By Dr John Yardley, Founder and CEO, Threads Software
Running a profitable business can be challenging, particularly when the threat of recession looms. A unique idea can be important – but, conversely, a business can be successful in a large market where there is much competition. The real key is erecting barriers to entry and keeping competitors in check by creating significant ways to stop them emulating your business model too quickly. Otherwise it’s easy for someone to steal your idea as soon as you have proved, at your cost, that there is a market.
Having a good business idea is one thing, but managing such a business requires a completely different skillset. Many potentially successful companies flounder because they are poorly managed.
Anyone who is in the early stages of running a business, or just contemplating it, needs to consider both the practical and philosophical aspects.
Why?
The first question is “why do you want to run your own business?” Working for someone else has some obvious drawbacks, and it’s easy to assume that being the boss brings freedom. In practice, work directly connected to your core business idea may account for only the minority of your time. This is because much of the work revolves around getting people to buy your idea (sales and marketing) and in running the business, including premises, equipment, accounting, recruitment, and so on. There is a world of difference between being a freelance specialist contractor and running a business that employs others.
There may be good reasons for wanting to be your own boss, such as a passion for something for which no-one else will employ you, wanting to control your working life, and exploiting a great idea. Sometimes the sheer frustration of working for people who you feel are incompetent, difficult or unprofessional is enough.
Simply wanting to make a lot of money, however, is not a good reason. It’s true that some people are great salespeople, marketeers and accountants and can make a business out of almost anything, but most highly successful businesses have been started by those with a passion.
Barriers to entry
The next thing to consider is what could stop anyone else competing with you in your chosen market? You may have a product or service that nobody else offers, but what is to stop someone copying your idea once you have spent money establishing that there is a market?
In the case of a product, a patent might be useful, but it’s unlikely you will stop a Far Eastern company copying it before you go out of business. Patents may help when you finally come to sell the business, but in the early days they are no serious barrier to entry for competitors.
The barriers least often considered are time, service and professionalism. Generally, an idea that has evolved over several years of practical experience – none of which is available immediately to competitors – can create a high barrier to entry.
Service on its own can transform a highly competitive market into something captive simply because many firms totally ignore the value of good service – and the bigger the competitor, the more likely they are to ignore service. Simply using a real person to answer the telephone can dramatically improve chances of success.
Customers also value professionalism. Not quibbling when a customer wants a refund, being available when needed, being open and honest about pricing all adds up. This may not matter where repeat business is unimportant, but for a long term business, it is essential.
Cashflow – where does the money come from and when to give up
No business can run for long at a loss. Most businesses won’t trade profitably initially, but the money has to come from somewhere if it is not from sales. That source can be savings, loans, grants or outside investment but at some point it will dry up, and any new business must cope with that. Entrepreneurs often plan to raise money through external investment or grants but that can be a long hard road, and time may be better spent generating business. The media is full of stories of how entrepreneurs made fortunes with early investors and by not giving up. Of course, we rarely read stories about all the people that failed and lost everything.
The costs to a small business of applying for government grants can be considerable in terms of time and therefore money. The UK government’s “Innovate UK” for example claims to receive 100,000 grant applications per annum, many of which involve filling in forms that would conservatively take a week to complete. Getting one of these applications even read by a suitably qualified assessor can be a lottery.
Similarly, many investors work on the basis that nine investments will fail and the one that succeeds will more than compensate. You can easily waste your valuable time writing business plans that nobody reads let alone understands. This is particularly true of hi-tech pitches.
It’s easy to get so involved in marketing and selling that you lose sight of the fact you are losing money. A good plan is to work out your average monthly overheads, and know to what extent they are covered, or not, by your gross monthly profits.
Ideas before their time and the psychology of your customers
You may expect that your fabulous idea will resonate with everyone, but there can be hundreds of reasons why your product or service cannot sell. Whether it is intrinsically useful, novel or will save customers money may be very low on the list of reasons to buy. At the top of the list is who else is using it? If it is someone they trust or, better still, a competitor, they will often not bother to see if it actually makes good sense for them.
One paying customer is worth a thousand prospective customers, so if you cannot convince even one customer, you may have to accept that your idea is either not a good one or ahead of its time. Sometimes it’s not the idea that is bad, simply that an enabling technology is not yet there.
When getting market traction for a generic product or service it is better to home in on one specific market than attempt to convince everyone.
Finding the right people
The CEO of a major international company once told me that no matter whether they took on someone that was recommended by a relative, or, at great cost, head-hunted the most qualified candidate, the odds of the hire working out were the same – 50:50. Recruiting the right person is largely a matter of luck.
Some staff are often recruited through desperation. The difficult question is always “is it better to take on someone not 100% suitable than no one?” If losing someone can dramatically affect your business then it’s arguably better to fill the post as best you can. But in the long-term this rarely works out, and underlines the importance of a business owner knowing how to do every job to bridge the gap while finding the right person.
Re-inventing a business
Even the least innovative businesses should never rest on their laurels. Long-established professions such as law and accountancy have been transformed by information technology. However, it is just as easy to go over-the-top on technology just because you believe your main competition is doing it. IT decisions should be made on the basis of in-depth analysis of their impact on your business. Gone are the days when owners can devolve responsibility for technology without understanding it themselves.
It’s a numbers game – when perception is not reality
In a free market, success is a numbers game. Making a market that does not previously exist can be very expensive and even the biggest corporations often fail. Some products do not deserve to succeed but they capture the imagination and success breeds success.
The key to success is evolution, not revolution. Start small, take one step at a time and see if it works before progressing to the next. The road to failure is littered with entrepreneurs with a great idea, the gift of the gab, and/or greedy investors. Whatever your perception about a market, it’s about what customers buy, not what they need. Awards, compliments and prospective clients will not pay bills. And don’t forget, you get no points for trying.