THE FOUR RULES OF SCALE

I have developed four rules I follow whenever I create a business. There are times I violate them, but I do so deliberately. Keep in mind that these are my rules that fit into my skill set and values. You will need to look at your own situation and determine the rules that work for you.

RULE # 1—RIDE A WAVE

I like businesses that are on a wave. Just like a surfer who gets in front of a wave and rides it to the shore, I want the environment to be right before I get on a wave in my business or my life. If the wave is big enough, then just being in its vicinity will generate enough power to propel you toward your destination. But if you catch that wave wrong, life can come crashing down around you. The key is to get on and off the wave at the right time. September 12, 2001, would have been a terrible time to start an airline. This same day would have been the perfect time to start an antiterrorist airline security business. Purchasing a row of new condos in 2006, when housing prices were at a point where experts were beginning to see they were unsustainable, would have been a bad move. Purchasing those same condos after the housing bubble burst and prices were slashed in half would have been the right time to add scale. You need to assess your environment and pick the right waves to ride.

RULE #2—TRANSACTION BUSINESSES

I like businesses that sit in the middle of a transaction. A well-known example is credit card companies, which make 2 to 5 percent every time one of us slides our credit card through a reader. None of us give what we’re paying a thought (and if you think we’re not paying, think again). Merchants are happy to pass along the fee because the convenience brings more people to their business. Customers love the convenience of not having to carry cash or write a check, so they willingly pay their annual fee (and high interest rates, as well). Positioning yourself in the middle of a transaction puts you in a great place to make money.

RULE #3—OWN THE CUSTOMER

I like to own the customer. I don’t like being in a business where I can’t look into the eyeballs of the customer and resolve the issue. I like to be in the middle of the transaction, but I do not like being sandwiched between brokers.

During the rise in the housing market, I was riding a great wave with a company called Mortgage Saver 101. We had an awesome website that generated leads of people looking to obtain mortgages. The company was riding a wave and was a transactional and a digital business. The only problem was that we did not sell our leads directly to the banks or the people who were coming to refinance their loans. We sold our leads to a broker who would then sell them to multiple vendors. Many times the broker would come back to us and say he did not like some of our leads. We would ask what he didn’t like, and he would simply say, “It wasn’t a quality lead.” Without being able to talk to the bank or the customer, we were left to guess at what they really wanted. This left us very vulnerable, giving all of the power to the broker. If there was a problem, we had no way to solve it. On the other hand, credit card companies are good examples of being able to own the customer. The credit card company can communicate directly with the merchant that is selling the product or the customer that has signed up for the credit card. They own the customer. They can manage the relationship on both sides of the transaction.

RULE #4—I LIKE DIGITAL ASSETS

This is my very personal preference, but I love digital assets. I really do not like retail. Why? Because I stink at retail. I don’t have enough discipline, and I am not patient enough to succeed in retail. It doesn’t scale as well for me. I know many other people who have been highly successful in retail, but it is just not my preference. Once I build a website or a digital application, I only have to make it one time. Then an unlimited number of people can go to my webstie or click on my toolbar. In a retail store, there is a limit to how many people can fit into the store and how many people are able to find the store. With digital assets there are so many more options. That’s the primary reason I like digital assets.

I do have some businesses that do not fit according to these last two rules, but have been very stable businesses that have scaled well. My wife and I started purchasing rental properties many years ago. We bought our first fourplex at a fire sale after the owners went bankrupt. We put enough money down that the cash started flowing from the moment we bought it. As we obtained more cash, we paid off this property. Through trial and error, we have been through the learning curve to know how to manage these rentals. With the money we made from that first rental, we bought another rental property. We added resources by hiring a repairman and other people to help manage the properties. We hired our sons to work on these rentals, as this was a great way to teach them how to work hard. (I’d hire my daughters, but we don’t have any.) One by one, we purchased rental properties that got us to cash, paid them off, and then purchased more. The great thing about these properties is that they are income-producing assets. Even as the housing market took a nosedive, our rentals remained full. Those people who no longer qualified for mortgages needed places to live and were happy to live in our rentals.

When my partners and I started CastleWave, we first got our initial SEO contracts to drive us to profitability, and then we hired the engineers we needed to build our resources. Then it was time to add scale. The scale component in CastleWave was our link-building component—the ability to get other authoritative websites to direct traffic to the sites for which we were consulting. Our expertise in this area was our number one value asset. We put together a pragmatic system—a set of processes and approaches that were bundles—that we could then have our employees replicate and follow, allowing my partners and me to focus on other issues.

If done properly, scale allows you to develop a system and train other people in how to use that system. Put together an entire system and process using all your rules of engagement, and then flip the switch and start cranking out the cookies. A cookie-cutter system is what will get you to scale.

Microsoft Windows is a great example of scale. How many times did Microsoft build Windows? Yes, Bill Gates and company have released updates and improvements (well, most of the time), but they really only built the program once! And they have been able to sell it millions and millions of times over. Virtually every PC sold has Microsoft Windows already installed, and Microsoft gets a royalty each time a person opens their box. Now that is scale—and the reason why Bill Gates is one of the richest men in the world!