whole trend of the economic world today is that fixed costs are dead. © 2007. You want a higher margin on each sale.youpublish. we will always be Chronically Profitable. You have the fixed costs you want to go down and the profit margin you want to go up. Everything else is variable. 17 . This part is not complicated. James Skinner. Having fixed sales that you lose money on does not generate Chronic Profitability. All rights reserved. we have just two fixed costs: the servers and our web master. We know that if we can keep fixed costs low. It generates chronic losses.

youpublish.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.” Now. finally got some sales. I could be a televangelist on this next part. James Skinner. and then you have to go out and do it all over again! That is called suffering. however. © 2007.” The amount you suffer every month at work is equal to your variable sales divided by your total sales—in other words. the proportion of sales that you need to make again every month. Roice Krueger. 18 .com /ideas Step 3: Increase Your Fixed Sales You now know what to do. and you improve your profit margin on each sale. is key. We have created what we call the “suffering ratio. and Mark Victor Hansen. You decrease fixed costs. The next part. All rights reserved. The opposite of suffering is your “ecstasy ratio. Suffering=Variable Sales/Total Sales You worked all last month. your ecstasy ratio is equal to your fixed sales divided by your total sales.

Roice Krueger.youpublish. 19 . All rights reserved. Would that be useful? What you need to know is how to do it in your business right now. How many of you are starting to like this idea? Is this triggering some thinking in your brain about how you may want to change your business? Lots of Ways to Get It Done Now we are going to go through each of the three steps in sequence. you are in business reality. and Mark Victor Hansen.com /ideas Ecstasy=Fixed Sales/Total Sales That means that I already did it so I don’t have to show up anymore. Getting Rid of Fixed Costs The first thing I want to focus on is fixed costs.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. because you are no longer in business school. We are going to give a whole bunch of ideas about ways you can make Chronic Profitability happen in your business. What are some ways that you can get rid of your fixed costs? © 2007. James Skinner.

Roice Krueger. It is not just other people who can be vendors. everyone will be an independent vendor. and Mark Victor Hansen. you can be a vendor.” You think I am joking. “Outsource everything. I want you to write down on paper. We are moving from a dependent paradigm to an independent and interdependent paradigm. In the future. I believe that in the future. So how can you get rid of your fixed costs? What can you do? You can outsource. James Skinner.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. every individual will be his or her own business! © 2007. including yourself. All rights reserved. Now you actually have to think for yourself. How do you outsource yourself? You can become a vendor that provides services to your company on a contract basis instead of being an employee.youpublish.com /ideas You thought I was going to teach you. 20 .

which says. The reason is that companies can no longer be the parent. Roice Krueger. and Mark Victor Hansen. The fact is technology is advancing so rapidly that entire industries now become irrelevant and companies can no longer guarantee they will be able to take care of you forever. but you must do what I say. but I don’t know what is © 2007. We are moving away from a masters-and-servants paradigm. Industry says. because of global competition. James Skinner.youpublish. All rights reserved. “You know we can work together while it is profitable to do so.com /ideas The dependent paradigm is the paradigm of parent and child. Is that shocking? That is what it is called. “I will take care of you. 21 .” This is the traditional paradigm of the employee/employer relationship. Do you know what they call the employee/employer relationship in the law? The law of masters and servants.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.

and the child must become independent.youpublish. We could be in the business of making whips and buggies. All rights reserved.com /ideas going to happen three years from now.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. We are moving to a different paradigm. 22 .” So we are all outsourced. So now we need to be independent. © 2007. I really don’t. James Skinner. which is called interdependency. This is a powerful phenomenon happening throughout the world. The company is required to outsource. and somebody could invent an automobile. If the company is the parent and the parent is becoming less stable. and Mark Victor Hansen. because now we are all outsourced! Let me put this to you in just a little different way and build on it. then the child cannot depend on the parent. so the child must quickly become independent. But we can work together. and in this case I can’t take care of you. You need to be independent. meaning that they can provide for themselves. We can work together while it is profitable for us to do so. Roice Krueger. You need to be able to take care of yourself. We could become completely irrelevant.

