Budget Your Business

The 80-20 Profit Formula with Michael Barbarita

• Scott Geller • Season 1 • Episode 35

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E#35: In this episode, Michael Barbarita shares how business owners can cut through the overwhelm by focusing on the 7 key drivers that make up 20% of their effort but generate 80% of their revenue. He breaks down each step of his "Pathway to Profit" formula—from attracting quality leads to increasing average sale value and controlling costs—plus a proven 4-step conversion formula to improve messaging and offers. Small tweaks, big results.

Join me, host Scott Geller, on the Budget Your Business podcast to listen. 

Book Recommendation: Powerful Business Strategies by Michael Barbarita (nextstepcfo.net)
Book Recommendation: Compound Effect by Darren Hardy

Find out more about Michael Barbarita or agree to a business interview: nextstepcfo.net

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Michael Barbarita:

In my view, if you could just use the seven step as a planning tool and drive the vast majority of your revenue, that's your planning tool the seven steps, and of course, there are strategies backing up each one of these seven steps.

Scott Geller:

Hello and welcome. To Budget your Business, the podcast for small business owners who want to learn how to financially plan for every aspect of your business. I'm your host, scott Gellip. Today, I'm joined by Michael Barberito of Next Step, cfo, to talk about harnessing the power of the 80-20 rule in your business. Hello, michael.

Michael Barbarita:

How are you, Scott Good?

Scott Geller:

to meet you. I'm good, I'm good. Thanks for joining me today.

Michael Barbarita:

Thank you for having me.

Scott Geller:

So, Michael, for folks who are meeting you for the first time, could you maybe share a little bit about who you are and what you do?

Michael Barbarita:

Sure, my background is business ownership primarily. I've owned retail, manufacturing and service companies most of my life. Most recently, the longest business I've ever been in is the one I'm in now Next Step CFO. I've been in it for 18 years. Most other businesses I just bought and sold over a five to six, seven year period, but I grew one business from two and a half million to eight million in five years. That was a ski retail company in the Boston area and then I was in the frozen cookie dough business as well as the outpatient rehabilitation facility business, which is that's the one I fell on my face on.

Scott Geller:

Yeah.

Michael Barbarita:

Yeah, so I fell on my face in the outpatient rehab, and the reason was is I. In the previous businesses I owned, I always implemented business and financial strategies that my competition wasn't doing. However, I took some stupid pills when I entered into the outpatient rehab facility and did exactly what my competition was doing, and so that ended up in disaster. But anyway, 30 days after I fell on my face, I started Next Step CFO.

Scott Geller:

Well, I mean, that's how you learn, right. I mean, I don't think anybody's perfect or anybody's successful at everything they do, and if you can't admit that you failed, then odds are you're probably hiding it from somewhere.

Michael Barbarita:

But just stay away from those stupid pills. That's it.

Scott Geller:

Fair enough, fair enough. So, michael, today we're going to talk about this 80-20 rule, right, or the Pareto principle, and personally, over the years of my career, I've definitely gone down the path of really believing in this. Now I knew the origin of it was from Vilfredo Pareto. However, I did a little bit more research and found out it was back in 1906 that he came up with this idea, and what I didn't realize is that the 80-20 was that he learned that 80% of the land in Italy was owned by 20% of the people. So thanks for making me do a little research on this, and essentially, I think everybody for the most part is familiar with this.

Scott Geller:

But the idea is approximately 80% of the outcomes are caused by 20% of the causes. 80% of the outcomes are caused by 20% of the causes. In other words, there's a small percentage of inputs or efforts. I guess that contribute significantly to the majority of the results, and you can keep it at that level or you can go down what I found a rabbit hole into. Let me see if I can pronounce these right Prono C methods, metaheuristics and all these formulas for comprehensibility, interestingness, confidence and something else called a sup and then an A in parentheses. So I doubt we're going to get into that level of a scientific method around this. But what is the 80-20 rule? What does that mean to you?

