Merry Christmas! 🎄

I hope you had an awesome time with your family the past few days!

This week at Natural Dog Company, we cancel all our meetings and encourage everyone to spend the week reviewing the year behind and planning for the year ahead.

One of the main things we’re focusing on in 2024 is how we can make things easier. I asked everyone to think about this question — "What would work feel like if it were easy to do what you were good at, and nothing else?"

Let me introduce you to what we’re calling the Complexity Tax. It’s not a number or a specific fee, but it’s the indirect cost your company pays by having too many interconnected systems, dashboards, SOPs, or doing too much custom work. And to illustrate, let me use a toy that’s currently scattered around my house, LEGO.

How LEGO avoids the complexity tax

LEGO is a perfect example of a company who fights tooth and nail against the complexity tax. I recently stumbled on this article from The Verge explaining how LEGO designs new sets. As you might imagine, there is a temptation for designers' imaginations to run wild and design all kinds of custom pieces in new shapes and colors.

But over time, it becomes difficult and expensive for the company to keep up with an ever-expanding brick catalog. More and more molds, dies, inventory, photography, cost accounting, production scheduling, and more. It seems like “oh it’s just one more brick” but collectively, there is a significant complexity tax. So LEGO came up with an internal scoring system called “frames.” It helps them keep complexity under control when designing new models.

Every designer at LEGO has a certain amount of frames they can spend each year, across all the new sets they design. If they absolutely need a piece in a new color, shape, or size — it costs them a frame. If they don’t have enough frames left to create their set how they want to, they have to reuse existing bricks and get creative, just like LEGO fans at home.

LEGO knows how complicated their company gets over time as more and more new bricks are created, so they’ve intentionally slowed it down. They reduced their complexity tax with the frame score and encouraged their employees to take advantage of the systems (bricks) that are already in place.

How I’m avoiding the complexity tax

At Natural Dog Company, it’s no different. We have a couple retail customers who spend ~$25,000 per year with us — they’re decent accounts. But we have to package and ship their products in special case quantities and with special labeling — all outside of our normal way of doing business. It creates a lot of rework, and we have a pile of SOPs just for dealing with these customers.

Yes, we make a bit of money doing it. But simple contribution margin isn’t the only way to measure profitability. We weren’t taking the complexity tax of working with them into account. Our 3PL was constantly having to retrain people on the custom SOPs, and the special projects distracted their attention from serving our best customers well.

So we went back to our complex customers and told them that we’re going to treat them the same way we do everyone else — standard packaging, standard shipping, standard communication — and if they didn’t like it, we were okay to lose their business. Of course we told them very nicely, but it was a line in the sand all the same.

Most were perfectly okay with us drawing the line and still order from us today. And the ones that were not okay — well we were happy to no longer be paying the complexity tax to have them as a customer.

My challenge for you in 2024 is to find the complexity tax your business is currently paying that is not quantifiable in dollars. Count the SOPs and the specific instances where you’re going outside of your process to serve someone. Where is your team or your partners spending time doing custom stuff that distracts from being great at your core processes?

Ask yourself, “Is this really worth it?”

If you have simple parts of your business that bring in a lot of revenue or profit, double down on those things. It’s so much easier to do more of what’s already working - sell more of your same SKUs, to your same customers, in your same channels.

And if you have way too many SOPs or hours spent on things that only see a marginal return, or that are only done infrequently, you’ve found a place to reduce your complexity tax.

If you liked this newsletter, I have 4 places where I share more like it:

1. 👔 The 1-1 coaching that I do with business owners (I only take on a few at a time).
2. 🐦 I tweet (a lot) @BillDA.
3. 🎙️ My bi-weekly podcast, Acquisitions Anonymous, where we break down real businesses that are for sale.
4. 📬 This weekly newsletter!

Until next time,
Bill D'Alessandro