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There was an interesting article about a new start-up company called AutoSlash in the New York Times this past weekend. AutoSlash says they will get you the best price on a car rental by constantly checking for better deals even after the reservation is made. What caught my attention was how many of the auto rental companies had decided to allow AutoSlash to work within their reservation systems and coupon systems to deliver these low prices.
This seems like an interesting move. I can understand why the low dollar rental companies may want to pursue this, but one company that is connected is Hertz. Given their reputation for being on-premise and having covered parking for the cars among other ammenities, it just seems odd. Maybe they figure that in a tie on price they will win the business?
For a new business starting out or a business trying to grow, competing on price does not make sense long term. Sure, you can use price to bring new customers into your business, but only if you think you can keep them over time for repeat sales or sell them something else while they are there. Walgreens is famous for this strategy. They will discount something heavily to get customers to the store but they make up for their loss leader sales with other purchases.
Competing on price alone signals to the customer they should always expect the lowest price. While this will win you some business, you will have a harder time keeping your customers long term. A price-only buyer does not tend to be a loyal customer.
Use price where needed to bring customers into your business. But when doing this, make sure you know you will keep them over time at reasonable margins or sell them other items that will make up the margin hit.
Mike Colwell
www.bizci.org
www.startupmodels.com
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I was getting on the interstate the other day. The intersection I was at had a dual left turn lane and a two-lane on-ramp. I am in the left lane with some cars behind me. Suddenly, a very large four wheel drive truck (when did Ford start making the F13500?) pulls up in the right lane. The truck is about 8 feet off the ground so all I can see is the sign on the door. “X———-X Home Remodeling” the sign says and below that is a tagline about care and trust.
So the light turns green and I begin to turn left. The large four wheel drive truck accelerates and starts to turn as well. The next thing I know, he has “merged” into the left lane, cutting me off and making me hit the brakes hard. The car behind me barely got stopped before hitting me. Needless to say I was not thinking kind thoughts about the driver of the truck.
So let me ask you, do you think I will be calling “X———–X Home Remodeling” any time soon? Do you think I am buying his tag line about care and trust?
We hear people talking about being careful about what you say on Facebook and Twitter. When you are in business, you need to be careful about all impressions you leave – your own front yard appearance, your personal hygiene, your appropriateness of dress and how you drive.
Who you are is judged by others based on your actions and appearances. Especially when you name is on a sign on your truck!
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From time to time, many of my clients come to me with a difficult decision they need to make. They have thought through all sides of the decision and are struggling with what to do.
They ask my advice.
Recognize any of these? Here is a good test. If your best friend came to you with the problem you are facing, what would you recommend? Would you take your own advice and:
Well, would you? Or do you continue to hide from the issue and pretend you can’t make the call. You own the business. You have to make the call.
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Big markets attract a lot of attention. After all, with that many potential customers you can see a path to huge revenues. The challenge is getting heard by that big market. On the flip side, a small market does not have a huge number of customers so the revenue potential is not as large. However, it is much easier to make sure that small market knows about you and your product.
Here in Iowa we are 1% of 4% of 7 billion people. While 3 million people in Iowa sounds like a big number, it is an incredibly small number compared to the earth’s population. You have a choice when you start marketing your product or service. You can cast your marketing net wide and try to let as many people know as possible, or you can target your marketing on a small segment. Which is right?
It depends.
If you need to scale large just to break even, you must cast a wide net and gain as many customers as you can, as quickly as you can. That means you will be spending a very large amount of money on marketing and sales. You likely will spend far more on marketing and sales than you do on your product.
If you have a product or service that gets you to profitability quickly, you have the option of starting with a small marketing budget pointed at a very defined, narrow grouping of potential customers. As you gain customers you can incrementally increase the size of the market to which you communicate.
Either way, you need to know who’s in your market and make sure you have the funds needed to reach them.
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Price gets in the way of doing business. For those who have sold for a living, you could probably each write a book about getting around the price issue. Yet for most businesses this is a self-inflicted wound.
Today, the worst example of this is booking an airline trip. Try it. Try to get a complete final price for a trip. Unless you know exactly how many bags and their individual weight, it is impossible to get the final price.