Michael Barbarita:

Well, when we were doing research for our book, we found that business owners are overwhelmed. I mean, by the way, that did take very long to find out, but we also found 32 areas that business owners need to know something about at a minimum. There's just a lot of stuff, and that's what causes the overwhelm. There's all these areas that they have to focus on, and I was in the same boat myself. It's just, it can get. It can get really overwhelming, but what many businesses do is then they hire marketing companies, and so when they hire marketing companies, marketing companies start in the weeds, as I call it, which is with, you know, social media, ads or some type of advertising. Well, there's a lot of things that business owners have to really do before that, and that's why a lot of business owners get frustrated with marketing companies, because they start with okay, let's start promoting left and right here, you know, to drum up business and that'll cure your problems. But that's not the way it works, unfortunately.

Michael Barbarita:

As we were doing research from our book, we found that 80% of your revenue is driven by 20% of what you do every day, and what we did as we dug deeper is we identified seven areas that make up that 20%, that drive 80% of the revenue, and so we call it the seven-step pathway to profit formula, because this is truly the areas that business owners should be focused on. That will drive the top line, and so some of it's going to sound very generic and basic. But the issue is is that because of the overwhelm that business owners have they're all over the place they're not going to focus on these seven areas? So the point is is that if you do focus on these seven areas, you'll drive 80. A very important component here is that if you increase each one of these areas very marginally, small incremental increases in each of these areas, it'll have a compound effect on profit.

Scott Geller:

Interesting.

Michael Barbarita:

And that's really the key point. And, by the way, on all these areas, most business owners just need small little tweaks in each of these areas to improve them. They don't have to blow up their business, they don't have to make major changes. Business owners hate big changes.

Scott Geller:

Yes, yes, they do.

Michael Barbarita:

That's not just small little incremental tweaks in these areas. So let's go through those areas. Yeah, please, yeah. The first one is leads. But this is not, you know, it's the lead. You have to go after, that quality lead, not the Mickey Mouse lead. You know, it's looking for those high quality leads. So leads, and then conversions. When I say conversions I don't mean closing, I mean converting a prospect into your sales process, whatever that is. It could be a meeting, it could be getting them to a retail store, it could be whatever it is. Your sales process is. That's what conversion is.

Michael Barbarita:

And then closing rates is pretty self-explanatory. It's your ability to make a transaction, because nothing happens until you have a transaction and then. So those are the first three steps of the seven-step formula. So the fourth is client retention. So now that you've found the perfect lead, you've converted them into your sales process, you close more customers. Now you have to retain them.

Michael Barbarita:

This is an area of weakness for a lot of business owners, but you have to. It's one of the seven areas. It's the fourth step of the seven step pathway to profit formula, that 20% that drives 80% of the revenue. You have to retain what you have. So it's really important and critical. And then the fifth step is increasing the average dollar per sale. So some of the techniques there are upsells, cross-sells, down-sells, those types of things to increase the average dollar per sale for every customer, that you have the new ones, that in as well as the ones you've retained.

Michael Barbarita:

And then selling to each customer more often is the sixth step. Ok, so you sell to each customer more often. So you're getting more. You're getting higher quality leads. You're converting them more, more of them, into your sales process. You're closing customers. You're retaining the customers you have. You're increasing the average dollar per sale to those customers. You're increasing the frequency of sale that's the sixth step to those customers. So, instead of selling to them four times a year, you're selling them 4.1 or 4.5 or five times a year. And then, finally, the sixth one is something that you and I both know and love, and that's controlling your costs, both fixed and variable costs. Right, yeah, so those are the seven steps. We call it a predictable pathway to profit because if you focus on those seven steps, which is, those seven steps represent the 20% that drive 80% of your revenue.

Scott Geller:

Interesting, and so do you. I mean, do you recommend, is that a sequential order of steps, meaning hey, let's address the first step and then we'll get to the sixth or seventh down the road, or is there a kind of a best-in-class order or sequence for that?

