Andrew Carnegie's secret to a profitable business

Summary

Andrew Carnegie ran the most profitable steel company on earth by knowing the cost of every single step in his production process, every day. not at year-end. every day. that’s the whole secret. modern businesses still don’t do this.

1. map the customer journey end to end. ad to click to lead to first call to first dollar to second dollar to renewal. write every stage down.

2. put a number on every step. cost per lead, cost per close, hours per fulfillment, your time at a real hourly rate. nothing gets to stay unmeasured.

3. find the leaks. one stage is always 2-5x more expensive than it should be. that’s where the profit lives. fix that one stage and you don’t need to cut other costs or raise prices.

most owners try to “be more profitable” by hand-waving. tighten the belt. work harder. that’s not it. measure each step, find the leak, fix the leak. boring, repeatable, ruthless. try harder.

Transcript

introduction to the importance of knowing your business’s profitability

The most impactful business is the business that genuinely improves another human, a better human business. And to grow a business like this, you have to continually improve yourself. This podcast is a documentation of that thesis, scaling businesses and also personal growth. My goal is for you to shortcut this journey.

So if you’re ready to try hard, subscribe. If you like what you’re hearing, please share and enjoy. How do you run a profitable business? Let’s talk about it. This is the Better Human Business Podcast. I’m Jerred Moon, and I am currently reading the autobiography of Andrew Carnegie. I’ve also read his biography, and let me go ahead and save you the time.

insights from andrew carnegie’s autobiography on running a profitable business

If you’re looking for some books to pick up, don’t pick up his biography. I don’t think the biographer did a very good job highlighting the important parts of Andrew Carnegie’s life or mindset or business acumen, and instead focused on a lot of boring details and facts that were not very helpful. But as you know, an autobiography was written by the person.

So Andrew Carnegie wrote his own autobiography, and it’s really good because he sprinkles in the lessons that a biographer misses. And that’s what I’m looking for when I read some of these books, but not every titan of business out there reads or writes an autobiography. But the book is really good.

discussion on old business practices and the evolution of profit tracking

I’m not done with it yet. I stumbled across this chapter where he’s talking about ironworks, so developing iron for bridges and rail and all this kind of stuff. And it’s very interesting in the book because he talks about how business was done back in the day. He described it as a mole digging in the dark where people would just run their businesses and at the end of the year, they would have no idea if they would have a profit or a loss at the end of the year.

We’re talking about the end of the year, not like the end of a quarter or something. It’d be the end of the year. And he said a lot of times it just came down to guesswork. He knew a lot of business owners, and these are big, big like industries. These are not like small mom and pop businesses, big, big businesses.

detailed analysis of carnegie’s profit optimization techniques

He would talk to these people and they wouldn’t know. They would think, I think I’m at a loss this year. And then they’d be like, they have a profit and they’d be like, oh, that’s cool, I’m profitable. And so, like I said, he described it as a mole digging in the dark. And how far off from that is like from what you’re doing right now?

I mean, I don’t want to call too many people out at once, but like, how aware are you of how profitable you are in the direction you are sending your business? Now, his solution in this was also interesting. It wasn’t okay with him. And the reason it wasn’t okay with him is he wanted to know how to have a more optimized business kind of as it was happening.

application of these historical methods to modern business operations

And that’s why we know who Andrew Carnegie is, because he wasn’t a guy sitting around hoping he was profitable at the end of the year. He was one of the richest men in the entire world to have ever lived and incredibly successful as a businessman and philanthropist because he was willing to try hard and work on these kind of problems.

So, what did he do to make sure he had a profitable business? He said it took years to master the accounting and the process for this to work. But what he did instead of just doing everything that was required to create iron and then take on the contract and then hope that it was profitable, is he put like all of these measures in place at every single stage in the process of producing the iron.

step-by-step breakdown of analyzing the customer journey for profit optimization

And so, they would weigh and measure and assess at all these different stages from taking the raw material down to the worker at the furnace, down to the production of the ore, all these things they would measure and optimize every single step. And he said they got so good at it, at some point they were able to realize not only at what stages were optimal, not optimal, they could get down to the furnace operator that day whether or not he was making it more profitable or less profitable based off of how many shovel loads he was doing per hour or whatever.

