By Michael Masterson
Bonn, Germany. Dead of winter, 1996. The meeting began at 8:00 a.m.
We were there to observe how our German partners ran their publishing business. It was impressive, with more than $100 million in revenues and growing fast.
We were growing just as quickly in the States, but their profit margin was higher - almost 10 percentage points greater than ours. Bill (the founder and CEO of Agora) and I were there for two reasons: to give them some insight into our method of doing business, and to study what they did so we could figure out how to beef up our bottom line.
Knowing how punctual the Germans are, we arrived at 7:55. Herr G and his key people were already seated in the conference room. They offered us coffee and pastries - and five minutes later, just as the clock struck eight, their first profit center manager stepped in the door.
"Have a seat," Herr G said to him, pointing at a chair at the far end of the long table. "We will begin with item one in section one of page one." We opened our reports to the first page.
"I see that your department's gross revenues were ____ from January to April and then ___ from May to August and then ____ from September to December," Herr G said to the nervous executive. "Can you please explain the trend?'
Herr G and his associates questioned the manager's explanation in detail. When they were finally satisfied, Herr G said, "I would now like to draw your attention to item two on page one..." and he proceeded to ask a series of questions about that one.
We were impressed by the Germans' thoroughness. They asked so many good questions. But what floored us was their tenacity. They continued in this excruciatingly, exacting manner all morning and afternoon and well into the evening. By the time we were done, all the line items in the report had been thoroughly investigated. There were 999 of them!
This was not the way Bill and I interacted with Agora's publishers in the States. We looked at numbers and asked questions, but never covered more than a dozen items. The entire process lasted less than three hours.
This meeting with our German partners went on for three days. When we left, we talked about how many metrics they examined. Perhaps that was the reason for their success.
For a few years, we tried to apply their method to our own business. But we discovered that the culture that existed in our business wouldn't allow for the same kind of detail. We wondered if we could still make progress with our less microscopic way of analyzing revenues.
In fact, we eventually became larger and more profitable than we ever imagined we could. And we did it by decreasing, not increasing, the number of metrics we focused on.
If you've read my books or have been reading this journal for a while, you are familiar with my Rule of One. Simply stated, it says that you will accomplish much more by focusing on a single goal, objective, or task than by trying to do many things at once.
Today, I want to expand that to a second rule, which I call the Rule of Three. This one states that when leading a business that has numerous objectives, strategies, concepts, and goals, you should reduce them to three.
Let me show you how this works.
At Agora and ETR, the three most important numbers are (1) how many new customers we bring in each month, (2) how much we pay to acquire them, and (3) their lifetime value.
By giving top priority to these three numbers (as opposed to the 999 numbers the Germans look at), we can always be sure that we are building a business that is financially healthy.
As publishers of ETR's two divisions (wealth and health), Jason Holland and Maria Dolgova devote a considerable amount of their planning and management time to making sure we meet our goals in these three key areas. This concentration makes it easier for them to establish priorities and apply pressure where it is needed. They don't waste time dealing with secondary issues - issues that can be delegated to someone else.
When Jason and Maria meet with their managers, they give each of them three - and only three - metrics to focus on. Jason's marketing manager, for example, is charged with (1) the number of advertising offers sent out, (2) the average response rate of those offers, and (3) gross profits (dollars collected after refunds). Maria's editorial director is responsible for (1) the number of positive testimonials ETR gets from its customers, (2) the number of refunds requested, and (3) the average sales that are triggered by editorial advertisements.
In total, ETR's senior executives might be looking at 36 to 42 metrics. But each manager focuses on only three.
The Rule of Three gives us the best of both worlds: breadth and depth. The breadth, at 36 to 42 metrics, isn't nearly as extensive as the Germans', but it is enough given the size and culture of ETR. The depth comes from requiring each key employee to focus on no more than three objectives. I am convinced that this is the maximum number any one person can really pay attention to in a fast-moving, complicated business like ours.
By establishing this ladder of threes, your top people can cover all the important metrics with diligence and thoroughness. You get more from trying to do less. Much more, and with much less stress.
If you are the CEO of a business, ask yourself, "What are the three most important jobs my business must do?" Figure out how you can measure the success you are having in accomplishing those jobs. Then bring in your top people and let them know that from now on you will be looking at those numbers every month. Establish monthly and yearly goals for each number and let them know it is their responsibility, not yours, to meet those goals.
Then explain the Rule of Three to them. Let them know that you expect each of them to assign three objectives to their lieutenants. Tell them to have their key people pass the system down the line.
Do this today and by this time next year your business will be substantially larger and more profitable. Guaranteed!
Note: If you are a solo entrepreneur, you may be wondering which metrics you should pay attention to. That depends on the particular business you are in, but stick with the rule and keep it to three. With a start-up business, your first priority is always finding the optimal selling strategy. The optimal selling strategy is a combination of copy, media, and offer. Your job is to figure out - before you run out of money or patience - which particular advertising message works for you at what price and where. To do this effectively, you have to test all sorts of variables. But the three most important are copy, media, and offer.