Advice for Small Business Owners » business development

Plan B? Support Plan A

Elie Kochman — Wed, 19 Jan 2011 11:45:27 +0000

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.

Who Gives This Type of Advice?

Elie Kochman — Tue, 28 Dec 2010 11:45:49 +0000

In a conversation with a client, we discussed a piece of advice he had received from a venture capitalist in regard to his business. He had been seeking an investment of a few million dollars, most of which would be spent on development and hardware infrastructure for the business. The business already had clients lined up to use the pair of products as soon as it became available, thereby crossing the first hurdle of getting the first paying customer.

With this validation under their belt, he hoped that the VC he was meeting with would see the promise. However, he left the meeting empty-handed, though the VC parted significant amounts of advice on how he might proceed. The reason he gave for declining the investment, though, was something along the lines of:

It’s not big enough for me to get involved. I think your business will do well, and will be profitable in the near future. However, you have a long road in front of you to reach the market, and the competition is quite strong. It’s not for me.

There are actually two types of investors who would make such a comment, and trying to differentiate between the two is complex at best, impossible at worst.

The first investor knows the industry, the competition, the existing products, and understands the business idea you’re proposing. He’s looked at how it compares to the current offerings, and has made an educated guess as to how the target market will respond. He’s factored in changes in the nature of the market itself – in this case, it’s age-specific, so understanding the generation that will be targeted to adopt the product is a key requirement to being able to project the business’ performance.

Once all this has been taken into consideration, this investor feels that the adoption rate will not be high, the product will not redefine the market as a whole, and there will be stiff competition. It’s unlikely that the business will do much beyond turn into “yet another” player in the specified market.

The second investor is likewise well-educated in the industry, but is also looking at it from the perspective of his own generation. That is, he sees how his generation would react to such a product, and projects that thought onto the current market. With limited adoption by that generation, a generalization of how it might be adopted by other markets is created, resulting in the same conclusion.

The difference between the two types of investors is that the first has made a properly balanced argument for why the business will not be the next shining star. The second, however, has merely projected an attitude against a new business, whose market he does not really understand. When the advice comes from the second investor, it should be taken dubiously, since he clearly does not get it.

The problem, however, is how to tell the difference between the two. For that, you need to know the people involved, past investments they’ve made, and then make a judgement call based on that.

It’s a Good Idea, Now What?

Elie Kochman — Fri, 24 Dec 2010 11:45:31 +0000

Often in my line of work, I have conversations with people who have thought of an idea for a product or service, and are looking to turn it into a business. The first barrier they need to cross, namely, having a GOOD idea, has been crossed via validation from potential customers of the product or service. The question they have, then, is what to do next.

The first thing that needs to be realized is that getting validation that the idea is a good one has ramifications for how to proceed. Some potential clients can help by working with you to refine the service or product. Other times, you have to go off on your own and figure it out.

One of the biggest mistakes someone new to the business world can do is to go out and try to raise capital. The reason is quite simple – you don’t know yet if you actually need any. Sure, it would be nice to have a budget of millions that you can spend on fancy offices and a huge staff, but do you NEED it?

The first approach, therefore, should be to determine how much of the product or service can be developed with what you have – namely, yourself (and any partners you may be working with). Commonly known as bootstrapping, you should be trying to build out with the minimum amount of resources possible.

If that’s not possible, see what you can get by reaching out to your network. People don’t expect to work for free, but you may be able to barter something of value (and note that shares in your business currently have little value at all) for work.

Don’t forget that you need to be thinking about multiple aspects to your business. You need more than just an idea, product or service – you need to be able to sell it. If there are legal ramifications to that, make sure you work them out up front. You may need a marketing plan, you might need to work out pricing schemes. If you know someone who’s been in business, talk to them – you should try to get a mentor if you can, if only to steer you clear of issues that you might not need to face.

However, start your approach with an eye toward frugality. That doesn’t mean trying to pay less than the value of a given item, but rather determining if you need the item in the first place. There’s a gray area between good enough and perfect, and usually, perfect isn’t worth the effort over good enough (though of course there are many exceptions to this).

