3.) "Entrepreneurs pay too little attention to what ought to be one of the main functions of business: MAKING MONEY. (Caps, mine).
The focus of the REWORKING article is a bit different than mine. They are talking about the weird dynamic that went on during the dot-com boom of growing the business but not turning a profit.
The -- "Lose a little money on every transaction, but make up for it in volume!" -- concept. Which creates large sales, and a churning of cash, but usually results in a company that simply can't charge a decent price for a decent profit.
A few spectacular exceptions emerged; Amazon, E-Bay, and so on. (Though I read recently that Amazon STILL doesn't earn a profit on what it sells; it earns it's profits from ancillary programs....)
TRYING TO GAIN MARKET SHARE BY LOSING MONEY.
This tendency also exists in small business. Growing market share by lowering prices and profits. If there is a well established business competitor, for instance, you might have a hard time competing on inventory, service, selection, locations, whatever.
But you can always undercut them in price!
Of course, the established business is earning more profit per sale which only makes them stronger, while you are losing a little bit more on every sale only making you weaker. If you think you're going to raise prices later on, think again. You've already trained your customers to think you are the low cost alternative. (Also crazy to try to be the low cost alternative, when you have the online stores and the big box stores as the TRUE low cost alternative.)
In effect, you've tried to bribe your customers into coming to you. Which also makes you vulnerable to the first competitor who's willing to go even lower in price. (And there always seems to be that guy who thinks he can "Name that Tune" with one note....)
LOSING MONEY IN THE FIRST FEW YEARS.
I've heard over the years that a small business doesn't earn a profit in the first -- three years, five years? -- whatever. That has always seemed crazy to me. If you can't break even in the first year, (by which I mean paying yourself a wage) you probably shouldn't even try. Seriously. It never really gets any easier. The longer you're in business the more challenges emerge.
My suggestion is, even if you don't NEED to earn a profit -- for those rare folk who are well-capitalized -- is to try to earn a profit anyway.
Consider it good practice.
Think about it. If in the fourth year of business you start to earn a profit, you still need to average it against the first three money losing years, and on into the fifth year and the sixth year, and ever onward.
Not to mention your investment costs.
BORROWING MONEY TO MAKE MONEY.
The article mentions growing without venture capital. For a small business, the alternative is to borrow money. I had to borrow money to buy the store; a few years later I borrowed again to grow the business to a viable size; and a few years after that I borrowed again to open new stores. (I would have been better off using the third wave of borrowing to shore up the base -- but I doubt I could've talked the bank into loaning money with that motivation. Whereas I could show a spectacular growth in sales with the expansion plans.)
So I needed to borrow money, at least the first two times. But I was careful to borrow money on the basis of what I could afford to pay in cash flow. The only real leap of faith I made was buying the store in the first place -- I knew I had to double sales -- but even there I had the experience of having working in the store for the previous 4 years, so I had a good idea what was possible..
NOT CHARGING FULL PRICE.
I also heard early on, that you can tell the strength of a small business by how close to full retail they can charge. (Makes me wonder if these little bits of wisdom I heard or read early on were what helped me make it....)
This I think is dead on.
I've had to negotiate prices with customers to create cash-flow; indeed, probably the majority of time I've been in business I've had to make those concessions. But it's never been healthy practice. Sure, it raises funds that I might pay bills, but it makes it much harder to maintain a viable inventory.
If I can reach the end of the month without having to had to lower prices, I consider it a strong month.
NOT CHARGING WHAT THE MARKET WILL BEAR.
Early on, I had the idea that I should charge a "Fair" price for product. Admirable in concept, but very flawed in execution.
I was getting very good prices for my sports cards. I could've charged even more, but I didn't.
Partly, it was because I figured I'd gain the loyalty of my customers, partly because I felt I was earning a 'good enough' profit.
Good Enough profit? What a stupid idea.
Because I guarantee you -- absolutely, in writing, and I'll lay money down as well -- that any product that you are earning such a profit that you can afford to charge less than the market will bear, is going to turn on you.
Thing is: I was the one who figured out that sports cards were a viable market. I took the risk. I was first in, and I was blazing the trail. The "fair" part of the equation should've included those factors.
The time will come will you need every cent you could've charged -- and more.
It's a bit like finding you have extra energy early in a marathon, and you decide to sprint. At about mile 24, you're going to be wishing you'd saved up that energy.
Make money when you can, because there are going to be times when you won't be making money.
FEELING GUILTY ABOUT MAKING A PROFIT.
Strange to say.
It's a mite peculiar.
But there is a tendency in small business to not try to make as much money as you can. I read an article early on, which I wish I had saved because I've never run across anything since that even hints at the same content, that it is a well known phenomenon in business among venture capitalists and investors, that many people -- otherwise well positioned to be business owners -- simply have a hard time accepting a profit.
Don't laugh. It's true.
I was commenting to my Dad once how hard it was to charge full price to friends and to my best customers. He just laughed and said, "If you don't earn a profit from your friends, you sure as hell aren't going to earn a profit from your enemies."
Bottom line. Try to earn a profit. Try to earn a profit from your first day. Try to earn the biggest profit you can. Charge what the market will bear. Don't be tempted by discounting. Don't try to borrow your way to success. Don't feel guilty.