Michael Barbarita:

Basically the order that I follow. It doesn't have to be, but essentially you can work on frequency of sale while you're trying to get quality leads Right. It's not necessary, but it's smarter, because getting quality leads starts with working on your messaging, and that's really where the rubber meets the road and where most business owners fall off the side of the road because their messaging is weak. We have, and, by the way it also. If you can improve your messaging, it'll not only help you with quality leads, but it'll also help you with your conversions and closing rate. So one of the things that we do that we train our clients on is something called the conversion formula. When we were doing research for our book, we had to go all the way back to 1931, not as far back as you went with Pareto.

Scott Geller:

I think you went to 1906.

Michael Barbarita:

Right. It just shows how old we all are. I had to go back to 1931 to find out what resonated with me, because I was doing my research, my book, and I was looking at all these modern principles and I said they just don't resonate with me. So back in 1931, I found that the key to successful marketing is to enter the conversation that's taking place in the mind of the prospect. Now, how do you do that? We're not mind readers.

Michael Barbarita:

So what we did is we felt that there were two emotional issues, in order to get into the mind of the prospect, that you have to address, and that is number one the problem the customer has. It doesn't want. And two, the solution they want, they can't find. And if you address those two emotional issues, you will enter the conversation that's taking place in the prospect's mind with respect to your product or service. So what we did, based on that research, is we put together something called the conversion formula, and the conversion formula is a four-step formula that needs to be done in the right order, otherwise it doesn't work. You know you have to look at a formula like H2O, that's two parts, two parts hydrogen, one part oxygen. If I gave you one part hydrogen, one part oxygen.

Scott Geller:

That blows up the formula it's not water, right, you don't have water. It doesn't work. I'm not sure what it is, but it's not water.

Michael Barbarita:

Right, right. So we put together the conversion formula and it's going to be followed in the right order. And it starts with what we call captivate, which is the problem the customer has and doesn't want. Customer has a problem, they don't want it, they want to get rid of it. And then the second part of the formula and, by the way, the captivate is a headline. It's either a headline in writing or it's a headline in a video, or it's a headline in networking. When you go out and network, it's the first thing that the prospect comes in contact with your company on. It's that headline.

Scott Geller:

And it sounds like what you're saying is it needs to be consistent across all those different avenues. Right yeah, the website networking.

Michael Barbarita:

It really does Once you discover the problem. Now there could be multiple problems, so you could, you could, you could be inconsistent in that way, as long as you're identifying a problem, right and if you're in the painting business.

Michael Barbarita:

Selecting the right color paint isn't the problem the customer has and doesn't want, because any painter can select the right color paint, okay. So you have to go. We have methodologies to go a little deeper to identify that problem, because that's real critical. The second step we call fascinate, which is the solution to the problem that the customer can't find. So you have captivate the problem. The headline, a sub-headline, is the solution. Okay. And now, once you've identified the problem and solution, you are now entering the emotional hot buttons of the customer and entering the conversation that's taking place in their mind. Now you've got their attention and you can educate them, which is the third step in the formula. And educating is simply explaining why your solution is far superior to the competition. And then, finally, the fourth component you have to make an offer, and that offer has to be so compelling and so irresistible that the client prospect can't say no.

Scott Geller:

Okay, and that to me it sounds like that offer is also the price around that offer, right, and that kind of gets you into I may have lost exactly the number of the steps, of the seven steps, but kind of in that around that middle ground where you're talking about average price per sale and that like how much you're charging for each of it, right.

Michael Barbarita:

Yes, true, no question. But also to get leads, quality leads. That's the messaging that I was talking about earlier. That's necessary with all the seven steps, quite frankly, you've got to identify the problem that the customer has and doesn't want solution they want, they can't find and then educate them on why your solution is superior and then present them with an offer in that order.

Scott Geller:

Okay, and that offer is that at that point is when you're providing pricing with that offer, or is that truly just kind of a hey, this is the idea that solves your problem.

Michael Barbarita:

It could be the next step in your sales process, if there's a process after the initial step, or it could be the actual close Okay, and the pricing, as you mentioned. You know, as you mentioned Okay, and we have five components that make up a compelling offer, because it isn't just. You know, it's easy for me to say make an offer so compelling that a prospect can't turn it down.