But I am not going to make a moral judgment on it overall. Roice Krueger. We all must become economic adults! Now what other ways can you reduce your fixed costs? Outsourcing is not the only way. 23 . I understand that there are many social issues involved. Personally. James Skinner. I believe that it is a good thing because it causes us human beings to grow instead of forcing other people into dependency. The social contract has shifted. very quickly now.youpublish. © 2007. We must become economical adults who are able to be responsible and work together in a responsible manner. for better or worse.” I am good with that.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. and Mark Victor Hansen. I am merely describing the world as we work and live in it.com /ideas Yes. All rights reserved. I happen to like the paradigm that says “I have to earn my keep. we all must become adults very.

says that when he goes to visit a company and it is in very flash offices.com /ideas Think hard. You can reduce your rent. You are in the business of making you and your shareholders and your employees wealthy. downgrade your offices. one of the greatest stock investors of all time. You know. he runs for the door. You are not in the business of making your landlord wealthy. James Skinner.youpublish. All rights reserved. They have got to work really hard just to pay the rent. Why? Because they are not going to be chronically what? Profitable. Eeeewww! you might say. © 2007. and Mark Victor Hansen.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. 24 . Roice Krueger. Peter Lynch.

You can pretend that it is variable. everybody thinks leasing is a V. All rights reserved. I told them that every time they wanted to make a copy. and Mark Victor Hansen. Every time that they wanted to make a copy. they had to put a coin in the slot. Now that is a variable cost. Roice Krueger. they had to go to 7-Eleven. That is called driving fixed cost all the way out. 25 .Ideas That Can Change Your Life ™ in Business Chronic Profitability www. but it is actually an F. When I set up my last company in Japan. but guess what? It has to be paid every month. Seriously.com /ideas That is another way to decrease fixed cost. Does that make sense? Use equipment that is used only on a when-needed basis: That is variable cost.youpublish. How else can you do it? Lease instead of buy? Nice try. James Skinner. I would not let the employees purchase or lease a copy machine. © 2007. so it is a fixed cost. Guess what? They didn’t make very many copies. See. You are tied to that contract.

You need to have many ways to do it. but then the bonus pool depends on the profits. Which fixed costs? Salaries. Roice Krueger. 26 . and Mark Victor Hansen. James Skinner. yes or no? Yes.com /ideas How else can you get rid of your fixed costs? You can downsize and get rid of all your fixed costs entirely. So unless you are profitable. Or you can give them a commission or a percentage of profits. Would that increase your Chronic Profitability. All rights reserved. You can create a larger bonus pool and a lesser salary. you don’t have to pay them.youpublish. Drive fixed costs all the way out! Improving Your Margin Now let’s look at improving your profit margin. So what is a way you can take a fixed salary cost and turn it into a variable cost? You can pay your people in stock options—which are only going to be valuable if your people make you a bunch of money. There are many ways to do this.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. What are some of the ones you can think of? © 2007.

27 . Bill Guthy. that’s what you paid.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. because there was a higher perceived value. and Mark Victor Hansen. If you want Personal Power®. Here is an example: In 1984 Tony Robbins put together his Personal Power® infomercial with my first client. It is really interesting. They sold more at $179. Aren’t these the questions you need to be asking yourself every day? © 2007. Bill tested the price point at $89.youpublish. and $179. You increase the price and more people want to buy. There are some products that will sell better when the price is raised. $129. Roice Krueger. You want to find your ideal price point that gives you the maximum margin you can get. I am concerned. What else can you do to improve the margins? If you don’t know.com /ideas Increase the prices. Does it actually work? It does. It is important that you check the price by what the client thinks the value is. today the product sells millions of copies a year worldwide. James Skinner. That is a really terrific one. All rights reserved.

He went in and said. If the CEO wouldn’t come. James Skinner. He said that otherwise it was a complete waste of because they needed to change the whole management paradigm. Now.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. “I am going to tell you the big secret. You need to understand this: Higher quality costs less! Higher quality costs less! This is the one single paradigm shift that Deming taught the Japanese that created the entire postwar economical miracle.” They said. All rights reserved. Now I want you to understand that improving the quality is very profound. 28 . “What is that?” He said. Deming wouldn’t do any seminar that didn’t have 500 CEOs in the room. Roice Krueger. and Mark Victor Hansen.youpublish.” They all fell out of their chairs. because improving quality does what to costs? It reduces the costs. © 2007. he wouldn’t let anybody in the company come.com /ideas One way to improve margins is to improve the quality. “The big secret is higher quality costs less.

you don’t have to process the claims. and Mark Victor Hansen. All rights reserved. It actually drives the cost down. Devilishly expensive. Number three. 29 . number one. what that does that do to the cost? The cost goes down. And when the cost goes down. if it is higher quality.youpublish. but you do it while driving the cost down. And when they raise the quality. no rework. lower marketing cost. And less waste—because when you start to drive quality into a process. you waste fewer materials. since we are doing a formula-based discussion here. what happens to the profitability? It goes up. Claim processing is devilishly expensive and time consuming. you start to get word of mouth and you start to drive the marketing cost outside the organization instead of inside. Not only does it bring the price point up. Roice Krueger. And when the © 2007. Does that make sense? So the formula for success. Because. less marketing costs. This is what the very best companies do. Lower selling cost.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. is very interesting. James Skinner. less rework. Number two. They take the quality and raise it up.com /ideas He said higher quality costs less because.