The focus of the REWORKING article is a bit different than mine. They are talking about the weird dynamic that went on during the dot-com boom of growing the business but not turning a profit.
The -- "Lose a little money on every transaction, but make up for it in volume!" -- concept. Which creates large sales, and a churning of cash, but usually results in a company that simply can't charge a decent price for a decent profit.
A few spectacular exceptions emerged; Amazon, E-Bay, and so on. (Though I read recently that Amazon STILL doesn't earn a profit on what it sells; it earns it's profits from ancillary programs....)
TRYING TO GAIN MARKET SHARE BY LOSING MONEY.
This tendency also exists in small business. Growing market share by lowering prices and profits. If there is a well established business competitor, for instance, you might have a hard time competing on inventory, service, selection, locations, whatever.
But you can always undercut them in price!
Of course, the established business is earning more profit per sale which only makes them stronger, while you are losing a little bit more on every sale only making you weaker. If you think you're going to raise prices later on, think again. You've already trained your customers to think you are the low cost alternative. (Also crazy to try to be the low cost alternative, when you have the online stores and the big box stores as the TRUE low cost alternative.)
In effect, you've tried to bribe your customers into coming to you. Which also makes you vulnerable to the first competitor who's willing to go even lower in price. (And there always seems to be that guy who thinks he can "Name that Tune" with one note....)
LOSING MONEY IN THE FIRST FEW YEARS.
I've heard over the years that a small business doesn't earn a profit in the first -- three years, five years? -- whatever. That has always seemed crazy to me. If you can't break even in the first year, (by which I mean paying yourself a wage) you probably shouldn't even try. Seriously. It never really gets any easier. The longer you're in business the more challenges emerge.
My suggestion is, even if you don't NEED to earn a profit -- for those rare folk who are well-capitalized -- is to try to earn a profit anyway.
Consider it good practice.
Think about it. If in the fourth year of business you start to earn a profit, you still need to average it against the first three money losing years, and on into the fifth year and the sixth year, and ever onward.
Not to mention your investment costs.
BORROWING MONEY TO MAKE MONEY.
The article mentions growing without venture capital. For a small business, the alternative is to borrow money. I had to borrow money to buy the store; a few years later I borrowed again to grow the business to a viable size; and a few years after that I borrowed again to open new stores. (I would have been better off using the third wave of borrowing to shore up the base -- but I doubt I could've talked the bank into loaning money with that motivation. Whereas I could show a spectacular growth in sales with the expansion plans.)
So I needed to borrow money, at least the first two times. But I was careful to borrow money on the basis of what I could afford to pay in cash flow. The only real leap of faith I made was buying the store in the first place -- I knew I had to double sales -- but even there I had the experience of having working in the store for the previous 4 years, so I had a good idea what was possible..
NOT CHARGING FULL PRICE.
I also heard early on, that you can tell the strength of a small business by how close to full retail they can charge. (Makes me wonder if these little bits of wisdom I heard or read early on were what helped me make it....)
This I think is dead on.
I've had to negotiate prices with customers to create cash-flow; indeed, probably the majority of time I've been in business I've had to make those concessions. But it's never been healthy practice. Sure, it raises funds that I might pay bills, but it makes it much harder to maintain a viable inventory.
If I can reach the end of the month without having to had to lower prices, I consider it a strong month.
NOT CHARGING WHAT THE MARKET WILL BEAR.
Early on, I had the idea that I should charge a "Fair" price for product. Admirable in concept, but very flawed in execution.
I was getting very good prices for my sports cards. I could've charged even more, but I didn't.
Partly, it was because I figured I'd gain the loyalty of my customers, partly because I felt I was earning a 'good enough' profit.
Good Enough profit? What a stupid idea.
Because I guarantee you -- absolutely, in writing, and I'll lay money down as well -- that any product that you are earning such a profit that you can afford to charge less than the market will bear, is going to turn on you.
Thing is: I was the one who figured out that sports cards were a viable market. I took the risk. I was first in, and I was blazing the trail. The "fair" part of the equation should've included those factors.
The time will come will you need every cent you could've charged -- and more.
It's a bit like finding you have extra energy early in a marathon, and you decide to sprint. At about mile 24, you're going to be wishing you'd saved up that energy.
Make money when you can, because there are going to be times when you won't be making money.
FEELING GUILTY ABOUT MAKING A PROFIT.
Strange to say.
It's a mite peculiar.
But there is a tendency in small business to not try to make as much money as you can. I read an article early on, which I wish I had saved because I've never run across anything since that even hints at the same content, that it is a well known phenomenon in business among venture capitalists and investors, that many people -- otherwise well positioned to be business owners -- simply have a hard time accepting a profit.
Don't laugh. It's true.
I was commenting to my Dad once how hard it was to charge full price to friends and to my best customers. He just laughed and said, "If you don't earn a profit from your friends, you sure as hell aren't going to earn a profit from your enemies."
Bottom line. Try to earn a profit. Try to earn a profit from your first day. Try to earn the biggest profit you can. Charge what the market will bear. Don't be tempted by discounting. Don't try to borrow your way to success. Don't feel guilty.