Part of the appeal of becoming an entrepreneur is the idea of making money. While we at White House Marketing see nothing wrong with focusing on the dollar signs, we think it’s important to point out the difficulty of driving profits – especially in young businesses. After all, there’s a reason they’re regarded as a bottom line.
In fact, a lot of business leaders subscribe to an old-school business mentality. They operate on the premise that expenses must first be subtracted from sales, and that the profit is what remains. We also considered this to be the standard formula of business, until we learned about the Recency Effect.
Entrepreneurial expert Mike Michalowicz describes the Recency Effect as the idea that people tend to think in terms of whatever has happened recently. If they have a lot of something, such as money, they believe that things are going great and spend freely. If their bank accounts are somewhat sparse, however, they plan more carefully. In other words, our behavior is dictated by what we perceive.
Michalowicz uses this concept to explain how business leaders can prioritize their profits, and our team at White House Marketing finds it quite intriguing. Instead of the traditional formula, he suggests taking a certain percentage of sales before dealing with expenses, and allocating them as profits. When those profits are safely tucked away into their own account, they won’t be visible – and there will be minimal temptation to spend freely. Instead, the money designated for sales will be utilized wisely.
What do you think of this approach?