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

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.
 
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.
 
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
 
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 :D). 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 :D). 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.
 
Interesting read Rob, thanks. :thumb:

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
 
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
 
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-who-said-no-wal-mart
We look today though and what do we see: http://www.walmart.com/ip/Snapper-2...ith-Side-Discharge-Mulching-Rear-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.
 
Rob,

I encourage people interested in starting a small business but I also send them to SCORE. I don't know if you have the same or similar available but SCORE is the Service Core Of Retired Executives. You are typically speaking with people who were quite successful businessmen on a larger scale than you are hoping for or high level executives from the corporate world. They will ask questions and have you put together information to fill out forms that makes people look at things they are likely to have never considered if they don't have a strong business background.

Someone starting a business needs optimism coupled with a realistic idea of what they are getting into.

Some of our beliefs are fundamentally different. Your cabinet example wouldn't be something I would do as an example. I might turn out an extra set of cabinets at very near or at my full price, I wouldn't turn out a heavily discounted set just because I had met my goals for a month.

My hourly rate as a MasterCNE was $150 an hour. However I did come in for an initial meeting to see what the customer needed as a free visit. An electrical contractor offered me $15 an hour to come in, "the same thing he paid his nephew in college to look at his computers." By your reasoning the fifteen an hour is thirty dollars I wouldn't have made otherwise so I should have taken it. I looked him dead in the eye and told him there were two options, I could make a free visit or bill him $150 an hour, his choice. I wouldn't consider for a moment devaluing my rates to charge even the $45-$65 an hour most computer repairmen charged at the time, much less $15 an hour.

Hu
 
Rob,

I was involved with the management of a business from age twelve. Was given responsibility to do almost anything but hire people, had to wait another year to do that. I did have to fire a friend at twelve though, caught him cheating customers. I was a full partner in a business at fifteen. Partners in a handful more businesses then split off into my own businesses. Often two to four businesses at a time. Had to reinvent myself in my thirties and worked as a draftsman and designer for awhile. Worked in R&D for a military contractor, VP of a research corporation, worked in Design Engineering at the local nuke. Had to reinvent myself again, became a computer system engineer with a Master CNE in under twelve months from basically no knowledge. I literally couldn't understand enough words to read the book the day I started classes. Spent four hours that night just studying the glossary! Partner in another business. Another handful of things since then including operating my own machine shop and working in someone else's. Oh yeah, commercial fisherman too, maybe a dozen other self employed or small business ownership gigs.

A running joke with a friend across the country that I get together with once every few years. He pulls out a list and asks what I have done for a living. The list tops twenty five different things in different areas and every time we meet I mention a few old things I have forgotten before. I can't even list the businesses I have owned off the top of my head. Like you I have been mostly successful, had my losses too.

Unlike you I can't remember talking to anyone interested in starting a small business that knew 85% failed in the first five years. I was also a running horse breeder. I can't remember talking to anyone that knew that only one horse in a hundred bred to race broke even on cost and expenses or did better. Only one in ten ever run a race. Very very few people realize the nut they are trying to crack when they start a project. Just as well in some cases, the optimism of ignorance has been behind many a success story. The Oak Ridge Boys bought a horse, won the Kentucky Derby, and thought there was nothing to it!

Hu
 
Rob,

A danger of long posts, we were both posting at the same time and I missed your last to me. You have walked the premise quite a ways from where we started. Business covers such a wide area that it is very hard to say something that applies to all businesses across the board.

I helped estimate and bid construction projects, hard money jobs. There we lived or died by our quote. Unless they changed the job we couldn't change the price. In that instance we did very much bid based on our costs and the profit margin we needed. Times were lean and there were a dozen other companies bidding the job and if we didn't bid tightly we didn't get the project. When times were booming our margins went up very substantially.

Hard times it was survival of the lean, mean, and smart! Not my doing but a company I worked for bid a $40,000 job under $17,300 to "freeze out" another company. I was bringing it in on time for under $25,000 which I thought was pretty impressive for a $40,000 project. Then they went into panic mode trying to do a $40,000 job for less than half the price without taking a bath. The job went way way over time and at least a hundred thousand over the bid.

Cabinets are an interesting area, I knew a man that had a large cabinet shop, cranking out what was considered custom cabinets as they were made to specifications for each job. The assembly methods were production but the result was "custom". Not quite in my book but debating what "custom" is could fill another long thread.

Anyway, when these shops don't have work on order they can't simply shut down and lay off crews or tell them stay home this week, you don't get paid. They keep right on cranking out cabinets and if they can't sell them they dump them off to huge warehouse sales depots at not much over cost, if cost. There is one of those warehouses about a hundred and twenty miles from me. I went there with a friend when he was looking for cabinets for his commercial business. We purchased sixty running feet of hardwood cabinets for $1500 not all that many years ago, maybe five. Guess where I go when I need cabinets? I can buy the same cabinets the local guy sells for five or six thousand for under a thousand. For those kind of savings I can buy the cabinets early and design around them a little.

By the way, I totally agree with doing work in a totally different area at whatever rate you choose to charge. I didn't get the same rate for mechanic work, body work, or designing and installing computer networks. Had I decided to paint a car while I was a system engineer I couldn't have charged $150 an hour to do it. I did paint a couple of cars during that time when I think about it, free.

I never did cheap work in my shop even when it was possible. When people want corners cut they never tell other people this is what they asked for they say, "Look at this garbage that xxx automotive did!" Saw that a few times so never fell into the trap myself. Let me do the job right or tote it down the road. I can't afford to turn out less than my best.

In sales market decides the price. Some things I made over 1000% profit on, some I barely broke even or lost a little on. Then the only thing the business person has to do is determine what to sell in his market. A funny story, I had an AMC Pacer in my auto salvage. Looked like somebody put a football needle in a Ford Pinto and pumped it up. Very few sold but I kept it for one customer that bought hundreds of dollars worth of parts off that car over a few years. Then he wanted to sell me his Pacer for salvage. Thought it was worth a fortune: "Look at all you sold off the one you have!" I had to explain to him that I hadn't sold one part a year off of the little car except to him. He was the market. If I bought his the market was gone. Gone regardless when he sold his to anyone. I gave him a hundred more than the car was worth and crushed both Pacers a few months later just to get them out the way.

Hu
 
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