The Difference Between Marketing and Sales

Elie Kochman — Wed, 08 Dec 2010 11:45:33 +0000

I have a client with an interesting employee – he can take a product, and figure out who the best customers of this product are. He knows how to reach those people, as well as the people who would ultimately pay for the product. He can get these people to seriously consider using his product over the competion. Many times, this results in sales, and until recently, the line between sales and marketing was blurred.

With recent developments, the nature of the products was changing, and it was realized that this person is actually a fantastic marketer, but not a salesman, much to many people’s surprise.

The difference between the two, however, is quite important, and in growing businesses, these two roles will eventually diverge from one another.

The marketer is concerned with getting people to look at the product, to consider its merits, sometimes in light of competing products. He listens to what potential customers are saying about the product, and requests changes to be made to the product. He does not, however, work with real products, but rather with demo versions, wish lists, and spec sheets.

The salesman deals with a completed product, getting people to actually pay for it. He will follow up on leads created by the marketers to get people to pull out their credit cards and pay. He will work on pricing models, support contracts, and return policies. He will focus, in short, on getting the working product into the end user’s hands.

The skills needed for both these roles are similar, but not the same. If you see your product struggling to be adopted by your target market, think about whether the problem is one of knowledge in the market at large, or in closing deals. Do your potential customers know about your product, and how it fits into their view of the world? If not, the problem is likely one of marketing. If, on the other hand, people know about the product but are not buying, then your problem may be in sales.

Knowing your problem is one of sales at least gives you a place to start your research into why people are not buying. It might be because you don’t have appropriate staff to follow up on leads, or it might be because your product fails to fulfill the needs you think it does.

However, at least you have been able to narrow down the problem into a set of solvable questions.

The Best Location For Your Business

Elie Kochman — Fri, 26 Nov 2010 11:45:36 +0000

A common question when starting a business is in regard to choosing a jurisdiction under which to operate. For example, here in Canada you can incorporate provincially or federally. In the US, you can incorporate in any of the states, provided you meet their requirements. Other countries will allow you to form a corporation under their auspices, which may have various benefits to you and your business.

To decide the answer as to which jurisdiction is best for your business, you need to think about the basic reasons why you incorporate to begin with. First, it offers you as a private person protection from the liabilities of the corporation (with a few exceptions). Second, it offers you options for taxation purposes. Third, it gives you a vehicle under which to operate your business, raise capital, etc.

The first benefit is pretty much standard fare for a corporation, and so is basically irrelevant to this discussion.

The second would require some serious consultation with your accountant and lawyer, who could work out the most beneficial way to organize your business.

The third would imply that you look at what you intend to do with your business, and what requirements might ensue from that activity.

For example, if your entire business is operating in Toronto, with no business activity outside Ontario, you would be unlikely to have any reason to incorporate anywhere other than Ontario (except for possibly incorporating federally instead). If you will need to borrow money, you should look at what requirements banks and similar institutions have in regard to whom they will lend money to, and at what terms.

The simplest rule of thumb, though, is to incorporate in the same place that your business operates. If you don’t operate in the Cayman Islands, than why are you putting your corporation there? An audit of your finances might reveal this holding, and could result in penalties if you’re caught doing something like this, under the premise of tax avoidance. If you think that isn’t likely, both Canada and the US have recently been catching people with exactly this type of arrangement, and the fines have been incredibly steep, far beyond any potential savings the arrangment might have provided.

Lowering Prices Can Increase Profits

Elie Kochman — Wed, 29 Sep 2010 11:45:41 +0000

A service provider recently sent me a bill for some work she had done for me. The job was not large, but I had requested a quote for the work before approving it, and when the invoice came, the price was slightly higher than had been indicated in the quote.

I debated the merits of questioning the bill, since the dollar amount in question was only $15, but I decided that it couldn’t hurt. So I sent off an email including the original quote, and asked for an explanation of the price discrepancy.

A few minutes later, I had my response. A new invoice was attached for the original amount, and an explanation of the difference between the two invoices. Apparently, there was a slight difference in materials used which resulted in the surcharge. However, she wrote off that surcharge once I pointed out that I had a quote for a lower price.

She didn’t have to write it off. She could have said that the change in materials justified the higher price. The material change was initiated by someone in my employ, and so I was actually responsible for that.

