How to Minimise your Financial Risk!
Two different approaches to business
It’s a simple fact that if you gave £10k – £100k to the average man or woman on the street with no business experience to start a new business it is quite likely that within 18 months he or she will have blown the lot.
If you look at the two very different approaches to business below, both of these examples are real life stories.
In the first example this person had no business experience and took a very standard approach to starting a business, significantly increasing their financial risk.
In the second example the owner was far more experienced and took a very shrewd approach to minimising risk and at the same time maximised his chance of success.
Business 1- Wedding Dress Outlet
A friend of the family who had never been in business but always dreamt of owning her own wedding dress shop suddenly had the opportunity to start her own wedding dress retail outlet after her mother kindly lent her £60,000 to start her dream business.
She quickly found “suitable” premises nearby and subsequently signed up for a long-term contract (as the rent was cheaper that way) and then eagerly visited wedding dress exhibitions to buy wedding dress samples and spend her easily obtained cash.
On visiting her first exhibition she was impressed if not slightly intimidated by the sales reps of these high-end designers and was told she would require a minimum spend to represent their brands. She subsequently spent thousands of pounds on the stock of the latest designs to be used as samples in her retail outlet.
She spent more on stock than she expected as the sales reps for the various designers had convinced her of the great discounts they were providing, feeling extremely pleased with herself that she now had the makings of a great wedding dress business.
On visiting her first exhibition she was impressed if not slightly intimidated by the sales reps of these high-end designers and was told she would require a minimum spend to represent their brands. She subsequently spent thousands of pounds on the stock of the latest designs to be used as samples in her retail outlet.
She spent more on stock than she expected as the sales reps for the various designers had convinced her of the great discounts they were providing, feeling extremely pleased with herself that she now had the makings of a great wedding dress business.
12 months later and after many months of hard work and even more money plowed into the business, the wedding shop was making a loss. 18 months later with increasing overheads, advertising costs, and a part-time member of staff to pay she had to go back to her previous part-time job; the shop was now making an even bigger loss.
The “greatly discounted” sample wedding dresses couldn’t even be sold for what she had paid and she was now starting to panic, reducing the prices of dresses as next season’s “new fashions” had arrived. There was an impending feeling of doom and the possibility that she might soon have to close the business and wave goodbye to the kindly £60,000 investment from her mum.
So her business plan was to open a retail outlet fill it with stock and wait for the customers to roll in. With a little more business acumen and experience, how could she have improved her chances of success?…
* In the first instance, there was no real research that took place to determine the market demand or competitor analysis. So how did she know she had the foundation for a business that would work?
*Was there a real need to buy all of the dresses, that in the end she struggled to get rid of? If she had a little more business experience and confidence she would have also been less intimidated by the sales rep. Realising that the suppliers have competitors also she could have negotiated far more favourable terms. In fact there was no attempt at any negotaition at all, simply accepting the price and terms laid down by the hard nosed sales rep.
*Did she need to invest in premises? or could she have potentially operated a mobile or online version of the business? Delivering dresses directly to customers’ homes instead?
The answer to all of these questions will never be 100% certain, but considering these issues and alternative approaches beforehand would have minimised risk and determined real demand. When we work with clients through our ‘Has it got wings’ business evaluation, these are the types of questions & issues we cover thoroughly.
Business 2- Software Solutions
In complete contrast take a read of the following story of RightNow Technologies- a company started by Greg Gianforte- there’s a sign on their wall with the quote “Nothing happens until somebody sells something. In other words, sales is where your business begins. You don’t have a business until you start selling.
In 1997 RightNow began as just an idea for a product. And the only thing that could make the product real was a sale. That year the Internet was just starting to boom. However, a lot of companies did not have a good way of responding to customer inquiries through their websites.
Most of their software solutions seemed to be homegrown and rather ineffective. So Greg tried to imagine what kind of software could respond automatically to customer inquiries. One by one he made a list of features he thought would be central to the product. Then he hit the phones.
Greg called hundreds of companies and asked to speak to the customer support manager. He described the software and emailed the specification, just one page, nothing more. Then he asked them whether they’d be willing to buy this product for their company’s website if it were available.
A core minority said yes, they would in principle like to buy such a product. Most companies of course said “no thanks”. But far from being despondent, Greg saw in this response a real business opportunity. When a potential customer declined, Greg went into fifth gear and started to listen really hard.
The customer would be asked, “Why not, may I ask?” and then other core questions: “What features do you really need? What additional features would it take to really make you buy this software?” Then the managers would tell him. Greg would then add the customer’s required features to the specification list of his yet non-existent hypothetical product- and put that customer’s name next to it.
Reactions to this “pre-sell the product” strategy yielded other instructive surprises. Some of the software’s features that had seemed likely to be snapped up by the managers aroused nothing but indifference.
These were dropped from the specifications, an action that saved many hours of unnecessary and pointless development work. The beauty of the process was that it all yielded invaluable feedback. All of the favoured features went into the product and all the unpopular ones were discarded.
Guess how well this business did in comparison?…
RightNow Technologies was acquired by Oracle Corporation in 2011 in a $1.8 billion deal.
Learning Points
The main two learning points from these different approaches to business are excatly the same methods we use with our own business clients when working on Business Plans & Marketing Strategy
1) Identify who your customers are with laser focus and completely satisfy their needs- once you do this you can more easily minimise your advertising spend and get far more bang for your buck!
2) Minimise your risk- dont start investing huge sums into equipment, offices etc. until you have definite orders.