The EQ Journal Blog

Earlier this season, the Ottawa Senators were having some trouble filling their building after years of sell-outs and near sellouts. The causes? Well, the performance of the team (missing the playoffs the previous season and being swept in the first round the year before by the Pens) is obviously a factor. The downturn in the national economy and US economy as well as relentless bad news on CNN also had an effect even though the Ottawa economy itself is isolated in part by the large presence of the national government here. Another factor influencing attendance is the on-going issue of civil servants not being able to accept complimentary tickets—the concern is that they might be unduly influenced by such largesse.

As a result, the Ottawa market (of 1.2 million people in Ottawa-Gatineau and 1.7 million within 60 minutes drive time of Scotiabank Place) is actually quite a bit smaller than the numbers would suggest because you can deduct more than 100,000 people employed in government.

Having said all this, only one team can win the Stanley Cup each year and if Ottawa were to win it on a pro rata basis, the team would only be a winner once every 30 years. Meanwhile, you still have to fill your building.

How do you do that? Negative cost selling can help.

Most pro teams sell their tickets on the basis of it being some type of beauty contest. “Look at our great players!” “How about our beautiful building!” “Did you know you can escape our parking lot in just 25 minutes!” “What a great logo we have and our merchandise, my, my!”
Or they try to guilt or bully you into buying a ticket: “If you don’t buy a ticket, the team will move!” “What kind of a person are you, don’t you have any civic pride?”

But remember, negative cost selling is about understanding your clients business almost as well as they do. Actually, what you want is to understand that plus your clients’ clients’ business almost as well as they do. And you want to be able to put all of that down in black and white, preferably in a spreadsheet that proves you can make money for your clients (by increasing their revenues or reducing their costs or doing both such that higher revenues and lower costs more than offset the cost of buying your product, in this case, tickets, sponsorship, suites or signage…)

I did a sketch (see below) of some examples of negative cost selling that the Sens (or any pro team) could use.

Let’s say Jay is a salesperson for the Sens and he is going to drop in on the woman (Dilys) who sourced the mortgage for the home he bought last year. This is a warm call—he already has a business relationship with Dilys and her firm. In fact, this will be a form of reverse selling—why shouldn’t the people you buy from, buy from you?

The answer is NOT that they should buy from you because they sold to you; the correct answer is that they should buy from you because you have a compelling value proposition and you can demonstrate it. The fact that you already have a relationship with them is a plus as is the fact that you know and have learned a great deal about their business (and their clients too). These factors help you get in the door but they don’t close the deal for you—negative cost selling does that.

I show what a negative cost selling approach looks like below and I also provide a link so you can download the spreadsheet. Based on this analysis, Jay, would be able to say to Dilys:

a. “I want you to think about investing in Sens tickets this year and next and making it an integral part of your marketing program.
b. Every homeowner that sources a mortgage through you, is going to get a pair of tickets to a Sens game!
c. The cost to you for two tickets to every regular season home game will be $55 less a 15% discount since you are making a 2-year commitment. [Note: Jay really wants at least a 2-year commitment. He knows that if he only gets a 1-year term on this deal, he’ll forever be doomed to the role of a baseball player—he will have to hit 40 homeruns each season and be subject to the ‘what have you done for me lately’ syndrome from the team. Instead, getting 2-year commitment from his clients (or longer if he can) means that Jay can really build a sustainable business for the long term. And like all good salespeople, he thinks of his sales efforts as his own business since he is earning a commission on top of his salary. He views the team as one of his suppliers!]
d. You are currently spending about $2,945 per year on marketing—if you divert 40% of that to the Sens, your marketing budget is going to increase by about $2,655 but here’s the good news. If you get just two more clients per year, you’ll break even and most of my other clients in this industry are finding that they are generating five or more clients per annum.
e. That means for an extra investment of $2,655 in each of the next two years, you’ll make an additional $6,695 per year or a total of $13,385.
f. Your net cash gain will be nearly $8,075 over that period. This represents a ROI of 152% per annum—a lot better than what you get from your Bank these days on your GICs (about 3.15% p.a.), wouldn’t you agree?
g. I guess what I am basically saying is that your cost to buy your Sens tickets is a negative $8,076.70. I am essentially paying you to buy the tickets from me… [As a student of mine once said: “I’ll pay you to hire me” when he used the negative cost selling technique on a future employer.]
h. In fact, I prepared a spreadsheet for you to go over with me. Notice that I took the Brokerage’s share of your commissions out before I calculated your rate or return. [This shows that Jay really gets his clients’ businesses.]
i. Hey, that reminds me: isn’t it true that if you do more than $10 million a year in mortgage biz, you’ll get a volume bonus from Mortgage Alliance? Well then, it looks like the investment in Sens tickets is just the ticket, so to speak—you’re at $9 million right now and the spreadsheet shows you at $10.125 million at the end of the year so your actual ROI will be even higher and the cost will be even more negative after you nab one of those year-end bonuses. How about that.
j. You just have to initial here, here and here, sign and date there.
k. Thanks. See you soon.
l. Oh, by the way, can I call you at the end of the season for a testimonial for my personal website?”

