A Small Business Startup Needs to Work on Its Business Model
Big words like business strategy and business model might confuse newcomers. Actually, these words mean practical things that all of us businesspersons can understand. And these things are critically important for making the business a success.
Entrepreneurship or Looking at Yourself
Before you jump in, you would need to look at yourself. A few things are critical.
- Can you take a lot of NO’s and yet persist? You are likely to receive a great deal of negative responses at the startup stage. Instead of letting these discourage you, can you learn from the experiences?
- Do you have the energy to persist? Starting and running a business is not a 9 to 5 thing, nor will there be any boss to tell you what to do. Instead, you will typically have to work long hours and also identify the tasks that need to be done to keep the momentum going. Do you have the physical and mental energy required for doing so?
- Are you a person with an open mind ready to learn from experience? Most of us are not natural businesspersons. Successful businesspersons observe ground realities and are able to draw the right conclusions from their observations.
- Do you have the basic resources? Starting a particular business requires a clear idea of what is involved in that business. Do you have the technical know-how? Or do you have the money and people skills to get and retain people with the required know-how? Money is also needed for many other things as will become clear when you develop the business idea in full detail. Will you be able to organize these?
Business Model or Checking that the Business will Make Money
Half-baked ideas are what cause many business proposals from even getting off the ground.
Businesspersons have to take the trouble to translate their general ideas into specifics. List all the tasks involved in running the business and estimate the costs of doing these. Next, develop clear ideas on how these costs will be recovered. How many items will you be able to sell? How will you sell that many items month after month? Will the selling involve incurring additional costs? Can the selling prices cover all costs, including selling costs and recurring establishment costs such as rents, office costs, interest payments, and so on? Some businessmen prefer to work with serviced offices just to make more money and hiring more skill.
Working out the business models involves two dimensions. The first dimension involves the estimates themselves, identifying all the tasks and estimating the costs, and revenues. The second dimension is the practicality of doing all that is necessary with the resources available. It is when both these dimensions are satisfactorily attended to that a realistic business model is created.
Marketing Plan to Achieve the Margins and Volumes
Profitability comes from margins and volumes. You have to sell at a price that generates a margin over the direct costs of making and delivering the product or service. And you have to sell in sufficient volumes so that the aggregate margins will recover your indirect costs, such as the costs of office administration, marketing, financing and compliance with regulations. You also have to recover the costs of the long-term assets such as plant and machinery over their life time (that is what the “depreciation” charge means).
The issue before the businessperson is how to achieve the desired margins and volumes. Margins depend on direct costs and selling prices. You can increase them either by reducing costs or increasing selling prices. Volumes depend on the market size and the share of the market you can gain.
Marketing focuses on the task of achieving remunerative selling prices and gaining desired sales volumes. Both these tasks are facilitated by differentiating your product or service from those of competitors. Unless you can clearly and convincingly identify how your offer is better, yours will be another “me-too” business that will find it hard to compete.
The task of such differentiation is easier if you target a segment of the customers who are feeling a little dissatisfied with existing offers. For example, the original mail order system catered to rural customers who could not otherwise buy what they wanted in a convenient way.
Marketers might also try to build “brands.” Brand building involves creating a great image about a particular company or product in the minds of a particular group of customers. Such an image creates customer loyalty, i.e. a group of customers who always prefer a particular company’s offer, even at a higher price. Much of the higher price commanded by “luxury” items come from such brand value.
The issue of volumes is also an issue of the marketing setup. One person can handle only so much work. There must be an adequate set up to go after and get sufficient business. The businessperson has to decide on the kind of sales force and distribution needed to achieve desired volumes.
We have looked at the startup issues of starting a small business. These included looking at one’s own readiness to meet the challenges of running a business, translating a general business idea into a specific and profitable business model and developing concrete marketing plans to achieve desired selling prices and sales volumes.