Wednesday, November 30, 2005

Three Magical Questions


When I am working on a client’s business, one of the first things I look at is the value proposition. And as always, don’t get hung up on the term because I’m right here to put it into real world small business terms. The value proposition is simply this:

1. What is your customer’s problem?
2. How do you solve that problem?
3. What is the value to your customer?

How you answer those questions has a great impact on your business. Let’s use as an example an accounting firm trying to get more business from small business owners.

1. What is your customer’s problem?

A small business owner is often (usually) a technician. They are good at what they do but they are unsure of themselves when it comes to many aspects of running a business…Things like keeping records, complying with state and federal tax filings, understanding financial matters, and so forth. They would like nothing better then to turn the whole durned mess over to somebody else so they can do the work that makes them money.

2. How do you solve that problem?

Your accounting firm solves that problem by providing them with the knowledge that they need to run their business and the services they need to stay out of trouble. And along the way you help them get the education they need to feel more comfortable about the financial side of their business.

3. What is the value to your customer?

When you are looking at the value to your customer, don’t put it in your terms. Put it in their terms. As an accountant I might think that the value to my customer is that I am educating them and helping them become more finance-savvy. My customer sees it in a whole different way. My customer sees the value as he no longer has to worry about these annoyances and threats to his sanity because he has someone he can trust to take care of “all that stuff”. One of my colleagues pays her accountant $1600 a year to handle “all that stuff” and feels it is worth every penny because she knows it is taken care of. All she has to do is sign on the line right where he tells her to and write the check. That has tremendous value to her and to her business.

Once you understand how your customer views the value proposition your whole business model can flow from that one equation. Your marketing plan flows from this as well. Instead of saying to your potential customer “I’m going to teach you everything you need to know about finances”, your approach is “I’m going to keep you out of trouble and make your life easier.” Which approach do you think will resonate with you the stressed out small business owner? The first approach sounds like more work. The second approach sounds like the answer to a prayer.

These three magical little questions are the key to every successful business:

1. What is your customer’s problem?
2. How do you solve that problem?
3. What is the value to your customer (from the customer’s perspective)?

Answer them well in the marketplace and you will go far.

Until next time,

Caroline Jordan
Get Knowledge. Get Focus. Get Results.
The Jordan Result
www.TheJordanResult.com

Wednesday, November 23, 2005

Hidden Flaws in Business Models Cause Business to Falter

Our last two newsletter segments have been dealing with the decision one of my client’s made about closing down their business. If you are a new subscriber (Welcome!) and you missed either of the installments, you can find them at http://TheJordanResult.blogspot.com. I spoke last week about the importance of having a solid business model and executing it well. Today I want to talk about what the problems were in my client’s business model and why we were not able to overcome them.

My client’s were first time business owners. They are both professionals with years of experience in their own fields who both found themselves laid off by their respective companies. They knew each other through church and had been friends for some time. Working with agencies set in place to help them find new work, they were introduced to a program set up to help displaced workers start their own businesses. The program provided good advice, resources, and structure for new business owners.

The friends decided to explore opening a business as partners. They began exploring different businesses and were drawn to franchising because of the remarkably high percentage of success for franchise outfits. Their interest in franchises led them to investigate a local operation that was selling franchises. The franchiser was new to the franchising business and had sold only one franchise to an employee so the model was largely untested.

The franchiser led the partners to believe that all was rosy with the original business that spawned the franchising. This was not the case. The original business and the first franchise were actually operating at a deficit and were being propped up by continued investments of personal funds by the owners. The original owner was far more interested in selling franchises than in giving a realistic view of expected results. The business model had some flaws that made it difficult to do well in this business even though the service was a very valuable one to the target market.

Flaw #1—Slim margins.

As I mentioned before, every dollar in sales cost 65 cents in payroll and insurances. An additional 3-7% (depending on the price structure they chose in buying the franchise) went for royalties. Once you subtract out rent, utilities, office supplies, and so forth, there was little if any left over for advertising and marketing. And the owners were left without a paycheck most weeks.

Flaw #2—Built in cashflow issues.