Sens and Mortgage Broker: Negative Cost Selling

Sens Tickets 41 regular season home games
Number of Tickets per Game 2
Total Number of Tickets 82
Cost per Ticket $55 posted prices
Discount for two year commitment 15%
Actual Cost per Ticket $ 46.75
Annual Cost $ 3,833.50

Typical Mortgage $225,000
Typical Fee $1,912.50 0.85%
Mortgage Agent Share $1,338.75 70%
Number of Mortgage per Annum 40 $9,000,000
Mortgage Agent Revenues $53,550.00 per annum
Mortgage Agent Current Marketing Budget $2,945.25 6%
Percent of Current Marketing Budget Diverted to Sens ($1,178.10) 40.00%
New Marketing Budget including Sens $5,600.65
Increase in Marketing Costs $2,655.40
Number of New Mortgages Needed to Breakeven 1.98
Number of Actual New Mortgages Written 5 $10,125,000
Increased Revenues due to Investment in Sens -ve Cost Marketing Program $6,693.75

ROI on Marginal Increase in Marketing Costs due to Investment in Sens (IRR) 152% per annum

Cashflow Profile

0 ($2,655.40)
1 $4,038.35
2 $6,693.75 $13,387.50
Cash Gain over Period $8,076.70

Note: this example is for demonstration and learning purposes only.

[You can download this as a spreadsheet from our server in .xls format: http://www.eqjournalblog.com/SensMortgageBrokerNegativeCostSelling.xls]

There’s no reason why Jay can’t extend this analysis to all of his clients. In fact, because he understands business modeling, he can take it one step further (we call this 2-D or 3-D biz modeling).

Say, Jay drops in on a restaurant owner. Her name is Shelly. Shelly has told him that the two weeks preceding Fathers’ Day have become more important over the years, coming closer in volume to Mother’s Day bookings but she would like to find a way to drive that volume higher. Jay knows that most of Shelly’s clients during that time are women calling and making reservations. Who are Shelly’s clients’ clients? During that period, they are, of course, men. What do men want? Well, a lot of men like pro sports. So Jay sells Shelly some Sens tickets that she can bundle with restaurant meals. If she breaks even on the Sens tickets but drives her restaurant’s utilization rate higher, it would be a pretty simple job for Jay to show Shelly how the purchase of these tickets was a negative cost.

You can extrapolate from these examples for florists, Banks, auto dealerships, spas, REALTORS, Accountants,… Once you understand the concept, the rest is just ‘making license plates’ (to borrow a phrase from Neal Stephenson’s Cryptonomicon.)

I did another sketch below on how this approach might work for REALTORS and Accountants (actually tax preparers). In the latter case, Jay would want to give his client (the tax preparer) something that would appeal to his clients—the answer again, Sens tickets! Now Jay’s clients’ clients’ client is CRA (Canada Revenue Agency) so he should stop at 2-D. CRA auditors won’t want (and obviously can’t accept) Sens tickets! But you get the picture—look at least 2-dimensions deep and sometimes 3 or more will be appropriate and useful and new ideas and ways of using negative cost selling will occur to you.