Scott Geller:

That's really easy. That's really easy to say right, just do it, just figure it out.

Michael Barbarita:

Just figure it out, right? No, we have five components to a compelling offer, which you could use one or more at the same time, and what we found is that when you use multiple versions of these components of the compelling offer, it's the most effective. And so, really quickly. Scarcity and urgency is number one. By the way, this is not necessarily in an order of priority, but the first one I want to talk about real briefly, is scarcity and urgency. So urgency is this offer ends on Friday. Scarcity is I don't have the bandwidth, I only have three appointments available or only have three units left. That's scarcity. So urgency and scarcity usually combine them. That's a component of a compelling offer. Second is risk reversal, where the seller in the transaction takes most or all the risk.

Michael Barbarita:

When I was in the ski business, the problem the customer had is they never really knew if the ski they were being sold was the right ski for them until they got it up in the mountain and tried it out. So what we did is we implemented what we call the ski guarantee, and this was never used by anybody else. Ski the ski three times, you don't like it, bring it back for a brand new pair. So you know, skis depreciate dramatically. So my employees thought I was out of my mind because no one was doing it, but I really felt strongly that all the customer really wanted was a great ski experience. And that proved to be true. We sold 8,000 pair of skis the first year we implemented it A 25% increase. Only eight came back. Okay. Next year we sold 11,000 pair. 14 came back. So that's a risk reversal.

Michael Barbarita:

Next is adding more value to your product or service. When I was in the frozen cookie dough business, the problem the customer had is they didn't want to bake cookies in their main oven because they didn't want to waste valuable oven space baking cookies, especially if, like they're a pizza parlor, they don't want to waste, plus the temperature variation and all that. So what we did with every opening order? First of all, we understood the long-term value of a customer which, by the way, is kind of a very important metric to know and the long-term value of our customer we believed in our product that's another very important thing was $5,000. But our opening orders averaged $50. But we gave away a free convection oven, which cost our company $200 with every opening order, because we understood the long-term value of a customer and we believed in our product. Given those two variables, it worked famously. Did we get people stopped buying after the first or what? Yes, but overall it worked great and it solved the problem. And, by the way, they took the convection oven and baked other things in it.

Scott Geller:

No problem, yeah, so you'll be able to use it for other things as well. Other things, so they saw tremendous value.

Michael Barbarita:

We added tremendous value to our product by doing that. That's adding more value.

Michael Barbarita:

Okay. Fourth is packaging and bundling. So you package and bundle things together. When I was in the ski business, everybody packaged skis, bindings and poles. But what we also did is we took the most popular ski cosmetics and we went to the clothing department and put together hat, sweater, bib and Parker combination packages that we sold with the most popular cosmetics on the skis and they flew out the door. It was a tremendous idea. No one copied it to it even after it worked. So that was packaging and bundling.

Michael Barbarita:

And finally, indifference to the outcome. And too often salespeople are going for that sale. Everything's a transaction. They go for that transaction and what is the prospect? Thinking, well, this guy is just trying to sell me something or this woman is just trying to sell me something. They're out for themselves, they don't care about me. You need to show indifference to the outcome, whether you work with me or someone else. There is five steps that you must take in order to properly implement the seven-step pathway to profit formula and you go through those five steps. But that's indifference. That's just a quick example, right? So those are the five Urgency and scarcity, risk reversal, adding more value to your product or service, packaging and bundling. And indifference to the outcome, to your product or service, packaging and bundling and indifference to the outcome.

Scott Geller:

Okay, so interesting, I like that. And going back to the seven, do you find that all seven of those apply to all businesses? Or do you find, I mean, if I'm going through these, do some of these maybe not apply? And I guess the one that I'm thinking of is, if I just pull one out, is sell more often, right, and there are cases where it's hard to sell more often because it's not that that you don't sell something that often or you don't have that many occurrences. So how do you approach a business that maybe thinks that not all of these could apply?

Michael Barbarita:

that not all of these could apply. Well, if that's the case, where they're all one-offs, okay, and some business owners believe that their product is a one-off but it really isn't. So I just want to footnote that.

