If you’ve been following me for a little while, you probably know that negotiating is a very big part of what I do—and it’s something I continuously stress.
When I was first getting started, I really wish someone had taught me the importance of negotiating, so today I want to share some very valuable advice with you.
As you build up your business, especially when it’s in that start-up mode, things will be moving very quickly.
But just remember to take that extra little amount of time to make sure you’re getting the best deal you can. You need to negotiate for everything, and here’s why …
The Huge Lesson I Learned about ‘Gross’ vs. ‘Net’ Profits
I remember the first time my company ever crossed $1 million in gross revenue. I didn’t get to keep all of that of course, because we had bills to pay, and we were paying a lot of affiliate commissions even back then.
But I remember logging into my Infusionsoft account that day and seeing all those zeros. It was a great feeling when I finally crossed a million dollars.
Then a few months later, it was my birthday on January 28—and that was also the day my company crossed $1 million net.
It was the first time in my life I could log into a bank account, and see a million dollars cash. And I felt pretty great about that. I stayed very busy for a few months, and then one day I logged back into that same bank account to see how we were doing …
I was shocked that there was still only $1 million in the account … I first thought this couldn’t possibly be right. Because we were always beating our best previous month, and growing so fast we could barely keep up. My mind started racing and I just kept thinking, “What’s going on here? There should be a lot more money in my account!“
At the time, we were doing around $400,000 a month, approaching the half-million per month mark. We were doing hundreds of thousands of dollars a month, and yet still, our net was only $1 million.
I printed out the bank statement and walked over to my CFO’s office.
Then I then asked him, “Where’s all my money going?”
He looked at the bank statement, and he started going through it telling me what the numbers meant. He explained that while we were scaling rapidly and beating our goals every month, we weren’t really making much net profits because our expenses were so high.
He showed me all the money coming in and going out each month, including bills, employees, and vendors. And he told me the best way to get more net profits, is to negotiate better prices with our vendors.
I remember seeing that and feeling pretty stupid about it because, again, I realized I was putting all my focus on gross profits—not net profits.
But now, I’m very thankful I did, because that’s when I learned an extremely valuable lesson …
If you want to run a successful company, you need to focus on your net profits, because you can actual keep that money.
Here’s an example … Let’s say after paying your bills and your employees, you’re left with 20% net.
That means for every dollar that comes in, you can keep 20 cents. In other words, for every $1 you net, you must produce $5 in gross revenue.
This is really an interesting concept, because most new business owners foolishly assume that if they make $10k, they can keep it all and just pay the taxes later.
But if you think about it, when you make $10k, it’s really only worth $2k after expenses.
And after realizing this concept, new business owners have that ‘a-ha’ moment where they realize the importance of negotiating.
The Basics of Negotiation
Let’s say you’re negotiating a deal to rent out a hotel conference room for your event. And they tell you the price is $10,000. But you’ve done your research, and the average rate for a room that size is around $8,000.
Now you could be nice and non-confrontational, and you could just hand over the $10,000 and hope for the best at your event. Or, you could negotiate with them …
You come back to them and say, “Look, we can’t do 10 grand, we can do 7 grand.“ They come back at 9, and you meet them in the middle at 8. Then they tell you it’s a deal!
So you got the room for $8,000 instead of $10,000. In other words, you’re saving $2,000 off your bottom line—simply because you negotiated a better deal.
From our previous example, let’s say your net profit margins are 20%.
To make that $2,000 you just saved, how much gross revenue would you need actually need to make? The answer: You would need to make $10,000 gross.
If you save $2,000, and you have 20% net profit margins, that’s the
same exact thing as if you made an extra $10,000 in gross revenue.
Negotiating Better Deals Can Save You Millions
When I learned the difference between gross and net profits, my entire outlook shifted. Here’s the way I look at running my business now …
If I can negotiate and get the best deals for myself and for my company, all throughout an entire year, on the scale that we’re operating with MOBE, especially on the bigger deals, I can save literally millions every year.
For example, let’s say our margins at MOBE are just 10%. (Our real margins are more than 10%, but I’m just using this as an example.)
So with all my different deals throughout the year, if I can save $500,000 collectively with 10% net profits, I have just produced an additional $5 million.
Here’s the point … It’s the same thing—Whether you can save half a million dollars by negotiating, or go make another five million dollars gross, you would have the same exact end result. It’s the same thing.
What Are You Netting?
You should try to start thinking about your business in terms of, what am I netting?”
What are your percentages after bills and overhead? And what’s the
equivalent additional revenue you would need to produce to equal that savings you just negotiated?
When you change your mindset from gross-to- net, you will see things very differently, and you will understand why it’s so important for you to negotiate hard.
Don’t Listen to Negative People
There are many people out there who love to give their ‘advice’ on negotiating.
And they like to label business owners who negotiate names like cheap, greedy, tightwads, etc.
But if you ever hear someone talking negative like this, just realize that this person obviously has never run a company before.
So the lesson today is you always need to be negotiating …
You need to calculate your net profits after all your expenses, and you should always be looking for ways to optimize those margins …
And you should always try to get the very best deal you possibly can. It could add millions every year to your bottom-line.
In conclusion, I really hope this helps you become a better negotiator and add more to your bottom-line every year.
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