Employees were paid every two weeks for work performed. Customers were billed every two weeks for services already rendered. So the cash leaves the bank account before it is received. Naturally the customers often took 30 days to pay so the cashflow for every transaction ran six weeks behind.

Flaw #3—Pricing inflexibility.

Franchisees could not lower or increase their pricing bases on the market they were serving. In the State of Maine, where this business is headquartered (and this is true of most areas of our country), there is a wide disparity of resources. The southern part of the state has higher income levels than the northern part of the state. The seacoast tends to have higher income levels than the western mountains. Depending on where your franchise is located you could find yourself priced out of the market.

Flaw #4—Name recognition.

When you think fast food, you think McDonald’s. When you think McDonald’s you picture the golden arches. You have an expectation of what you will get—the restaurant will look a certain way, the food will be universally awful. You know exactly what to expect. The same is true of every other successful franchise—Dunkin’ Donuts, Olive Garden, Hardee’s, H&R Block, etc. With the business my clients entered, there were no strongly defined franchises so the expectation had not yet been created. This means they had to explain what the business was all about. It wasn’t a case of being able to say, “I own an H&R Block franchise” and everyone knows what you are talking about. This makes it an uphill battle.

Flaw #5—No strong marketing program to build name recognition.

Part of the responsibility of the franchiser organization is to do the legwork to build name recognition. The franchiser did some local advertising through events and radio advertisements which were a good start. I have to say, though, that if I am going to consider buying a franchise I want to see some serious commitment to building name recognition before I sign on the dotted line. When you mention the name of the franchise, I want to be able to immediately know exactly what you are talking about. That kind of familiarity takes a very concerted, and sometimes expensive, effort on the part of the franchiser.

Flaw #6—Where are my Step by Step Business Building Techniques?

The glory of a franchise is that for any task or challenge I can simply flip open the operations manual and see step by step exactly what to do. With this franchise, the most important piece was missing…How do I build the business? What specific steps do I take to create buzz before the grand opening? What steps do I take to attract the attention of my target market? How do I get the business to a point where I can make a living?

In addressing these issues with the franchiser, it became increasingly apparent to my clients that their grand dream of making minimum wage for themselves was far off in the distant future hence their decision to sell.

Next week, I will continue discussing the all important topic of business models. A good business model well executed is a critical success factor for every small business.

On a personal note, a very Happy Thanksgiving to all who celebrate that holiday. I am looking forward with eager glee to a fine selection of pies baked by my mother and my aunt. May you enjoy the day.

Until next time,

Caroline Jordan
Get Knowledge. Get Focus. Get Results.
The Jordan Result
www.TheJordanResult.com

Wednesday, November 16, 2005

A Cold Hard Look at a Struggling Business

When I wrote last week about a client’s decision to close down their business, I promised this week to talk about why they found it necessary to do so. I alluded to a problem at the core of every struggling small business.

When I spoke of my clients’ difficulties, I mentioned the constant struggle to make payroll and have enough leftover to pay the owners. You may think the problem I alluded to IS cash flow. But cash flow is only a masking problem. Actually, poor cash flow is more of a symptom of the actual problem. The problem is generally a business model that is not well thought out or well executed.

Before you get hung up on the phrase “business model”, let me tell you what it means in real world small business terms. Your business model is basically what you do and how you get paid to do it. For an example, let’s look at eBay. eBay makes its money by serving as a go between bringing buyers and sellers together. In exchange for providing the meeting ground and facilitating the sale, eBay receives fees. It isn’t a complicated business model at its core, the difficulty is in executing the model in a way that satisfies customers and makes a profit for eBay at the same time. If the customers are unhappy, the model fails. If eBay can’t operate at a profit, the model fails.

The second half of that equation is where my clients ran into problems. They provide a valuable service to a growing market but providing the service carries a high payroll and a high rate of liability and workers comp. insurances. For every dollar in sales, they pay out about 65 cents in payroll and insurance. That leaves 35 cents of every dollar for rent, utilities, telephone, marketing, advertising, etc. Trying to wring out enough money for the owners to get paid a living wage was usually impossible.