I © 2007. which increases the profit margin. what does the company do with the profitability? The first thing they do is invest in higher quality. And the third thing they do is reward their employees. which allows them to give a lower price.youpublish. They drive the quality up.Ideas That Can Change Your Life ™ in Business Chronic Profitability www.com /ideas profitability goes up. and Mark Victor Hansen. out of the increased profitability. All rights reserved. and all the other stakeholders in their business with a larger dividend. Can anybody say TOYOTA? This is how they do it. Start doing this for a couple of years and nobody will be able to catch up. Roice Krueger. and a bigger shareholders’ dividend. even-higher quality. The second thing they do is give the customer a lower price. 30 . Quality↑=Cost↓=Profit↑ Profit↑=Quality↑+ Price↓+ Profit↑ How else can you improve the margins? You can negotiate better terms of business with your suppliers. their shareholders. James Skinner. which drives the cost down.

James Skinner. getting a better delivery schedule can allow you to drive down your inventory. although part of it is price. It is a non-value-added process. I followed the forklifts around for two days. Roice Krueger. delivery.youpublish. and service. One of the first factories I went to was an automotive parts factory. which did not add value. 31 . In the value equation. and Mark Victor Hansen.com /ideas am not only talking about price. Not to mention the fact that they drove forklifts all over the factory. We created a whole new layout for the factory and got rid of most of the forklifts just by following them around and finding out how things really needed to © 2007. All rights reserved. you can improve your operational efficiency.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. or QSDC. Does that drive any cost into your business? Yes. Also. So. cost. This factory was having one forklift accident a week. I started out as an industrial engineer. which will improve your margin and return on capital. you have four elements: quality.

Roice Krueger. Decrease waste in time. The factory radically improved its operating efficiency. James Skinner. All rights reserved. Let’s talk about some different ways you can create fixed sales in your organization. 32 . Remember that fixed © 2007. and now we want to increase the fixed sales. There are all sorts of things you can do to increase the operating efficiency. materials. Here’s another example.com /ideas move through the factory. Another thing you can do is decrease waste of all kinds.youpublish. Creating Fixed Sales Now for the big one (a little drum roll please): We have decreased the fixed cost. and Mark Victor Hansen. We have improved the margin.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. Say an employee is doing one process that is taking 20 seconds. What you do is get two people doing the process that takes 40 seconds and you get twice the output by increasing the manpower by only a third. All these things will improve your margin. The guy next to him is doing a process that takes 40 seconds. and energy.

How do you get fixed sales? Contracts. Without the fixed sales. It then becomes a fixed sale. You can have ongoing purchase order agreements that they are going to purchase $X amount from you every month. 33 . © 2007. We knew they were going to come in every year. Roice Krueger. they had to go through our training. you are not going to have the Chronic Profitability that you desire. we built training programs that were integrated into organizations as part of their systems. That is a fixed sale. and Mark Victor Hansen. Is that good or is that good? That is good. Now we are at the crux of the equation. All rights reserved.youpublish. those guys are going up the ladder and we are getting the order. it doesn’t matter what you multiply or subtract at the end. When it gets to be promotion time. James Skinner.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. Whenever a manager was promoted. Using our training company as an example.com /ideas sales lead to Chronic Profitability—making money all the time no matter what.

Word of mouth is better than having to do it myself. Yes! Yes! Yes! Subscriptions. and I know what is coming in.youpublish. James Skinner. Roice Krueger. I like word of mouth. Memberships. All rights reserved. and you know that they have to purchase. Word of mouth is not a fixed sale because you don’t know if it is going to happen or not. It is nice.com /ideas You want to start looking into ongoing purchase agreements or how to get yourself systematized so your products and services are part of the system of your client. and Mark Victor Hansen. What other kinds of things are fixed sales? Exclusivity. What else? Word of mouth? Word of mouth is not a fixed sale. Do you know that if everybody who has © 2007.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. nice try. but it is not fixed. You have an agreement that they purchase exclusively from you. I want something that I can put a number on. 34 . Subscriptions.

and they don’t have to sell you anymore. you have ordered an “auto-ship. It is a fixed sale. we charge your credit card. Everybody say “Auto-ship. Roice Krueger. the club would be toast? But they get those memberships.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. All rights reserved. $100 a month out of the bank account whether you go to the sports club or not. James Skinner. and they take money out of the bank account every month. They get $80.” How else can you get a fixed sale? Joint ventures? Partnerships? What kind? I have had a lot of © 2007. depending on the periodicity of the product. What else? How about multilevel marketing? Only certain parts of multilevel marketing become fixed sales.” It comes. That stuff just keeps coming.com /ideas a membership at your sports club actually showed up. and Mark Victor Hansen. 35 .youpublish. We do not need a new order from you. I am going to give you the operative word that can be used in multilevel marketing: “auto-ship.” “Auto-ship” means that we are going to ship this product to you every single week or every single month.