Scott Geller:

I agree, I thought you might go down that path, so please go ahead.

Michael Barbarita:

That's just a footnote but I'm going to answer your question, but that is just a footnote. But I usually what I do is I try to add more products and services. So by adding more products and services you're able to sell them different things more often. So that's what we and we have a strategy for adding more products and services. And, by the way, all of our strategies focus around the seven steps. So the conversion formula is all about the first one or two steps cross-sell, up-sell, down-sell and adding more products and services. Those all follow some of the future steps that we talked about in the seven steps.

Scott Geller:

Okay. So if I'm progressing through these seven steps, and to your point, the idea is all right, I'm going to do these seven steps. You know I'm generating 80 percent with 20 percent of the effort. Maybe some of these, maybe all of these, I mean, do I kind of continue going back to them or kind of restarting, or is it look, I'm going to go through these. It's going to take me three months and then, tongue in cheek, everything's perfect.

Michael Barbarita:

No, Unfortunately, in business it just doesn't work that way.

Scott Geller:

It usually doesn't work that way, correct it just doesn't.

Michael Barbarita:

You know, it's a consistent effort over time. If you want to delegate, by all means, you know, delegate some of these responsibilities, please do it, as a matter of fact. But the business, the heart of the business, the core of the business, has to focus on these seven areas in perpetuity in order to be successful. Because once you stop, or you slow down or you get complacent, we all know what happens.

Scott Geller:

We all know what happens.

Michael Barbarita:

Unfortunately, it's the way business is and, by the way, there's a competitor that's doing it consistently Right. If you're not someone else is, Someone else is right.

Scott Geller:

So if I'm going through this and I'm trying to stay on this consistently, how would you? You know, we would like to wrap these conversations around kind of a planning within the business organization, and I personally like, prefer a continual planning cycle, not just all right, we're going to do this one time a year and then we're going to return to another time later in the year. How should I think about these seven steps as part of my planning process? Or maybe it is a planning process, I don't know.

Michael Barbarita:

Yeah, I believe it should. Well, I mean I'm going to be biased about this, but I believe it should be the core of your planning.

Scott Geller:

OK.

Michael Barbarita:

How do I go about getting higher quality leads? So you know we our methodologies is utilization of the conversion formula, but how do I go about getting higher quality leads? How do I go about finding the problem the customer has and doesn't want? Now the solution that we offer. Can I do it logistically? So in my view, you could just use the seven step as a planning tool and drive the vast majority of your revenue. That's your planning tool the seven steps, and of course, there are strategies backing up each one of these seven steps, and that's what we do.

Scott Geller:

And that's you know, if you have, I'm assuming that if you have outside resources or inside resources, you're kind of pulling them in, depending on where they hit along these seven steps too right?

Michael Barbarita:

Yes, that's correct. Like, for example you know, now, once we get the messaging right and we take care of those 32 areas that I talked about, then we can hire a marketing agency.

Michael Barbarita:

But you have to have the messaging right. A lot of businesses do what I call I hope so marketing, and what I hope so marketing is is using terminology like largest selection, lowest prices, most convenient, most experienced, high quality. All of those the customer is saying to themselves well, I hope so. Why would I? I hope you have high quality. Why would I do business with a company that has lousy quality? I hope you are honest and sincere. I mean, the Boston Strangler thought he was honest and sincere.

Michael Barbarita:

So saying you're honest and sincere doesn't really cut much mustard, but anyway. So that's what I call I hope so marketing, and that's what just about everybody is doing, just about everybody, and that's why we all sound the same, and that's why there's only one differentiator at the end of the day, because we all sound the same, one differentiator, and unfortunately that is price.

Scott Geller:

Gotcha OK, and that's not. That's not really you want to be at. Well, maybe it is, but if you're, if you're taking care of these early steps, then you're not just a price seller. You have the message, you have the problems, you can actually speak to them beyond. I cost less or I cost the same as competitor X.

Michael Barbarita:

Y Z Right, we've got to identify the problem. We identify the problem, then price becomes a secondary Right. Okay.

