To Startup or Not To Startup? Five Things to Consider Before Launching Your Own Company
Why start your own business? After all, it may be one of the most masochistic decisions any individual can make.
To begin, startups come with financial risk, and impact of failure on one’s finances can be severe. Moreover, starting a new business is a sure-fire way to distance oneself from friends and family. Startups can be all-consuming, leaving little time for much else—including personal relationships. Finally, starting a business can take a heavy physical and emotional toll. Late nights and meals at one’s desk are not a healthy lifestyle, and the highs and lows of the startup game can drive a person mad.
Here is why I love being an entrepreneur. In short, starting a business is one of the most exciting, challenging, and rewarding ways to spend my working years. Yes, it can be hard and cruel, but six years into it, I haven’t experienced a single day of boredom.
Startups are not for everyone. Here is some advice if you are considering whether to get into the game:
(1) Get some experience first
Some recent academic literature has concluded that the ideal age for entrepreneurship is 40. This is no doubt because can help to have working experience before you start a business. For one, it provides an opportunity to save up some potential capital to invest. Moreover, you will inevitably pick up some useful skills and knowledge along the way—some of which could prove handy, even if your new business is in a field outside of your expertise. In addition, as you work, your network of contacts will grow. This can prove useful in a variety of ways, including client development, recruiting, the pursuit of capital, to name a few.
(2) Analyze your opportunity costs
If you have nothing to lose, it is easier to take the leap into entrepreneurship. If you are the sole breadwinner for a family of 5 with a limited nest egg, it probably makes sense to save up some cash first, and think very carefully about the impact that a bombed startup would have on your life. One other word of caution here in a different vein: Be aware of the risk of your opportunity cost rising too high. Although an increasing employee paycheck is generally a good thing, the higher your salary rises, the more difficult it can become to quit your job and scratch that entrepreneurial itch.
(3) Build a detailed financial model for the business and test your assumptions thoroughly
Once you begin reducing the business to a spreadsheet, the realities of the numbers will begin to emerge. Taking into account all of your expenses and revenues, as well as when they should occur, will give you a sense of whether the business can make money. It will also give you a sense of how much capital you will need and by when. While there are always financial surprises in the startup experience, waiting to build your projections until after you commit to a business is a dangerous proposition.
(4) Speak to potential clients
Treat your new venture as a sophisticated investor would treat a new potential investment and determine whether your idea can be monetized. Do some due diligence and explore whether there is interest in your product or service. Ask client prospects whether they like your value proposition. If you are entering a competitive industry, ask what it would take for clients to switch providers. Knowing what potential clients want and need is critically important to know if there is room in the marketplace for your business.
(5) Ask yourself whether you have the right DNA
Jumping head first into a startup is not for everyone. If you are the type who needs others to motivate you, or who has trouble staying focused when times get tough, starting a business is probably not be the right move. But if you have self discipline, a fair amount of confidence, passion, and a good deal of intestinal fortitude, you may well be the perfect fit for entrepreneurship.
Keep in mind that starting a business is not for everyone. But for those who have what it takes, becoming an entrepreneur may be the most fulfilling professional path.
About the Author: Paul Mandell is a Founder and the Chief Executive Officer of Consero. In this role, Mr. Mandell provides strategic leadership for the company with a rigid focus on excellence at every level of the business. Prior to founding Consero, Mr. Mandell founded and was the President of a national legal support company that was acquired in 2007. The successor entity was recognized as one of the world’s top legal process outsourcing companies during his continued tenure as President the following year. Prior to entering the business world, Mr. Mandell practiced law at Arnold & Porter LLP and Sullivan & Cromwell LLP in Washington, DC, and New York, New York, respectively, where he focused primarily on antitrust and pharmaceutical litigation. Prior to his law firm experience, Mr. Mandell clerked for the Honorable K. Michael Moore of the U.S. District Court for the Southern District of Florida.
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The Secret Recipe to a Successful Small Business
Ever wonder if there is a common thread amongst successful business people, and small business owners that make them successful?
It’s common to think that really successful people must know something the rest of us don’t, that they have some business secret that has given them such success, right?