In the on-line world, a recent change by on-line retailers is to provide free shipping as a standard offering. This is happening based on evidence that purchase rates increase for items with free shipping. Evidence also exists that these customers tend to comparison shop less where free shipping is offered. I believe this is simply a case of making it easy for the customer to buy.
One key market that is just beginning to change pricing practices is the services area. A good example of this change is in the practice of law. Most people know that lawyers typically charge by the hour. Many of us start off our discussion with a lawyer trying to figure out what the work we need done will cost us. This is especially true if the client-lawyer relationship is new.
Recently, several firms in town have started providing some services at a fixed price. In the area I work, mentoring start-up companies, this is a real change for the good. When your cash balance is precious and there is little or no revenue coming in, it is hard to engage in an open-ended-fee relationship. A good example of this change is Start-up Launchpad by Davis Brown Law. For a set fee, the client receives a set of services that are typically needed by a new start-up company. Even better, potential clients can sign up for access to the site for free and access valuable information without cost.
So think about the average start-up business person facing the long list of tasks to start a business. Getting all of the legal work done is only one item on that long list. Which do you think the entrepreneur will choose, the hourly rate with the unknown total cost, or the flat fee bundle of services? The customer choice just became so much easier.
By providing a clear price for a product or service, you are taking away a roadblock to business. Look at your business and find new ways to make the buying decision easier for your customer. They will thank you.
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Here is a hard truth for most first time entrepreneurs. There are a lot of great ideas out there and many of them are not original. A great idea is a beginning to the entrepreneurial road, but it is not even a full first step. The first full step is determining if your great idea is marketable.
So what does it mean to be marketable? Here are a few starting points. Keep in mind this is by no means a complete list. Bookshelves have been filled with volumes on what it means to be marketable!
Inc Magazine had a great post titled “How to Assess the Market Potential of Your Idea” It is worth the read. They listed five ideas on how to asses the market potential:
I have to say you must be careful with the “Just Do It” idea. I think that is great when your investment in “Just Do It” is something you can afford to loose. Those who blindly launch into the market are often the first to fail. On the other hand, Sell something, anything is great advice. The vast majority of entrepreneurs are not good sales people yet they will spend their days selling their products and their ideas. Selling is the education most entrepreneurs need.
What would you add to these lists?
- Mike Colwell
www.bizci.org
www.startupmodels.com
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A guy comes up with a business idea. It is a pretty good idea. He starts working on it. The idea takes hold. Others start encouraging him. Customers begin to say a tentative “yes” to his offer. The guy gets a friend to help him out. The guy tells the friend he cannot pay him but can share some equity and that they should discuss the amount and terms. The friend says no, don’t worry about it. Let’s deal with it later.
Later happens. The discussion takes place. The friend is insulted by the percentage offer of equity. The friend bails on the business idea. They are no longer friends.
The difference of opinion on equity percentages was probably a factor of 10. As sad a situation as this is, it is not as bad as many I see. Partners must discuss these types of arrangements up front.
Waiting until after the fact is terribly dangerous. Not only are feelings hurt, there are potential legal ownership issues to deal with. To top it all off, if the two parties cannot come to a break-up agreement, it becomes a “he said” vs. “he said” issue and resolution becomes extremely difficult.
Do not leave partnership or ownership issues for later. If someone is going to be in business with you, make sure they know going in what they are signing up for.
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We all have a lot on our plates these days. Everyone I talk to responds “Busy!” to the question, “How are you?” It is a good sign that people are busy. The economy is improving. Business is picking up for almost everyone I know. So what do you do when you are too busy? Start by looking in the mirror.
I am willing to bet that many of the things on your list of to-dos are there because of you. There are two general causes. The first is not taking the next step. One of the most popular books on self organization is “Getting Things Done” by David Allen. In his book, he discusses at length the idea of identifying and doing the next step. Get out your list. Focus on the items you seem to be struggling with. Identify the next step for each of these items and get on them!
