Yesterday we discussed how to make a basic business plan for your own use, and how to determine whether your business idea is feasible.

Sometimes it isn’t.

The three criteria I listed yesterday for a feasible business were:

1) Pricing has to be competitive.
2) Estimates for customers-per-month must be higher than the break-even point.
3) You must be able to get enough start-up capital.

If you fail on one of those criteria, despair not. You still have a chance, you’ll just need to get more creative. Get paper and pencil, pull out your brainstorming hat, call up your favorite brainstorming buddies, and think about how you can change your numbers.

Pricing

As I explained in the previous post, your prices don’t necessarily have to be lower than your competitors’, they just have to be justifiable in the consumers’ minds. This may mean higher prices but better service, or higher prices but more convenience or whatever.

But it has to be somewhere in the vicinity of your competitors. If the prices you have to charge are significantly higher than the prices of others, your customers are going to go elsewhere.

So if making a profit requires you to charge too much, you have two choices: lower your costs, or justify the higher price with a competitive advantage.

Lowering costs
Can you get a better price if you get your materials from somewhere else? Do some comparison shopping online, or see if you can get a bulk discount.
Can you reduce or eliminate sales bonuses?
Can you make delivery cheaper?
Can you negotiate with your suppliers for a lower cost?

Improving Competitive Advantage
What else could you offer to your customers that would make it worthwhile to buy from you? A sympathetic ear costs nothing, but has always been a competitive advantage for bars. Can you think of a low-cost bonus that you could throw in? Can you keep an informational website? A free information product on how to use your merchandise? A place to use your products?
Good customer service is hard to maintain, but can go a long way towards convincing people to pay more.
If you increased your costs by 10%, could you double the quality (and hence the expected price)?

A friend of mine wants to open a bakery; her husband wants to open an auto-repair shop. Individually, neither store can justify much of a premium over their competitors. But a place where you can sit with a scone and check your email while waiting for your brake repair? That’s worth paying a little more, especially if both the pastries and the repairs are high quality.

Break-even

The first thing to check is that your estimates are reasonable. I had you calculate a 1% conversion rate on all forms of advertising, which is a nice, safe, conservative estimate, but may be too conservative in some cases. Walk-bys on a mall, for example, usually have closer to a 15% conversion rate, with 20-50% of those who walk into the store buying something, so that could bring up your expected monthly customers. Talk to someone in your industry, or do some web research, to get more accurate estimates of monthly customer numbers.

If you believe that your estimates are accurate, the easiest way to improve your break-even point is to increase your gross margin, either by raising your price or lowering your cost (or both). If your price analysis indicates that you could charge even a dollar or two more per item, it can have a huge effect on your break-even point.

But if you’ve already been wrestling with the above steps to get your price lower, then raising it isn’t an option. In that case your best bet is to reduce your fixed monthly costs (overhead). Could you take a smaller salary? Could you make do with one fewer employee? What if you closed in the middle of the day, or didn’t open until early afternoon? Could you negotiate a lower rent, or change locations to one that has a lower rent? Would energy-efficient appliances help with the utilities bills? Could you forgo the data package on your smart phone? Are there any advertising methods that aren’t bringing in enough customers to justify the expense? What else can you do to lower your monthly bills?

Start-up Capital

The easiest way to reduce your start-up capital is to sort your list of requirements into two categories:
1) Things I must have to open the business, and
2) Things that would be nice, but could be purchased later as we grow.

It used to be that starting a business at all took hundreds of thousands of dollars, and so a few thousand dollars for leather office chairs, subscriptions to the Wall Street Journal, real linen table cloths, and so on… wasn’t that big a deal.

But today businesses can be started with less than $100, and easily less than $1000. So it’s more important to look down your list and figure out what the bare necessities are. Pulling things off the list and putting them in an appendix of “Things to buy as soon as possible” can reduce required start-up capital in a hurry.

If your pared-down list is still too big, you have two options: you can change the business model, or you can look into scary capital sources like bank loans or venture capitalists.

Some businesses are just inherently capital-intensive. Restaurants really do take that much money to start, and there’s no way around it. A retail store can be the same way. But closely-related businesses might be much cheaper: a catering business run from your home (with the plan to open a restaurant from the catering profits) or an online store (with plans to open a physical location ASAP) can be started with 1/10 the start-up costs.

Or you can take what you’ve got here, turn it into a full-blown business plan, and take it to the bank or to a venture capitalist. I can’t give you much advice on these, because I’ve never started a business for which they were necessary, but they can be a very effective way both to raise capital and to learn a lot about business.

Resources For Further Reading
Creating a Competitive Advantage
How to Raise Start-up Capital
LowCost Startup Ideas

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