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Thread: The Cancer that kills small business or self employment (part 1) part 2 next post

  1. #1
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    The Cancer that kills small business or self employment (part 1) part 2 next post

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    Last edited by Rob Keeble; 02-27-2014 at 06:46 PM.
    cheers

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    Part two continuation.

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    Last edited by Rob Keeble; 02-27-2014 at 06:47 PM.
    cheers

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    All very true, Rob. So many companies - especially small ones - don't grasp the importance of good marketing. At the company I used to work at, we would put 10% or more of our weekly GROSS income into marketing. That was the primary reason we outsold all of our competitors combined. Tenfold.
    When the going gets weird, the weird turn pro. - Hunter S. Thompson
    When the weird get going, they start their own forum. - Vaughn McMillan

    workingwoods.com

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    The pricing model is on the spot too for the Software industry. Quite frequently the price should be based on the benefit it provides the client, not necessarily how long it took to develop.

    The sweet spot is in finding out how to save the client a LOT of money, without require a commensurate amount of development.
    Programmer - An organism that turns coffee into software.
    If all your friends are exactly like you, What an un-interesting life it must be.
    "A door is what a dog is perpetually on the wrong side of" Ogden Nash


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    been there, made money, been there, lost my t-shirt!

    I wrote a book as usual, not required. Simple stat's, 85% of small business start-ups fail in the first five years in a decent economy. The vast majority of them fail because they are undercapitalized. A few fail because there was never a chance of success, the people didn't realistically assess the costs of doing business. More business would just cause them to go broke faster. A few fail due to poor management. You can do 99 things right in business and one wrong and fail, 99 things wrong and one right and succeed. Poor management is far from the biggest cause of failure.

    Business is a very simple thing, more money out than in including living expenses, you fail. More money in than out you succeed. Usually there is a huge gray area and a business could succeed or fail, the models don't mean much once the doors are open.

    One of the most dangerous things to a very small business is growth! Working alone? Hire one person and you will make less. Hire two people and you might make as much as you did by yourself. Three people you are pretty sure to at least break even, maybe make a little more than working alone. Four people and you should be making more than you did by yourself. However, I hope you didn't like the hands on part of the business, you don't have much time for that anymore. Growth has killed many a business, large and small. It is an especially brutal hump going from a one person business to the three or four person business needed to get over the employee hump.

    Hu

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    Hu hit a lot of the extra points I thought were important. Especially on the extra person - that's one area where I was having a hard time agreeing with Rob (although I agree in general). Ideally you would be in a position to pay for extra employees before hiring them (cashflow > outflow). The hands on comment really strikes home as well - owners trying to still "own" it all once they have a lot of employees are a major source of failure (sounds weird, still true). The capitalization point is also an excellent one, being under capitalized can lead to a lot of short term "gotta make it work" nonsolutions that torpedo you shortly there after. As I heard it put one time "its hard to worry about draining the swamp when you're surrounded by alligators" (it wasn't quite that sanitized but the point holds ). Not to say you can't start a business on a shoestring but if you look around most of the folks who pull that off (and by shoestring I mean they have no other source of money for food) are young and unattached so the cost of failure is pretty low in comparative terms.