Secondly, and probably the most problematic, is indecision. A while back, Mark Suster wrote a great post titled “Avoid Decision by Indecision.” It is a very accurate view of indecision as it relates to start-up companies and those who finance them. From one-person companies to major corporations, the challenge of indecision is immense. You must identify the items on which you are procrastinating. I can guess the categories these items will fit into: employees, spending a lot of money, bad news and upset customers. These items are the cause of your full plate.
Each time you take something off the plate, one of these issues returns to your plate to fill the space. If you have a problem employee, deal with them. You know in your heart the issue will not go away on its own. Deliver bad news immediately. If you wait, others will spend too much time wondering why you withheld the news in the first place and not focus on going after the problem. Upset customers are a today problem. There is no tomorrow with an upset customer, unless you want them out there telling everyone else how bad you are.
Finally, if you are working on a spending money decision, try this process: Decide the time horizon for this decision. Does it need to be made this month, this quarter, when? Gather all the facts you have. List out the (reasonable) facts you do not have and when you will have them.
When is the key. Many times we put off large money decisions because we are waiting to know more. If the data is coming soon, great. If you have no idea when the facts will be available, you’re just delaying. You have to take on the decision with the facts you have. Do not fall into the trap of waiting for facts that are not going to arrive!
groupon (Photo credit: Sean MacEntee)
Recently I drove by a closed restaurant. It had been a steakhouse most recently. I thought about how tough it would be to compete against the other steak houses in the area and wondered if that was why it did not survive. As I drove on, I thought about all the types of food available today at restaurants from German to Italian, to Mexican to Chinese to Thai, to bagel shops, well, you get the picture.
I realized the one thing harder than competing against the steakhouse or any other type of restaurant probably would be if a new restaurant came along with a whole new type of food or way of doing business. At least if you are a steakhouse, the customers will know what to expect. This is the paradox of a new idea. While many customers will say that they are seeking something new, they tend to gravitate to the familiar.
If you are starting a business that is truly a new idea, how do you get customers to try you out? Groupon leveraged the analogy of a coupon, something everyone already understood. When Yahoo became be one of the first mainstream search engines, they spent a lot of money on memorable ads that demonstrated what a search engine was, then added a unforgetable holler of “Yahoo!”
How does the small business or startup entrepreneur best compete with a new idea? After all, they do not have the millions of dollars Yahoo. That is one of the most challenging questions for the truly new idea based business. Here are a few paths to consider:
Offering a brand new, unrecognizable product to a market that does not know what it is, will most likely lead to failure. Make sure your new idea can be recognized and understood in context to it’s use.
Mike Colwell
originally posted on www.iowabiz.com
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It is truly a disadvantage to be a new business owner. To start with, you are an unknown to most potential customers. You probably do not have a long list of referral accounts or a line of customers out your door. So how do you make up for this disadvantage?
There is one thing you can do that will make up for most of the “new business owner” challenges. Professionalism. It is a big word both in number of letters and in fulfilling the attribute. Professionalism is not accomplished through a single action or method. It is a constant state of being. Here are a few examples. See if you can spot the professional.
You make an appointment over the phone with an auto repair facility. At the end of the call, the person on the other end says:
a) G’bye
b) See you then
c) Repeats back to you the time, date and expected work to be accomplished.
You walk into a retail store. The clerk is at the back of the store is talking to another person. The clerk:
a) Keeps talking to the other person
b) Makes eye contact but does not engage you
c) Greets you and tells you s/he will be right with you
You are working with a consultant. You ask for a proposal for the cost of doing some work you have been discussing. The consultant respond with:
a) A verbal cost
b) An email with a “Thank you for the opportunity” and a price
c) A written proposal including all terms, conditions, scope, price, payment terms etc.
Being professional will set you apart from the crowd. If you have employees, make sure they understand the same concept and are professional at all times.
- Mike Colwell
www.bizci.org
www.startupmodels.com
Too often business people I mentor make the assumption that their business costs will remain flat over a 3 to 5 year period. While a few costs may indeed be flat over time, there are more that will increase.