However, because she wrote off the $15, she made me happy. As a customer, I would now be happy to use her business once again, and to refer her to others. She made a solid business relationship that will ultimately bring her more business. The next time, the margin on the project may be larger, or the volume of referred business may justify the write-off.

Sometimes, the bird in the hand is worth less than the two in the bush. Releasing the one may result in two more coming days, months, or years down the line.

Sometimes, you really do need to pay attention to the big picture, and realize that what’s being debated isn’t worth the time, effort, or dollars you’re putting into it.

Looking for a Business Mentor

Elie Kochman — Tue, 14 Sep 2010 11:45:03 +0000

One of the best resources that a business owner can get is a mentor. I am not referring to a coach per se, but a mentor, and the distinction is important. A mentor can help a new business owner gain experience without the pain of making mistakes (or at least, reducing the pain and frequency of those mistakes).

Why do I not include a coach in this category? Simple – there’s a conflict of interest.

While I do not accuse any particular coach of the following, it is something to be aware of when recruiting ac coach for your business. A coach is in the business of coaching. They earn their fees by spending time with you, by providing you with material, by getting you to continue to be their client, and to refer other clients to them. As such, while a coach does want you to succeed (thereby garnering additional clients through your referrals), they also want that success to be slow, not fast, so that you will continue to be a client for a long time.

A rapid success would mean that you’ve learned the lessons. Even were that not to be true, because of the success you’ve seen, there would an inclination to remove the expense of retaining your coach. Slow success would show you why the coach is worth the fees, and would keep you paying them for as long as it took to fully succeed.

What I would look for in a mentor, therefore, is an altruistic reason for coaching that cannot be explained by the fees I pay. This could be a successful businessman who sees the mentoring as a way of giving to the next generation of business owners some of their experience. It could be someone who simply wishes to donate their time and expertise, or charge a minimal amount relative to what they could be earning.

The altruism means that this mentor would be happy to see you succeed rapidly as well as slowly. Since the financial gain is almost irrelevant, the conflict of interest is likewise removed, or at least reduced.

This is not to say that I’m looking for a handout. I’m strongly of the belief that if someone does work, they should be compensated fairly for it. As such, even a mentor could expect to be compensated for their time. But the compensation should not be the reason that the person is coaching me (or you, or anyone). Rather, it should extend from some other altruistic cause, with the financial reward being for the value of what they deliver.

2 Paths to Product Development Success

Elie Kochman — Thu, 19 Aug 2010 11:45:27 +0000

When HP was first founded, it was done on the basis of a product which had been built out of curiosity and then sold, followed by requests for more. The engineers then built another product, and then another, each of which sold to more and more customers. The company grew on the basis of many individual products with little to no vision for where the company was going. Products were built with no vision for market and yet the company grew to become a massive success.

Other companies have taken a different route – they identify a need, a consumer, and then build a product or service to fill a void. The vision is clear, the goals well-defined.

Which is correct? Both, and neither.

Building a product with no vision for market means that the product is likely to be built well, since there is little pressure to get it to market sooner rather than later. However, since there is no market, it’s a distinct possibility that the product has no market, and therefore will never see revenue. As well, since it is not fulfilling a real need, it’s possible that the product will be found to be lacking in key areas that customers are concerned with.

On the other hand, selling the product first means that there is external pressure to complete the product as soon as possible, which can have negative impacts on quality control. Additionally, there is the risk of unachievable promises, with features being sold without an ability to build those features.

Like many things in life, the best route is that of a compromise. No vision isn’t good, but too much vision can blind you to other options and alternatives. Waiting to find a customer means time is wasted that could be spent developing the product, but ignoring customer acquisition means that you can be headed into a dead end long after you could have realized that there’s no future in the product.

Do you ascribe to one of these two concepts over the other? Why?

Get Some Skin in the Game

Elie Kochman — Fri, 09 Jul 2010 11:45:28 +0000

There’s a fairly well known rule in propositioning to potential investors – make sure you have some personal investment in the business or you risk losing all interest up front. The reason for this is fairly simple – the investor wants to see that you believe in the idea enough to take some risk before putting their own money behind you.

I discovered today that not all investors are actually aware of this rule, and that it applies in reverse. A proposal I had heard about consisted of 100% introductions and connections, but no cash. This was actually the second time I had come across such a scenario, and it surprised me.