They were able to keep their heads firmly buried in the sand for only so long. We sat down one day and had a very in depth conversation about what the business could potentially produce for income for the owners in the short and long term. We weighed all the benefits, the costs, and the risks. The bottom line was that the business could not realistically support the owners in a way that would allow them to support their families in even a modest way.

Normally, this type of a hard look at a business reveals any number of opportunities for improving the business. In this case, it simply was not possible to make the changes necessary to make things work better for all involved. I will give you some insights next week into why it wasn’t possible…

Until next time,

Caroline Jordan
Get Knowledge. Get Focus. Get Results.
The Jordan Result

Wednesday, November 09, 2005

Struggling Against the Current?

Imagine what it would be like to work for the perfect company.

What would that look like for you? Good pay? Flexible hours? Good benefits? A wise and business savvy boss? Profitability?

Do you work there?

Chances are, your own company is missing some of the features that you might consider to be ideal. But being a business owner can have other benefits that are not as quantifiable. Things like satisfaction, loving what you do, not dancing to someone else’s tune and charting your own course.

But the truth of the matter is this. If your business is to be sustainable, it has to sustain you financially in a way that makes you feel all the trials and tribulations of business ownership are worth the trip.

For one of my clients, that trip has gradually become less and less sustainable and sustaining. They grew tired of the constant battle, the struggle to create enough cash flow to make payroll every week, and the toll the lack of cash was taking on their own lives. They made the difficult decision to sell their business and go back to work for someone else.

Much of what they learned as small business owners will make them more valuable to the organizations they are joining. They are also leaving their communities better because of the business they built up, the employees they supported, and the clients they served. They worked extremely hard building a business that was valuable enough to sell to someone else. Because the business has value, the clients will continue to be served and the employees will continue to work. They have much to be proud of.

But in the end, the business did not work in one very important way. Their personal financial needs were not being met. For them, that was an insurmountable challenge.

Next week, I will give you some insight into the anatomy of the problem with their business…a problem that lies at the core of every struggling small business. Stay tuned…

Until next time,

Caroline Jordan
Get Knowledge. Get Focus. Get Results.
The Jordan Result
www.TheJordanResult.com

Thursday, November 03, 2005

Rockefeller's 39 Drops of Solder

I have been spending some time with a very exhaustive (and sometimes exhausting) biography of John D. Rockefeller. He is one of the most fascinating business icons of all time. Starting from zero, he built an incredible business empire in the oil industry, long before there were automobiles to really fuel the industry (Oh, how cute! A little pun!)

John D. is one of the most respected and the most hated business tycoons who ever walked the earth. Some of his business practices were incredibly ruthless as he stamped out his competitors by fair means and foul, all the while living his personal life as a very pious and generous man. A wolf by day and a sheep by night. He really is a fascinating character study.

Here is an example of the tremendous business acumen of John D. Rockefeller. John D. would visit his various plants to check out how things were operating. He carried with him a small red notebook in which he noted deficiencies or inefficiencies no matter how small. When a manager or worker saw the red notebook come out, they cringed. John D. would make a note of any shortcomings and would follow up to make sure they were taken care of.

One day he was visiting a plant that put kerosene in tin jugs for export. As he watched the process, he noticed that workers always put 40 drops of solder on each can to attach the top. He asked, “Have you ever tried 38 drops of solder?” When the manager replied that they always did 40, John D. said, “Try 38 and let me know what happens.”

When they experimented with 38 drops of solder, a small percentage of cans leaked. When they tried 39 drops of solder, the cans held tight. That small change saved the company $2500 the first year and hundreds of thousands of dollars over the course of time. And that was just one of the many, many areas of his business that John D. worked to improve.

Take a lesson from the master, look at your business to see what changes you can make to plug leaky holes, overcome inefficiencies, cut costs, or increase sales. I can’t promise you’ll be as r i c h as Rockefeller but small improvements have a way of dropping to your bottom line in a big way.

Until next time,
Caroline Jordan

Get Knowledge. Get Focus. Get Results.
The Jordan Result
www.TheJordanResult.com