Lets start with rent. We have been in a glut of rental property for commercial space for at least three years. While this has kept rents low, I would not bet on those same rents staying low in the next several years. Here in Des Moines Iowa, we are already seeing the turnaround in commercial Real Estate. A recent article titled “Commercial vacancy shrinks, signaling road to recovery” in the Des Moines Register gives credence to this idea.
If you are paying employee benefits, you should expect that the costs of these benefits will continue to increase over the next five years. All economic indicators point to an increase that is several times the inflation rate for the foreseeable future.
Fuel costs will affect you one way or another. If the anticipated increase in gasoline and diesel fuels become reality, expect new freight surcharges, increase shipping costs, and higher deliver fees. That is all before you buy fuel for your own business.
As you prepare your business plan financials, whether you used the StartupModels template or your own, make sure you enter the expected increases over time for these and all other expenses.
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Someone asked me a while back about what I had learned from working with startups. Where to start? I have learned many things across a variety of subjects. For one, I cannot predict success. Not worth a darn! No matter how much I know about a business startup, I am almost always surprised.
One area that I have learned more about than any others is assumptions. Putting together a business idea and then transforming that idea into a plan is all about assumptions. It usually starts with the assumption that others share your opinion concerning a problem or need. You have a need for a better way to manage your social media accounts so must everyone else. You are not satisfied with the email software on the market so many others must not be as well.
From there, the assumptions start to pile up. I can charge $XX.XX per month and license several hundred per month within a year. My cost of marketing will only be $X,XXX. Pretty soon you have a model of a business that makes very good money in a relatively short period of time. If this is you, you are in good company. I rarely see someone with a set of assumptions for a business that predicts imminent failure. Think about it. Predicting failure is not where most new business people begin. We, as a group, just don’t plan to fail.
Yet we all know the old saw that 4 out of 5 new business startups fail. What I have learned is that, given hard work by the entrepreneur, most business fail to achieve or realize the assumptions they first laid out. For those trying to raise the likelihood of success, the key is in validating your assumptions. While this is not always possible, there are good techniques out there for validating market assumptions. Don’t be afraid to spend some of your precious resources making sure that your assumptions are shared by others. On the costs side, make sure you check with others to see where they have missed the mark when understanding their costs.
We do not plan to fail yet most of us do anyway. There is little worse than finding out post failure that others knew your assumptions were wrong.
I have always tried to make the financial models I create as easy to use as possible. With the first release of finmodel4, there was one area that truly needed improvement. That was the employee details area. To be honest, it was confusing and hard to work with.
Recently, I released a new version of the model and the companion guide to address this issue. The employee details area is much easier to work with and allows several new options. There is one unified entry area for all employee types. The user chooses from “Full Time”, “Part Time” or “Contractor” for the type of employee. Based on this selection, taxes and benefits are applied as needed. The user can also set both a start date and an end date for the employee, making contract workers easier to manage.
In the area of taxes and benefits, new tables are now in place allowing the user to detail each tax and benefit paid by the company and build in inflation adjustments over time.
I hope you find the new model useful and would appreciate your feedback.
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Growing a business quickly requires that you can bring new employees into your business and bring them up to speed in their tasks. Too often, bringing a new person on requires one of your best employees to take precious time to train the new person. The same can be said about developing new processes which you want everyone to start using. Whether these are processes used in serving the customer or managing information, everyone involved needs to know how to do these new procedures correctly.
I have had great success managing this problem through my employees. Many of my employees would ask for opportunities to learn new things on the job or just work on something different. My solution was to have the employees write written instructions on how do do certain procedures. I fell into this by accident one evening late when I was trying to create a document for my employees. It finally dawned on me that many of the employees knew the details much better than I did. I can be a bit slow at times! Perhaps this sounds simplistic, but think about it.
Finally, asking the employees to develop, write and improve the processes your company uses, engages the employees in the business and enables you to grow faster.
There is a new update available to both finmodel4 and the companion guide, “It’s Not a Plan Until the Numbers Add Up.” You can go to the download page to get the model now. There are three significant changes to the model:
been completely redesigned to be easier to use and to allow better detail for taxes and benefits.As always, if you have any questions, please do not hesitate to contact me.
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