Small business owners get caught up in the smoke of constantly putting out fires under duress, all the while missing what it is that their business needs to stay profitable and continue to grow. It is this central problem that Mike tackles in his best-selling book, Profit First, and its recent follow-up, Fix This Next. His “thesis,” if you will, is that there is a hierarchy of needs for every business, much like Abraham Maslow’s famous pyramid, and that a business needs to address whatever is most immediate, regardless of whether it’s at the base or the top.
“The biggest challenge entrepreneurs have is knowing what their biggest challenge is.” - Mike Michalowicz
Maslow for Businesses
In Maslow’s model, all human beings, regardless of external differences, all have basic, fundamental needs, the most pressing of which are things like food, water, and oxygen. After those basic needs comes safety, then a sense of belonging, and finally self-realization, or a sense of purpose. Mike uses this same paradigm to set up the various degrees of needs that all businesses have.
The crucial difference, which Mike points out, between the way these needs address themselves is that human beings have a built-in physiological response that sets off an alarm when someone is in danger, hungry, or lonely. Our instinct lets us know what needs to be addressed, and it will always go for the base-level needs as the priority. In contrast, a business does not have this built-in operating system and needs to always focus on working within the level where it has an immediate unsatisfied need, rather than going straight to the base level. In other words, if there is a crisis in organization (level 3), and a less concerning sales figures issue (base level), that business owner needs to treat its organizational issue first.
The Five Levels
According to Mike, the five levels of growth for a business are as follows:
- Sales. This is the engine that drives a business, but by itself cannot keep it afloat. In his books Mike goes into more detail about things like lifestyle congruency (how the business services its owners), prospecting (attracting the right clients), conversion (turning prospects into clients), and delivery of offering.
- Profit. This is the key determining factor in whether a business has a future or not. “Sales creates cash,” Mike says, “but the health of an organization is the retention of it.” Mike says he has seen million-dollar businesses that generate huge sales numbers but collapse overnight because they cannot retain the cash they are earning. Also included in this level are things like product margin and debt leveraging.
- Order. This is the organizational efficiency of a business.
- Impact. A profitable and growing business should aim to provide a service or product beyond the transaction itself. In other words, is there a kind of transformation that happens to the customer? An example of this is buying a Harley Davidson motorcycle, and feeling a sense of belonging to a club, as opposed to another kind of bike that simply gets you from point A to point B.
- Legacy. Ultimately, a thriving business should create its own permanence, and become its own living, breathing thing out in the world. It’s no longer about the owner anymore, but has its own life independent of its creators.
Again, the important thing for business owners to remember here is that they will cycle through this hierarchy as needs present themselves, not just climb the ladder and wave from the top of the mountain.
How do I get my business to the next level?
The question every business owner has, naturally, is getting to the next level. Mike offers a three step approach:
- Get frustrated. Don’t live in denial or ignore what’s happening in front of you. Let yourself get frustrated by the things that aren’t working. That will force you to pay attention.
- Dip your toe in the water. Try using a resource to help you: you can buy Fix This Next, for example, or draw the pyramid and look for where your weaknesses are. You can also go to fixthisnext.com and answer the 25 Question assessment to evaluate the health of your business.
- Gain awareness of what to tackle. After step 2, you should have insight into exactly which area needs work. Now you can move forward.
Dubbed “the top contender for the patron saint of entrepreneurs" by author Simon Sinek, Mike Michalowicz rebuilt his fortune after losing it all as an angel investor. The experience proved to be invaluable, and he is now the author of Profit First and Fix This Next, as well as the creator of Clockwork, a powerful method to make any business run on automatic, and the head of two multi-million dollar ventures. Check out his website fixthisnext.com to learn more about him or take a free business assessment.