Scott Geller:

Well, this has been great. I really like this. Seven steps. I have a feeling we could continue talking about this for an extended even longer, and I don't want to roll on too far. So, yeah, we like to wrap up all of our shows with one to three immediate takeaways that our listeners could literally put into action as they turn off the podcast. You've given us well more than seven, because multiple steps with each of those, but curious if you have any just one or three takeaways that you'd be willing to share with our guests.

Michael Barbarita:

Well, one is identify the problem the customer has, because those are the emotional hot buttons. People buy based on emotion and then back up that emotion logically. And if you look at the conversion formula you have the captivate, fascinate, which are the emotional hot buttons. The logical is the educate. And so if a spouse was explaining to another spouse why they bought something, they would use the educate because it's the logical component, even though it was the emotional component, identifying the problem and the solution that got them to buy the product or interested in the product in the first place. So that's one.

Michael Barbarita:

Another one is and I'm sure you see this a lot accounts receivable management. I'm coming out of my strategic hat for a moment, going into my financial, but I just see a lot of mismanagement of accounts receivables with a lot of companies. Some of them are collecting enough deposits from the customer, some of them are just not sending out statements on a consistent basis, some of them not being tough enough and strictly adhering to their AR policy, their credit policy policy, their credit policy. So that's an area that I think. And then, if you have inventory, when I was in the ski business I had inventory and if I didn't manage my inventory right, I would have gone down the toilet even though I was profitable. Totally down the toilet, totally, and so the management of inventory is really critical. So understanding your flow of inventory and how you bring it in is phenomenally important for survival.

Scott Geller:

Yeah, I definitely agree, especially with that last one. If you're an inventory business and you don't understand your inventory, then you're not going to be in business for very long Right.

Michael Barbarita:

I've dealt with situations where the first thing we had to do was clean up the inventory because it's a disaster and you know there's so much resistance to cleaning up inventory.

Scott Geller:

It's hard, right, it's dirty, it's hard.

Michael Barbarita:

Well, you have to admit mistakes.

Scott Geller:

That too.

Michael Barbarita:

And that hurts. And so some people say I'm not going to sell that at cost or all of that. And boy is it tough.

Scott Geller:

Yeah Well, another ask that we always have is you know we enjoy a good podcast or book recommendation. You mentioned that you have a book out there, so I'd love to hear about that, and if you have anything else as well.

Michael Barbarita:

Well, my book is called Powerful Business Strategies. You can get it on our website at nextstepcfonet. It's free. It's not on Amazon or anything else, it's just free on my website. But also I like to recommend a book called the Compound Effect by Darren Hardy. I mentioned the Compound Effect a little bit in my seven-step pathway. With those small little tweaks, if you increase each one of those seven areas five percent, it will have an incredible compound effect on your profit. So the Compound Effect by Darren Hardy is an excellent book.

Scott Geller:

Okay, Thank you, and this has been great. Where can people, if they're interested in learning more about the Seven Steps or I think you mentioned the book as well where can they find out more about you or maybe reach out to you?

Michael Barbarita:

Yeah, I'm always actively interviewing business owners for the next edition of my book. Why? Well, because business is constantly changing. We know our strategies work in all environments, but we like the industry information to prove what we already know. So what we do is we do what's called a book interview. It's 60 minutes on Zoom. I present strategies from my book and then I ask the business owner their opinion on how the impact the strategy would have for business owners who would implement it in their industry. It's an industry perspective. And to interview for the book, just go to nextstepcfonet forward slash contact. Fill out the contact form and in the message area just write book interview and I'll be happy to schedule a book interview with you. And I promise you this you'll learn business and financial strategies that your competition isn't doing.

Scott Geller:

Great. Well, thank you, michael, this has been great. I appreciate you joining us today.

Michael Barbarita:

Thank you, thanks for having me.

Scott Geller:

All right, folks. That's it for today. If you found something you liked in today's show, reach out to another business owner and share the podcast and help grow our listening base. I'm Scott Keller and I hope you join me next time on Budget your Business.