As a business owner, when looking for an investor, you are generally looking for some cash. While the investor usually brings more to the business than just their bank account, the business owner will still want to see some cash in the deal. The reason is fairly simple – the investor too should have some skin in the game.

Take a business worth $100,000 before the investor arrives (we’ll leave the derivation of that value alone for the sake of argument). The investor requests 10% equity in exchange for performing various services for the business (which do have a value, perhaps quite large). The business owner will likely retort with a request for $10,000 in addition to the services, and a deal might be struck somewhere in between.

There are two reasons for the money, though.

One is to get the investor to part with cash, showing that they truly believe in the company and are willing to take a risk. Having them provide a service at no cost is an investment of time, which may have more value in terms of dollars, but doesn’t have the same emotional connotations.

The second is to get a more widespread investment in the form of cash that can be used for a variety of reasons, instead of time, which can only be used for the particular expertise of the investor.

A message to investors – if you want to be taken seriously, include at least a token amount of cash in your deal. You can request more equity in exchange, or a particular service in exchange. The offer of cash shows that you trust more than your time with the business, but also your hard-earned dollars.

Readers Respond: Questions to Ask About Your Business

Elie Kochman — Wed, 23 Dec 2009 16:35:08 +0000

Recently, I wrote about various questions to keep asking your business, and asked my readers for their take on the questions, and suggestions for additional questions. Here is an extract of what they had to say. The list was actually a fair bit longer, with over 30 additional questions. What I provide here is a sampling of those answers, grouped by focus point.

Customers and Clients

How do I win more customers? (James Wilson) This is one of the biggest questions to be asking yourself, because your existing customers can only bring you so far, and if you want your business to grow, you will need to find new customers.
What is the profile of my best customers? (Mike McRitchie) In order to attract new customers, you need to know what kind of customer is ideal for your business.
Am I looking after my existing customers? (Michael Greenwood) We are often sidetracked by growth, and forget to take care of those who made the growth possible. Don’t forget about your current clients when searching for new clients.

Products and Services

How do I create excitement for my product? (Dave Maskin) If your product is boring, you’ll have a hard time selling it. Make sure that you know how to spin your product or service so that it looks interesting and exciting.
Are we delivering value consistently? (John Cameron) Make sure that as your company grows, you continue to deliver the same or better quality that your customers have come to expect from you.
How should I price products? (James Wilson) Profits are a function of having the right price and keeping your expenses down. Make sure that you spend enough time figuring out the right price, and that you adjust for changes in your costs on a regular basis.

Metrics

What are my benchmarks and how do I actually stack up against them? (Shelly Searcy) How do you measure your success, or advances? Where do you stand at any given point in time?
How do my numbers stack up to the past and others in my industry? (Mike McRitchie) It’s important to know where you stand in terms of your history and your competition. This information can help you plan for growth, and to determine how best to capture more of your market segment.

Growth and Goals

Am I really being realistic in each of my business assumptions? (Wallace Jackson) You can only grow if you are honest and truthful with yourself. Make sure that any assumptions made about your business are as accurate as possible.
Are the values and purpose and vision clear for my business? (Steve Rucinski) Your business will grow in the direction you desire only if all the people involved understand what it is your business stands for.
Where and to whom can we profitably deliver more value? (John Cameron) Growth is done by expanding either your services or products, or by expanding the size of your portion of the market. Do you know what your options are?
How much growth can my cash handle? (Mike McRitchie) The most limiting factor to growth is likely the money you have on hand. Make sure you know how much cash you have available, and what your options are for acquiring more cash, either via an investment or as a loan.
What is keeping us from achieving our most ambitious goals? (Adrienne Creger Jandler) You haven’t yet reached your goals, but if you understand what it will take to reach those goals, then you can and will succeed.

In summary, you can reduce all these questions to just four, as phrased by Karen Sherr:

What am I doing that I should be doing?
What am I doing that I shouldn’t be doing?
What am I not doing that I should be doing?
What am I not doing that I shouldn’t be doing?

All the questions about your business come down to those four, to ensure that you’re doing the right things, none of the wrong things, and you haven’t missed anything. The rest is just details.