A Good Entrepreneur Knows How to Listen

Doug Burgoyne came on the den this week pitching his business Frogbox, which supplies hard plastic boxes as a rental in place of cardboard boxes. His pitch, coming in with a valuation of $1.2 million, was that the business is profitable (though apparently not yet to a significant level), and is designed to scale.

The basics of the business model is that Frogbox drops off and picks up sets of hard plastic boxes which are sturdy and waterproof, at a cost to the consumer on par with using new cardboard boxes. A quick check of their website shows that renting 35 boxes with a dolly for a week would cost about $109 plus a delivery fee (in the case I looked up, the delivery fee was $40).

Robery Herjavec and Kevin O’Leary made the first offer with a valuation of $400,000 to which Arlene Dickinson pointed out that the offer was ridiculously low. Jim Treliving and Brett Wilson then put out an offer with an $800,000 valuation. Arlene, who had been pushing a higher valuation, made an equivalent offer to that from Jim and Brett.

Doug Burgoyne, after some discussion, came back with a request – that Jim and Brett join their offer with Arlene, which would mean that the investors would bring the full set of experiences needed. Jim, of course, with his various franchises, could show them how to scale their business to add new cities to their list. Brett could provide more general business experience. Arlene, the master of marketing, would help in bringing their brand into the public awareness.

On air, the dragons accepted, and the deal moved forward with the three dragons. However, after the show, Arlene stepped out of the deal when it became difficult to determine the exact role she are her business, Venture Communications, would play in the marketing of Frogbox. However, Jim Treliving and Brett Wilson continued with the deal and closed recently.

Part of coming on the den with a pitch is being prepared to explore new options. An entrepreneur who believes they know how to run their business better than anyone else and cannot listen to new suggestions will find themselves on the receiving end of harsh criticism from the dragons. At the same time, there are aspects to every business that are truly best understood by the people in the trenches.

Doug was aware that expansion was the key to making the deal go forward. The two offers dealt with the problem in different manners. Jim and Brett were likely to focus on the ability to franchise the business (starting in a new city had a cost of about $60,000 which is not unreasonable for a franchise model). Arlene was more likely to focus on how to market the business more extensively. During growth, both aspects of growing the business are important, but one needs to dominate the other.

Ultimately, the business would take one of the two paths, and that would be determined by conversations between the owners and the prospective investors. As smart business owners, they made the decision before the deal closed, and will be more likely to see success in their growing business.

The Expansion Dilemma

Perhaps this issue is more relevant to those in service-based businesses, though I believe that no matter the nature of your business, this issue will resonate with you. I would be interested in hearing your feedback on this issue – as I believe that it has no right or wrong answers, merely a large set of choices.

At some point during the life of a business, the amount of work coming in the door will exceed the limits of the business. Product based businesses will see this when demand outstrips their ability to supply, service-based businesses will see this when the demands on their time exceed the number of hours available to work. In a large business, this issue may have already been solved, either by having a process for increasing the supply, or by increasing the price to reduce demand.

However, smaller businesses walk with trepidation when faced with this issue. On the one hand, their ability to increase supply is severely limited – they may not have the necessary cash flow to handle additional hires, or to front the money required to pay for additional goods. On the other hand, the inability to supply the increasing demand may hamper their ability to expand, and may result in a negative impact on their existing business.

Additionally, there is the inability to see the future, which means that the business owner trying to decide whether or not the sudden increase in demand justifies hiring another employee must guess (hopefully with some helpful data) whether the sudden demand is merely a spike in activity, or if it is sustainable. This has ramifications on what is needed to ensure that the decision is made with appropriate resources allocated to support it, should the spike in demand be followed by a dip.

To determine how to best handle the spike in demand, it is necessary to look at the goals for the business. If the aim is to grow by hiring more people, to increase the supply, then the spike in demand can be one way of moving toward that goal sooner than expected. If the aim is to reach a certain level of activity, or, in other words, to cap the supply at a certain point (for example, to work 40 hours per week), then the decision that needs to be made is only how to go about reducing the demand – should you raise your prices, or merely refuse to take on additional customers?