Jenna Jantsch, who works with VerticalResponse, was asking herself those same questions when she decided to interview three very successful business owners and see if they would divulge their “secret recipe”. Their responses were interesting, and should be quite telling for anyone who thinks to be successful you need to have some insider information that only a few are lucky enough to possess.
By: Jenna Jantsch
I work for VerticalResponse, a self-service direct marketing firm geared towards small businesses, you can just imagine the variety of businesses I encounter on any given day. But it never seems to matter if it is a salon, chocolate shop, marketing firm, film studio or a pizza parlor I am always blown away by the owner’s optimism, creativity and determination. After pondering these three ingredients for sometime I decided I needed to find out what the prefect receipt was for creating a successful small business. I asked three of the most successful small business owners how they took that leap of faith you need to start a small business. What qualifies these three to be some of the most successful small business owners? That’s easy, they love what they do and they can make enough to support themselves doing it. John Jantsch, a marketing and digital technology coach and author of ‘Duct Tape Marketing – The World’s Most Practical Small Business Marketing Guide’ said,
It was the fact that I knew everything would work out – win or lose everything happens for a reason. That is something my parents thought me and I bring that with me in everything I do. John Jantsch – Duct Tape Marketing
Something all small business owners need is optimism. Optimism allows you to try new things and believe that it will work out. It allows you to trust your employees during the times you have to put your business, also known as your life, in their hands. It permits you to make mistakes while understanding that you can learn and grow from them. Connie Hanrahan, owner of The Mantooth Company, a marketing and event planning company said,
I sent out a direct mail piece to all of my contacts asking what I should do next. I had an overwhelming response that said to start my own marketing firm. It was good to listen to others which just fueled my initial gut thought that I could do this. Connie Hanrahan – Owner, The Mantooth Company
Creativity is what makes your next big idea different than the any other. Let the creativity flow, allow yourself to be inspired by keeping your eyes open. Being one of a kind is never a bad thing when it comes to your small business. And Janine Popick, CEO of VerticalResponse, a self-service direct marketing firm said,
Starting a business and taking on responsibility for others will always keep you up for some portion of the night. That’s what keeps you going and makes you successful – you don’t want to let anyone down. Janine Popic – CEO, VerticalResponse
Having determination when starting your own small business is a must. Anyone who has done it knows there are sleepless nights and long hours in the beginning. Believing in yourself and knowing that you have a strong product will take you leaps and bounds farther than your competition. Optimism, creativity and determination are the three ingredients that I believe could make your next big idea into a thriving small business, even in this economy. In addition to an explanation of the three most important ingredients I was also reminded that you must never be scared to try. Succeed or fail jumping in is always the best way to go.
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How to Price Your Product or Service – Part II
In Part 1 of How to Price Your Product or Service we concentrated on specifically how to price a product. In Part 2 we will explore how to price your service so that you not only remain market competitive, but also pay yourself what your worth while making a nice profit.
Many small business owners provide a service of some kind to their customers. They don’t have a tangible product per se, but provide information or solutions to meet their customers needs. These services could be as varied as tax planning consultants to interior decorators, from web developers to landscape architects, but the conundrum remains what should you charge so you can attract and retain clients while still providing an adequate income for yourself?
Just because you are providing an intangible doesn’t mean you cannot systematically price your service, and we recommend the following three step approach.
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Pricing Your Service
Most businesses based on providing a service are billed on a per hour or per job approach, and we advocate knowing what per hour rate you will charge even if you are billing per job. Also we suggest you work through these steps in the order we present them (you’ll see why shortly).
For sake of example let’s say you own “No Audit Tax Planning Consulting Services” and you provide tax planning consulting services to small business (I’ll be giving you a call in a couple months to do my taxes!). How do you go about setting the rates for your tax consulting business?
Establish a Baseline Rate
First you’ll want to establish your baseline rate, which factors in your cost of doing business month in and month out regardless of how many clients you have. All of your overhead cost associated with your business should go into your baseline rate calculation.
Example: At “No Audit Tax Planning Consulting Services” you run a pretty lean operation, and have only a few recurring bills each month. When you add up your office expenses, phone bills, stationary, monthly advertising expenses, office space rent, and a few other miscellaneous expenses you find it cost you $2000 each month to run your business, and that’s before ever getting a paying client.