    A few other things I'd add:
    • You aren't your customer! Its not what YOU think is a reasonable value its what THEY think is a reasonable value (notice I didn't say price - value is subjective and includes a lot more than price). Pretty much every artisan I know has been caught in this trap; "why that's ridiculous no one would pay, that it would only take me.." yep you aren't your customer.
    • Don't underestimate overhead! I've had friends who were consultants (in other markets) who charged "ridiculous" fees (and some who got kind of caught up in the idea they were "making big money" and spent like they were) who ended up walking away with something close to minimum wage equivalent take home. This is highly region and business dependent but do some pessimistic guesses (and include all the downtime and design overhead and business management overhead and ... etc.. in this in addition to the obvious things like rent, power, water, taxes of various sorts, cost of goods, waste, I could go one ). A rough estimate is that between 60 and 80% of inflow for a small business goes towards overhead before dime one is taken out.
    • You can't get to the top by fighting your way to the bottom! Unless you're that guy importing stuff from china/india/pakistan/bangledesh/malaysia/wherever is making it cheapest this week and reselling it you aren't likely competing on price (not saying that that's not a valid business model just that that's where the price competition is) so you need to find something that makes you different/better/worth more or you'll be going under faster than you can say cash flow negative. Plan your product line and marketing strategy accordingly.
    • Finally I'd like to issue a plea that just because you CAN sell things cheap because you don't need the money doesn't mean you should. You're devaluing the market and making it harder for the fellow who NEEDS the money/business to feed his family to make a go of it (even if he wasn't on this job on the next one when you aren't available they'll have a value/price preconception). Not to say don't make things for friends and family, I do that all the time but mostly I either just charge for materials and do it as a straight up "you owe me a favor" (like helping someone move) or its something I wanted to try making anyway and just give it away - this changes the value perception some.


    And.. there's another book.

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    Interesting read Rob, thanks.

    Funny that I was trained using the opposite phrasing of your initial point -- selling price has *everything* to do with cost. The problem is, most people don't understand all of their costs. Only after you understand all of your true costs -- materials, electricity, advertizing, shop space, your "salary" (including for time between jobs, if any), etc, etc can you begin to set a price. But the basic idea is still the same. My boss also loved the book "Purple Cow' which is all about making your business stand out -- an excellent read for anyone looking to start their own business.

    -Matt
    Measure with a micrometer, mark with chalk, cut with an axe.

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    interesting reply ryan!!
    If in Doubt, Build it Stout!
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    Just a quick reply to Ryan, nobody can compete on cheap price alone! There are always some that will sell at below the cost it takes them to survive. They are going under and if you try to keep with them on price you aren't far behind. I bought a business, ran it for about four years. During that four years the cost of stock roughly tripled. During the same time my struggling competitors cut prices and when eight or ten out of the dozen suppliers of something in a small city have cut prices you have no choice but to follow suit on the identical item. In this particular business there was no difference in quality distinguishable to customers. I was paying triple the price for stock and selling much of it for 1/3 to 1/2 what I sold it for when I bought the business. Insurance and all other overhead had increased too of course. Sold my stock, sold my real estate, got out of Dodge! One of those businesses that looked great from the outside. Nobody saw the $15,000 a month it cost to keep the doors open in the mid-eighties.

    Hu

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    Quote Originally Posted by hu lowery View Post
    Just a quick reply to Ryan, nobody can compete on cheap price alone! Nobody saw the $15,000 a month it cost to keep the doors open in the mid-eighties.

    Hu
    Heh - I was in the middle of the internet market in the late 90's/early 2000's. There was a lot of low price leaders who were going to "make it up in volume" (which mostly translated into "figure out how to IPO and cash out fast before anyone figures out we're going under because we're bleeding money faster than a balloon leaks air"). I wasn't one of the "lucky" ones and never cashed out but survived by escaping into a government job for a while - but it left a real bad taste in my mouth for a lot of the so-called "startup culture" built on pyramids and promises of tomorrow. I see competition on price alone at the expense of quality as a direct extension of this thought process (which is at least one reason I don't like it; although I have other more personal ones).

    I think one of the more interesting stories on this vein is "The Man who said no to walmart" http://www.fastcompany.com/54763/man...id-no-wal-mart
    We look today though and what do we see: http://www.walmart.com/ip/Snapper-21...r-Bag/22094737

    I actually think you can sort of compete on price alone - as long as you aren't trying to actually run a sustainable business on the "making stuff side". If you're willing to bleed the producers dry for a small cut in the middle you can make some dollars off of it. I suppose it depends on what you mean by compete and business.

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