Others, though, are stuck between the two decisions. While they don’t mind working more than a certain number of hours, or, in other words, to work with an expanding business, they also may not be actively looking to expand. As a result, they are unprepared for the expansion, both from a fiscal point of view, and psychologically as well.

Some may choose to bridge the gap by using sub-contractors to take on the work they are unable to do. This can help defer the decision until it is clear whether or not the increase in demand is going to be enduring, but it also exposes the business owner to various risks associated with delegating work (the quality may not be up to standard, managing the contractor can be complicated). Others may raise prices moderately, in an attempt to drive up margins while they debate internally how to handle the demand.

What would you do? How have you handled sudden spikes in demand beyond your abilities to provide?

Marketing – Paying Attention to What is Not Said

Working in business consulting, some of my time is spent dealing with the issue of marketing – namely, assisting clients in getting the word about their product or service out to their target market. Sometimes, the issue is reaching the target audience, which is usually fairly simple to solve. Other times, the issue is about conversions – turning the audience into customers.

Reaching the target market is a fairly simple problem, though implementing the solution may not be easy. Once you understand which groups make up your target market, you can determine using a variety of processes where your audience receives information from, how they make purchase decisions, and then make sure you are placed accordingly. The placement itself may be complex, or expensive, but determining where to be placed is neither.

However, a low conversion rate is much more difficult to diagnose. As an example, I could offer a book on this site, and the sales might be less than hoped (as an aside, I’ve never offered anything for sale on this site, so this example is complete hypothetical). I could look and determine whether or not people were looking at the book via Google Analytics. I could look into how people find the book, and how many buy the book.

What this teaches me, though, is merely a statistic – it does not provide a reason why fewer people complete the purchasing process than start it. Is it because it takes too many steps to complete the purchase? Is the book too expensive? Perhaps the topic is boring and no one wants to read it. Any of these is possible.

To complicate this further, even if a prospect told me why they did not follow through with the purchase, I may still not gain much valuable information. For example, I might be told the price was too high, but lowering the price might not have increased the number of sales sufficiently to cover the difference. That prospect in particular might not have purchased even at a lower price, because the price was not the core issue!

The prospect might have declined to purchase because they couldn’t see the value in what I was offering, and used the price as an explanation – it was too expensive for an unknown entity. To convert them, I would need to explain to them what the value is in making the purchase, except nobody told me that was a problem.

Good marketing involves listening to prospects, and hearing what isn’t said. Are you talking to the right person? Have you addressed their true concerns? Does the person you’re talking to need approval from someone else in their organization, who may have a different agenda? In other words, beneath the cover of the excuses for no purchase being made, what was the real reason that the prospect didn’t become a customer?

Social Media is Not a Strategy, but you need a Social Media Strategy

Trying to trace down the origin of the saying “Social Media is not a strategy” was more difficult than I expected, though I have been able to confirm that it’s been around since at least 2004. Some businesses get this – social media is a tool, just like radio is a tool, and sandwich-board men are a tool. A marketing strategy makes use of tools, but tools do not create a strategy. That is, throwing together a bunch of tools does not create a coherent strategy.

Social Media is even less like radio or TV, in that there are many aspects to social media, each of which is a tool on its own. Perhaps this is where the confusion arises – does the creation of a Facebook page, a blog, a Twitter feed, some presence on Linked In – do those add up to a strategy?

As many business people I know who utilize Social Media heavily in their marketing efforts will tell you, using the tools does not make a strategy, though a strategy uses the tools. A coherent Social Media strategy understands the role each of the tools can play, the type of work needed to balance the various aspects to Social Media against one another. The strategy involves more than just the tools, but also how they will be used.

Will the Twitter feed be used to showcase products, or will it be for chatting with the target market?

Will the blog focus on issues internal to the company, or external to the industry?

Who will manage the Facebook page?

The answers to these questions, and many more besides, result in the creation of a sound strategy, one which has an objective, and shows how the various tools will be used to bring the goal closer to fruition.