Take your monthly expenses and divide that by the maximum number of billable hours you will work in a month. You’ll be tempted to overestimate this amount, but try to be realistic, factor in days off, or time between clients. For our example we’ll say you can bill a maximum of 30 hours a week, or 120 hours a month.
From these two numbers you have your baseline rate. Take your overhead expenses and divide by your maximum billable hours.
So the baseline rate for “No Audit Tax Consulting Services” is $16.66/hr ($2000/120). That is the rate you absolutely have to charge in order to not loose money every month.
Gross Up Your Baseline Rate
The second step is to begin “grossing up” your baseline rate to include an adequate profit and to account for necessary expenses that would be paid by your employer if you were not working for yourself.
Example: You know your baseline rate is $16.66/hr. To this you want to add the cost of benefits you will need to pay yourself, and such things as transportation cost, or other soft cost that usually would be picked up by an employer. A good rule of thumb is to add 30% to your baseline cost to incorporate these expenses. After doing that you now have an hourly rate of $21.65/hr.
To this you will want to add a reasonable profit, usually in the neighborhood of 20-30% for consulting services. You choose to use 25%, and will add an additional 25% to the above rate bringing your new base rate too $27.06. or $27/hr. You now know with reasonable certainty that if you charge your clients $27/hr for tax consulting services you will be able to cover your monthly overhead, business expenses, and make a nice profit! Notice we do not factor in what it cost you to live each month, or whether or not $27/hr will be adequate to live a life you are accustomed to. This rate is purely a rate that pays your business expenses and gives you a nice return…if you want to live in a McMansion and buy a boat you will need to figure out how to pay for that, and has nothing to do with what a fair billable rate is. Your clients shouldn’t be penalized by a higher than average rate because you like to fly to Paris on the weekend.
Time to run out there and start getting the business right? Not so fast…
Competitor Analysis
The final step in the process is doing a full competitor analysis. You need to go out in the marketplace and find companies offering similar services to yours and see what they are charging. If they are comprable to your grossed up rate, then you are probably okay, if they are much higher or lower you will need to make some decisions.
Example: You find for tax planning service providers in your area a typical hourly rate is between $20-$30 dollars per hour. This means you are one of the more expensive providers in your area for similar services.
What to do?
You really have two choices at this point:
- Accept that you will be one of the more expensive providers and find ways to differentiate your service from your competitors that will justify the additional expense in your customers eyes.
- Find ways to trim your expenses so that you can lower your hourly rate.
Do not just lower your hourly rate to meet the competition! This will be tempting, but is rarely the right decision. You have already established a rate that you would comfortably meet your financial obligations with and you should try to stick with that rate, and this is the reason we have you go through the steps in the order we suggest.
If you are going to lower your rate to match the competition you need to find a way to cut expenses first. By just lowering your rate to meet competition you set yourself up for numerous potential problems (what if your competition lowers their rate under yours again?).
We suggest you stick with the hourly rate you calculated above and find ways to ad value your competitors don’t. You’d be surprised, it doesn’t need to be anything drastic to justify the cost, going a little above and beyond should do the trick.
What if you find your rate is significantly lower than the market rate?
Being significantly lower than the market rate is not a good thing either, but the solution is probably a little easier to stomach. Accurately assess if your service is providing the same value as your competitors, and if it is then decide how you want to price relative to them.
Example: You find for tax planning service providers in your area a typical hourly rate is between $50-$75 dollars per hour. This means you are the least expensive provider in your area for similar services.
What to do?
You really have one choice at this point:
- Raise your rate to align more closely with the market
Why not keep your rate the same and be the low cost provider?
- When selling a service you need to keep in mind your customers perception of value, and like a bottle of wine most will think more expensive is better, within reason.
- Being 5-10% less expensive than your competitors may not be a bad thing, but if you are 25-50% less expensive, your potential customers will see you as “cheap” and not a “value” as you had hoped.
What to do if You Provide a Product and Service?
Some businesses overlap between offering a product and a service, and more often than not the product is a consequence of the service they provide not the reason they are in business. Most often these business will bill per job, and coming up with a good quote really shouldn’t be a mystery.