The Ultimate Negative Cost: Free

In the summer of 2003, Rob Hall, a brilliant Internet guy and owner of Momentous.ca (Internic.ca, Zip.ca, etc.) came to see me with a new business model. He wanted to enter the domain name backorder business which at that time was dominated by Snap Names. Rob had this idea of giving the product away for free and I had heard a lot of pitches for giving things away for free on the Internet many of which had come to grief so I wasn’t too keen at first.

But Rob hit another home run with Pool.com. He launched it later that summer and it was a runaway success. Here’s why Pool.com was a “heads Rob wins, tails Rob wins”, revolutionary business model:

1. SnapNames.com was the recognized leader in backordering deleting domain names. So say you owned the domain name MyGreatCompany.ca or .de or .uk or .ne or .com.au, and you wanted the dot-COM TLD (Top Level Domain) equivalent but someone else had it.

2. With Snap Names, clients had to pay $60 USD per year for each domain name they wanted to backorder and if the name you want was deleted by the dot-COM domain name registry (Verisign), then they would try to get it for you (but there are no guarantees).

3. So along comes Pool.com.

4. Now you can register any domain name that you want to back order for free with Pool.com. Hundreds of thousands promptly do. You only pay if Pool.com is successful at getting your backordered domain name.

5. More than 20,000 dot-COM names are deleted each day. (There are about 80 million dot-COM domain names registered as of Q1 2009 (Source: Versign Domain Name Industry Brief). Pool.com is bound to have many names on its list that drop every day.

6. If there is more than one client that has backordered the same domain name, then here is what they do:

“You pay only when we successfully secure a domain for you. We charge a low US$60 fee which includes a 1 year domain registration. In the case of a domain backordered by multiple users, a short auction will take place and the winning bid replaces our standard fee.” Pool.com, December 2003.

7. They are currently doing over 3,000 deleted names a day (at $60+ USD each), 7 days a week. Note that almost 60% of backordered names are wanted by more than one client so mini-auctions are happening all the time, with an average price exceeding $200 USD, so do the math. This became a significant business from nothing in just a few months. Gross margins are in excess of 80%.

8. The $60 USD also includes a one year registration so they are automatically locked in to their domain name registrars and Rob can sell them many other things like email, hosting, etc.

9. Having millions of domain names backordered through Pool.com gives Pool.com a chance to sell them other things even if their backordered domains never come up.

10. Rob has developed a good algorithm for attacking registry sites with multiple channels (as of November 2005, he had over 120 registrar channels to the registry) so his success rate at getting deleted names was more than 60%. (Snap Names at that time was less than 50 %.) Pool.com’s goal is 80 % with maybe 70+ % actually do-able.

11. Many IP lawyers, domain name speculators and sophisticated Internet users moved over to Pool.com in just a few months.

12. This business went through an intense geometric growth period.

So basically if you are an Intellectual Property law firm that had backordered 40 domains with Snap Names at $60 each, Rob’s company can come to you and say for a -$2,400.00, you can back order the next 40 domains with us. Now that is a compelling sales proposition.

Pool.com Negative Cost Selling

Domains Backordered with Snap Names 40
Cost of Backorder with Snap Names $2,400 $60 per backorder
Cost to Backorder with Pool.com $0
Negative Cost of Backorder with Pool.com ($2,400)

Conclusion

Negative cost selling is a technique that finds many applications. Whether you are a former student of mine telling a would-be employer: “I’ll pay you to hire me” or a top-flight HR recruiter showing a CEO how by paying your firm $30,000, they can save and make an additional $390,000, you’ll be much further ahead if you master this technique in many ways.

You and your firm will make more money, not only by selling more but by selling more to each client (the average order size will increase) and your batting average will rise too. That is, you will close a higher percentage of the pitches you make. If you are closing 2 out of every 10 potential clients and you can move that up to 3 or 4, think what that will do to your income and how it will change your place in your company.