For example, my strategy with my blog here is not to promote my own work, or my business. It’s to help showcase my expertise by talking about issues relating to my target market. While occasionally I will talk about my business, it’s not really about that – it’s about issues potential customers might want answered. Ultimately, some of the readers of this blog may choose to work with me, but only because I’ve already established credibility with them through my writing (over 170,000 words to date).

Strategies don’t need to be complicated, but they need to involve more than just a tool, or set of tools. Social Media is a set of tools – not a strategy.

Question: Where did you find a mentor?

Something advocated by most advisers for business owners, which I’ve promoted here as well many times, is that you find a mentor – someone who can advise you in regard to your specific issues, and help you navigate the world of business from having been in your shoes before. The value of such a person is not questioned – but finding an appropriate mentor can be quite the challenge.

Where would you find your mentor, or, if you already have a mentor, how did you select him or her?

Retaining Customers

Last week, I asked what it was that would drive you away from a business. Not surprisingly, the most common answer was customer service, or rather, poor customer service. While consumers can be tolerant of poor quality and high prices, service is something we’re unforgiving of, unless we’ve been prepared to accept it.

As an example, going to dollar stores in general does not make one think of good customer service. The expectation there is that the prices be a dollar (or, with inflation, perhaps as much as two or three dollars). The criteria for measuring the store is in its name, thus there is more flexibility in terms of other factors such as service.

Other businesses, though, do not have that luxury. We expect, when entering a store, to be received in a friendly manner, that the sales staff be knowledgeable about their products. Customers don’t like to wait in line, or be ignored while the staff chat on the floor.

This extends to online stores as well. When we shop online, we have an expectation that we will be notified whether items are in stock, the estimated shipping times, and any extra fees that may apply. The site is expected to have a current security certificate, to ensure that our credit card information is being sent to the site in a secure manner, and being handled responsibly.

If a store processed your card, and you immediately were contacted by fraud alert that several transactions had been processed seconds apart, you would be concerned. Even if the reason for the multiple transactions was later determined to be legitimate, corresponding to each of the expected deliveries, you would not be impressed with the site. If this resulted in a delay in your order being processed, you would be concerned, since the site had precipitated the problem.

This is not an unusual scenario. A recent order placed on the Best Buy website for several hundred dollars of miscellaneous equipment was split into four shipments. A separate charge was placed for each portion of the order (though they were all ordered as a single unit), since the site policy is to bill as the orders are shipped. This makes sense when shipments are being made on different days, but not when they’re all shipped on one day. Not a surprise, the credit card company held the transaction until I verified that the transaction were okay.

Several hours later, I got an email from Best Buy saying that the order was being held because my card was denied. This, in fact, was not correct – the credit card processor had sent an error message that Best Buy was to contact them in regard to the charge, and they had already approved the charge.

In this, the site failed in my expectations. They looked at the order from the perspective of computational simplicity, not from customer experience. Since this had been a compounding of previous bad experiences with their store, they lost me as a customer. The issue was completely in regard to service – and when a store fails in its customer service, it will lose potentially more than just the one customer who had the bad experience.

Den Pitches Rise and Fall

There’s something interesting about the show Dragons’ Den that seems to appeal to a certain type of business person. People come on the show with their businesses, hoping to leave the set with a potential investment from one of the five dragons, yet in the average show, only 2 businesses will get lucky. Having watched the show for a few seasons, I’ve started to notice a change in the businesses.

There are a few types of businesses that make appearances. There are the truly good businesses, with solid number behind their smooth pitch, realistic expectations, and they generally walk away with a deal. These are the businesses that could have acquired an investment elsewhere, though the relatively easy access of the dragons leads them into the den. Not that getting the investment is easy, but getting the investors to listen is a lot more straight-forward.

On the other end of the spectrum are the spectacularly bad businesses, with lousy pitches, no numbers, and unrealistic expectations in regard to the value of their business. While some get deals, it is unusual, and often not because of the merit of the business, but rather to support some other cause (Brett Wilson is often the investor in those cases).

This week, one business arrived with a new reason for needing money – speed.

Sometimes, even a profitable needs money for rapid growth, for the simple reason that expansion happens in one of two ways. Either it’s done in bits and pieces as the cash flow in the business allows, or it’s done in a sudden spurt, in which case, outside financing will be required.