It just got down to a very tiny level of detail. He got to the very tactical level of every single thing that he could optimize and then know if he was shooting for a profit or a loss and he could optimize all these things very quickly. He could even fire based off of who shouldn’t be working there or try to teach other people what the more successful person is doing.

the critical role of measuring each aspect of the business process

And once he mastered this, business became a lot easier because he was able to know at every single stage if he was on track or off track. And that’s where I think this gets really interesting. Now let’s take this to your business and how to make sure that you have a profitable business. So what you need to do is start to look at your business kind of how Andrew Carnegie did and I think it’s going to be a lot easier for you because you’re not producing iron.

You’re not working in a mill or a factory where there are a lot of things that can happen. But if you walk through your entire customer journey process from customer acquisition if you are doing advertising and customer acquisition can come in a lot of different ways. So let’s start there. You have to acquire customers in some way shape or form.

encouragement to take a proactive approach to business management for increased profitability

You’re either going out and spending your time forming building relationships which you should put a dollar amount to and it doesn’t have to be like oh well I pay myself X thousand dollars per month so it’s this many hours. It’s really what would it cost to replace yourself in doing this activity. That’s what you’re if you’re trying to value any of your own time because sometimes as a business owner the perk could be you getting paid the profit right.

So you don’t need to factor all this stuff in just what would it cost someone else to do if you weren’t doing it. So that’s the first thing is what is the cost to acquire either in your time going out there building relationships if it’s local or what’s the cost to acquire if you’re doing online advertising Google ads anything like that.

final thoughts on the commitment required to truly optimize a business for profit

You have to know that you have to know the cost to acquire the customer. And then after you know the cost to acquire the customer you go one step further into the process as a customer comes into your world. Are they interacting with employees and if they are interacting with employees whether that be a front desk person or if you’re like an online business and you having a coach reach out to them or something like that.

How much time does each customer interact with this person and how much how much does that person cost even going down to hourly rate or monthly rate and then you’re starting to get into like labor efficiency ratios that you could actually calculate if you really wanted to look into those and go into them.

But I’m kind of doing like a broader overview here and then you get down to your time if you’re actually fulfilling on the service again not necessarily exactly how much you get paid but going down to the level of what would it cost for someone else to do this if I were to hire it out and that’s where your mindset should kind of always be as a business owner to make sure that you can still maintain profit and then go down to the fulfillment of the customer then the maintenance of the relationship with the customer after then you go through the entire life cycle the entire customer journey from them finding and hearing about you however you facilitated that all the way to them taking part in your product or service and then becoming repeat long term customers over a long period of time.

Anything that a person touches you want to quantify down to a dollar amount even if it’s not an actual expense like sometimes people don’t think of their employees time touching a customer as an expense to the business because you’re like ah whatever I pay that person this much per month no matter what well you might want to start thinking about that a little bit more and then this is when you can start to see if your business is running profit or not profit or profitable or not profitable but ultimately what you’re looking at is what can you optimize and I think that’s the biggest thing biggest takeaway because you could say hey I’m going to skip all that and I’m just going to look at my P&L at the end of the end of the quarter and hey I was profitable I don’t really care that’s great but if you want to become more profitable or you think that you could get more profit out of the business what you’re probably going to do is you’re going to start just cutting expenses or you’re going to try to make more money that’s business 101 like my kids if I ask my six-year-old how to run a successful business I could probably get her that out of her so don’t think you’re some you know titan of business because you are going to go try and make more money or spend less money that’s not really getting good at business getting good at business is understanding this entire journey that I’m talking about of your customers and knowing it at such an intricate level that you know where things are not profitable and you might be like oh wow my this person who first interacts with customers can see way more people or can do way more tasks than I’m currently giving them this is not efficient here or maybe I shouldn’t be doing this task because it costs too much and I could hire someone out who’s a lot cheaper to do this like when you go through it at that level like Andrew Carnegie did and you understand your business all the way through the entire customer lifecycle then you can start to optimize specific points in the customer journey and now when I say hey go make a more profitable business you’re not just okay well I’m going to go try and make more money by doing a mark another marketing campaign or I’m going to spend less money I’m going to cut this software or this service out when really these things might like you can only go do so many marketing campaigns they’re going to earn you more money right and you can only cut so many expenses and at some point I a big problem I see business owners doing cutting expenses that they should really keep oh we didn’t have a good month I’m going to cut marketing I don’t know if you should cut marketing when your business is doing well that’s that’s not the best decision so anyway understanding this full customer journey takes a lot of work but then optimizing it and having dollar amounts for every touchpoint that you do interact with a customer that’s something you can look at and you can optimize but like I said it’s a lot of work so if you want to do it you’re going to have to try harder.