I use these techniques and I have been able to improve my closing rate to 7 or 8 out of 10. No one closes every deal but I try.

It also takes a lot of the fear out of selling—you go into each meeting knowing almost as much about your clients’ businesses and their clients as they do. This gives you confidence and confidence is the sine qua non of moving your closing rate upwards. But it isn’t artificial confidence—it’s real, the best kind and its authenticity will shine through—your clients will pick up on it just as they can pick up on the reverse.

Humans are incredibly good at picking up signals that say ‘this person is lying to me.’

Why don’t more people do this?

Some don’t know about it or don’t know how to do it but I find a lot of salespeople are just plain lazy. They figure the beauty contest approach is easy and simpler and will work often enough that they don’t have to put themselves out to learn much if anything about their clients’ business ecosystems. This is not sustainable—in a tough, competitive world, a negative cost selling master will eat their lunch.

If you can’t sell, you can’t be a CEO, Entrepreneur, Founder or a Self Actualizing Human Being. If you can’t sell your ideas, your suppliers, your clients, your bosses, your colleagues, your Bank, your Board of Directors, your Faculty, your sponsors, your patrons, then you can’t be a researcher, a supply chain manager, a sales executive, an upwardly mobile hot-shot product manager, a middle manager, a CFO, a CEO, a Dean, an Executive Director of a Charity or Not-For-Profit or an Architect or Artist. That’s a lot of ‘can’ts’.

If you don’t believe me just think about this for a minute. You are a Product Manager at Cisco. You wake up at 3 am with a super idea and you write a few notes so you won’t forget your brainstorm. The next day you go in to see your boss and tell her: “I have this great idea for a new product or service… It’ll take two years of R&D at a cost of $10 million but the potential market is huge.”

Your boss says: “That’s really interesting. Build a business model, do a biz plan, work up some revenue numbers, get some market research done and then come back and see me. If I still like it, I will take to the Director. If he likes, we can take it to the Vice President and if it passes that test, we get to take it to the CTO. After that, we still have to tackle our CEO and BOD.”

Your shoulders hunched, you walk away thinking this is going to take a long time before you get the green light.

Meanwhile, one of your peers has also approached your boss. She said: “I have this great idea for a new product or service… It’ll take two years of R&D at a cost of $10 million but I got four strategic partners to each pitch in $2.5 million and they are willing to be our launch clients too and take the first 18 months of production plus the potential market is huge.”

She is using the negative cost selling model on her boss and she is an intrapreneur. She has the full skill set* of an entrepreneur but she is applying them within a large established organization.

(* Do you want an employee who has the skill set of an entrepreneur? Do you want someone who can: take initiative, doesn’t need a lot of direction, is innovative, can do everything in parallel, will find launch clients, knows how to build cashflow, understands the value of a client and customer, will use bootstrap capital, can sell/sell/sell, knows how to use guerrilla marketing and social marketing to build the brand and capture market share at a reasonable cost, is not afraid to try new things, understands negative cost selling, knows how to build a sustainable business model with a lot of ‘pixie dust’ in it, can set goals and achieve them, is dynamic and has high energy, can create a business plan and be ready to change it when the market moves in sudden and unexpected directions?)

Now whose project is more likely to get the go ahead, which project is going to launch first and which person is going to be promoted first?

There is nothing more rewarding in your professional life than working on a project you had a hand in initiating and creating. To be there at the first glimmer of an idea, to help it grow and develop, to see it launched into the world, to see it successful and meeting real needs and helping people to achieve their goals—that’s what I mean by being a self-actualized human being. And a self-actualized person is a highly-motivated, serene, confident person who is terrific to have around.

I have hung out with NHL coaches and they are all, to a man, self-actualized people. They make everyone around them feel special; they make everyone around them feel like they are part of something bigger than themselves. They make everyone around them better at what they do. They put round pegs in round holes and square pegs in square holes and they tell you it’s OK if you are a square peg—they have a place and role for you.

That is the essence of leadership and it is an ingredient missing in many working lives. Here is hoping that you will have people like this in your life and that you will be one of those people too.

Prof Bruce