John Rowe and Justin Rowe from Honibe understood this. Their dehydrated honey business, offering a unique product with wide appeal, was already quite profitable. They could have continued along their path, slowly expanding into new markets as their internal finances allowed. However, they wanted to expand into the US, and for that, they needed money – a lot of it.

Robert Herjavec felt that the request for money was perhaps short-sighted, and that giving up equity for the cash would be a decision they would eventually regret. But the other dragons didn’t care about that – it was a good business, profitable, and the money was being directed toward something likely to provide a return. They were willing to back it to the tune of $1 million, split between an investment and an operating line of credit.

John and Justin took the offer, because $1 million is not an offer to walk away from lightly. I suspect that following their appearance, they’ve taken a look to see if they could acquire alternative forms of financing that would result in them keeping a higher percentage of teh company. However, they also recognized the value in having the dragons as major stakeholders in the company, and the eventual advice and experience they would have access to once the deal completes.

Effective Marketing Strategy

Recent discussions with one of my clients brought to light a common problem with marketing plans made by businesses without the foresight to consult with marketing companies, or companies involved in aspects of marketing. The client in question was looking for ways to promote their product, and thought of several different methods by which they could reach out to their target users. Like many businesses, their marketing budget was limited, and so they were looking for the best way to use their budget effectively.

The suggestion I made came from a piece of advice provided during a course on business planning, and that was to pick 3 marketing methods they wanted to use. One would be their primary method, being allocated 50-80% of their marketing budget. One would be the secondary method, garnering 15-30% of the budget, and the third would be a minor player, getting as little as 5% of the budget.

The result of this breakdown is that each aspect to their marketing plan will be given its best chance to succeed. The method deemed to be likely to see the widest success (in their case, creating channels to promote their product) would be given the highest priority. The method which is likely to do somewhat well gets just enough resources to be useful, but not so much as to detract from the primary marketing effort.

The third marketing channel is what I call the wildcard. There is the off chance that something a bit different will work. It might be a pet theory of the business owner, or something a manager in the company stumbled on and wants to try. Rather than risk the entire venture on this, a small budget (and corresponding time and effort) is given to the plan, just enough that it can succeed, but not so much that it interferes with the other, more central plans.

I found this interesting, because there are many things in business that deal with the number three. Timelines are often short by a factor of three, budgets in the initial years can be off by as much as a factor of 3. Strategies are made in groups of three – this week, this month, this year.

Marketing is just one more aspect of business that should be running off the number 3.

Plan B? Support Plan A

There is a tendency for prudent people to have a Plan A, or what they really want to have work, and a Plan B. In business, though, your Plan B should be to support Plan A.

The true reason for having multiple plans is when there is an outside factor which can influence whether or not a plan is feasible. For example, if you’re planning a camp outing, you don’t have control over the weather. Plan A would then be for a beautiful sunny day, while Plan B would be in case it rains. Since you won’t be able to control this factor, having a second plan (or a third, as the situation demands) would be perfectly reasonable.

In business, however, having multiple plans can actually hamper your ability to succeed at your primary plan. Setting up your business, you have a path of how you would like to grow your business. Some parts of that plan are flexible, others are not. However, all your planning should be dedicated toward removing obstacles to Plan A succeeding.

As soon as you start to devote effort toward a secondary plan, you diminish the effort put into Plan A. Suddenly, with obstacles arising in your chosen path, it becomes easier to say you’ll switch to Plan B, rather than persevere toward your original goal.

To flip this around, not having a second plan can seem foolish – it’s known that life rarely follows along our ideas of perfection. As such, how can one justify not having a recourse?

The answer is that the recourse is to plan better – think through the various possible scenarios, all the things that could go wrong, and plan for them. If your flyers don’t generate a lot of leads, then you’ll adapt your marketing strategy to use direct mail postcards. If the average customer spends $50 in your store instead of the planned $75, you’ll implement a plan to increase the number of customers.

However, in the big picture, all these actions and plans are to achieve a single goal, whatever that might be. Plan B is merely one of several plans for when Plan A needs a bit of tweaking to succeed.