Some people think it’s impossible to spend more money than you make without knowing it. Au contraire.
A few months ago, my brother called me up to invite me to lunch. He had put his business card in one of those bowls at a restaurant where you can win a free lunch, and he had actually won. A financial planner had called him and said, “Bring up to 7 friends to lunch. I’ll talk to you about financial planning for a few minutes and then I’ll buy you all lunch.”
The restaurant was 2 minutes from my house, and I love Mexican food, so I went and listened to the pitch. The funny thing was my brother and his friends are all in college and came looking completely disheveled, so when she saw them, you could see her heart sink. College students who woke up at 12:01pm with hair nearly touching the moon are not the most profitable customers. Still, she made the effort to try to sell her services by explaining what financial planning was, then asking us to fill out a form with our contact information.
Here’s the interesting thing: I was the only one to say, “No thanks.” The other students all filled out the form but half filled out fake contact information. Later, when I asked them why they did that, they said, “Well, she bought us lunch so I couldn’t just say no…but I didn’t really want to talk to her again.” Ah, reciprocity at its finest.
Afterwards, I sat down and thought about what a horrible marketing strategy this woman was using to reach people. She was taking out completely unqualified people to lunch and praying she could convince them to pay her lots of money to be their financial planner. She was spending money on lunch (granted, not a lot) with the hopes that by sheer numbers and persuasive ability, she could generate revenues. The problem is not really with the amount she’s spending on lunch, but with the pitifully small percentage of people who will convert to paying customers.
Now, earlier I said that it’s easy to spend more than you make. A lot of people don’t believe that, saying, “How could you do that? You would know if you spend more money than you had! Your bank account would be negative!” That’s not true. I have friends, for example, in exactly that situation. Some of them have a couple thousand dollars in their savings account, so it slowly seeps out without them realizing it. Others have all kinds of complicated accounts with transfers from here to there, so they just can’t figure out exactly how much they’re spending. And as we know with real estate, people systematically forget to factor in expenses like repair and maintenance.
In this case, I’m not 100% sure this woman was losing money, but I bet she is. It’s easy when you (1) don’t track your money in/out and (2) you get sporadic client signups, which make you think “This must be working!” (sort of like keeping a budget).
Here are my assumptions (feel free to play with them):
If you can’t see the embedded file in your RSS reader, click through to this post to see it. Thanks to Julie N. for helping with the spreadsheet.
What do you think? Are my assumptions right or wrong?