- Calculate your hourly rate as you did above
- Add in the cost of materials used on the job (some will choose to build in profit with the sale of materials to compensate for the time it takes you to procure them)
- Calculate the hours you will spend on the job times your base rate, plus cost of materials…and presto you have a quote for providing product and a service.
Pricing your service needn’t be nerve racking or a shot in the dark. Follow the steps above and you will have a realistic idea of what you need to charge in order to cover your financial obligations, make a nice profit, and remain competitive with your competitors.
Don’t forget to enter for your chance to win $100 in cold hard cash from SmallBizBee.com
Ribbit Films – Entrepreneur Fills Niche & Finds Success
The November 2008 issue of Money Magazine landed in my mailbox a couple days ago, and inside it I was pleased to find an interview with an entrepreneur who typifies the idea of filling a niche to find success. Below is a summary of the interview he gave to Josh Hyatt.
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Name: Navarre Joseph
Age: 37
Business: Ribbit Films, a NY based company providing stock video footage for use in ads and promotions
Started: 2004
Annual Revenue: $900,000
How He Got the Idea:
Navarre was working as a photographer at an ad agency when a retailer came to them in a hurry wanting a video clip of a couple being cuddly. Navarre suggested they find a place that could sell the footage without the background, and it turned out there was no such place! Immediately he saw a niche to build an online library of moving images that could be superimposed on any backdrop. He started shooting clips of “iconic” moments: Three seconds of a soccer kick, a home-run swing, a handshake, that could be used by the designers on any backdrop they wanted.
Greatest Challenge:
Navarre found it difficult to educate the desisgners about his services. Designers at first did not see a need, and using their clips which cost $299 each did not appeal to them. Nobody wanted to use the clips, until they saw someone else using them.
How He Overcame It:
He put the footage in peoples hands. He sent potential clients a disk of his work, and put free clips on their website that people could download and play with. Pretty soon people were asking “Where have you been!”
To win clients, I had to show them why they needed my pioneering video service
Navarre Joseph
Advice To Others:
When you’re talking about something people haven’t seen before, it’s hard for them to envision. So wherever you can, show them rather than tell them.
Navarre used many techniques we have talked about here at SmallBizbee.com. He essentially gave his product away for free so people could get used to working with it, and then found they couldn’t live without it. He put is product in their hands, which we know is a way to get word of mouth advertising started. And he has made sure he has a top notch product and service which is the foundation of building a successful business.
Are you a successful entrepreneur, or do you know one? Why not submit their story to us so they can be featured here?
5 Ways to Boost Your Business Today
1. Connect With Your Customers
Brainstorm ways to connect more with your customers, then implement those strategies. Custom emails, follow up phone calls to say “Thanks for ……”, customer service training for your staff, appreciation day(s), valued customer cards/discounts/coupons, etc, etc, etc…business is about making connection with people. The more you find ways to connect with your customers the more your business will grow, period.
2. Know Your Target Market and Reach Them
Spend 10 minutes thinking about targeted advertising for your business, then put a plan in place to reach that market. Already done this? Analyze the effectiveness of your targeted campaign, and tweak where needed.
3. Give Away The House
If you offer a product or service you think your customers cannot live without, give it away! That’s right, if you offer something you feel is so good your customers will be hooked the minute they try it then give it away to them for a period of time. Make a great smelling soap? Give out freebies. Offer consulting services? Make your first consultation free. Sell the next greatest gadget? Run a contest where the winners all get one. You can never loose money giving away an indispensable product for a period of time. If you’re right and your customers love the product/service, they’ll be back for more and be happy pay for it. However, if your products or services are marginal you will never see those customers again.
4. Know How to Market
Commit to learning one new thing about marketing for small businesses. All business come down to two things, marketing your product and service, then making a connection with the customers you marketed to. Learn marketing techniques, and use them DAILY in your small business. Most businesses come down to a numbers game, I believe most all of you produce a great product or provide a great service. The only thing stopping you from breaking your business wide open is you don’t get your product/service in front of enough people. Fix that!
5. Do Something!
Do something, anything, to promote and grow your business. As simple as it sounds, one of the best ways to boost your business is to do something today. If everyday you do something for your business, no matter how small it may seem, the effect those “something” have will compound over time. The only way your small business stalls, is if you stop actively moving it forward.
What are you going to do to boost your business today? Let us know in the comments section.
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