All rights reserved.” We didn’t have sales costs because we didn’t have out looking for licensees.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. 36 . develop it. “We would like to represent your product in our country. If you are not getting that same ratio. Licensees and franchises. In our case we would create a training program and nurture it. I used to manage a franchise business and for every dollar that we brought in. our fixed cost was six cents. you need to hire Roice as a consultant. This is what you really need to know. and Mark Victor Hansen. and make it grow in the United States. You ought to be looking at 40 percent coming in.” Let me give you the profit margins on franchises. You like the margin? So franchising and licensing is an awesome business. Everybody say “yes. Now sometimes you are not going to get that same ratio. We did have some © 2007. But you can get your margin to at least 40 percent. because people would call up and say. We created a profitable model and would just wait for the telephone to ring. Roice Krueger. James Skinner. Yes.com /ideas partnerships that did not generate me any fixed revenue.youpublish.

Ideas That Can Change Your Life ™ in Business Chronic Profitability www. “Not only do I want that income for the time that I am working with you. I decided to completely outsource myself from them. but when I retire I would like to have it five years in the future. But what we would do in our case was outsource. which could also be a variable cost. Then what we would have is an accounting cost and we would have a service cost of the individual on telephone and so forth. In your company you might have a product that you would ship out. and Mark Victor Hansen. Roice Krueger. Got it? Then I just developed an income stream. so the companies could actually produce the materials in their country. In one organization. why don’t you just pay me a percentage of that profit?” So I licensed to the company to license for them. 37 . which I guess is a variable cost in this case because you do that each time. You could work on that type of margin. and they simply sent us a royalty check.youpublish. They didn’t have to buy them from us. James Skinner. I said. “Look. I said. So you would have a one-time variable cost.com /ideas legal cost involved. I have such a profitable model.” © 2007. All rights reserved.

Diamond Pet Foods came to us. I get 7.5 percent.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. but we get 15 percent off the top on the $2 million sales a month this company makes.5 percent. This is a pure-profit business. Think licensing.youpublish.com /ideas And they bought the deal. Got it? This is a powerful concept. It is what I call the multiplier effect. I could retire just on that. For example. In Chicken Soup for the Soul—we became inundated with people who wanted to license with us because our name is a brand. Roice Krueger. It is how to multiply your organization and what you are doing. We just gave you another $1 million in value from these ideas! © 2007. This is why I said your title is everything in a book or a product or a subject. That is $300. and Mark Victor Hansen. James Skinner.000. I do not make the pet food or anything. 38 . All rights reserved. Jack gets half: 7.

Then there’s George Lucas and Steven Spielberg Lucas said to Spielberg.T. You need to work on it and find lots of ways to do it. Summary: All You Need to Know So that is basically all you need to know. Licensing is a young business.” Look what happened. You have to lower your fixed costs. All rights reserved. © 2007. He started licensing the Disney characters and images. You want to have lots of ways to reduce your fixed costs. 39 . The first guy in licensing was Walt Disney. And you will be chronically profitable. You can generate all kinds of fixed sales. You have to increase your fixed sales. You have to improve your margins.com /ideas There are many levels of licensing.5 billion on licensing.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. interest. annuities. Bottom line: You have rentals. “We ought to be licensing all that stuff you are doing with E. Roice Krueger. In Spielberg’s book he says he made $800 million on E. James Skinner. and Mark Victor Hansen.youpublish. and trail fees on introductions. and $1.T.

and lots of ways to generate fixed sales that come in every day.com/ideas To contact the authors for a speaking engagement: speaker@youpublish. every month. 40 .com /ideas lots of ways to improve your margins. and every year. Roice Krueger.youpublish. every week.Ideas That Can Change Your Life ™ in Business Chronic Profitability www. All rights reserved. James Skinner. Mark Victor Hansen ___________________________________________ For more ideas on business or to send this book to members of your team: www. Roice Krueger.com ___________________________________________ © 2007.youpublish. James Skinner. Because you want to have lots of Chronic Profitability to minimize your suffering and maximize your ecstasy! With best wishes. and Mark Victor Hansen.

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