Tag Archives: business plan

Play it Safe — and Experiment

In Learning From Your Competition, I discussed what things you can learn from your competitors, including what price, which promotions, and which combinations of products are most likely to be effective for your business. But if your business just copies what other businesses do, why should any customer go to you? This is especially true on the internet, where “Just like Facebook, only different” has repeatedly proven a recipe for failure.

What your competition does is safe

Nonetheless, copying the competition is a good place to start your entrepreneurial ventures, because you know there’s a market for what they’re selling. If you offer a product that’s basically the same as your competitors’ most popular product, at a price that’s the average of all their prices, using the same promotional methods as they do, you’re pretty much guaranteed to sell some of it.

It’s a low-risk choice, but it’s also a low-reward choice: since your offering is essentially identical to everyone else’s, you’re relying on the vagaries of fate to randomly steer some of the customers in your direction.

Once you’re safe, then experiment

With your solid base of safe, low-risk products, you have a relatively stable platform from which to explore. Now start experimenting.

Experiment with new products, or product combinations. Would your customers like these new items? Would they like the deluxe edition? Instead of buying products individually, would they like a subscription?

Experiment with prices (the people who select the MSRP are just guessing, too). If you put this on sale for 10%, does it increase the number of sales by more than 10%? If you increase prices on this one by 5%, how many people still buy it? What does it go for on eBay? Does it make sense to have different prices at different times of the day? Different times of the year? In different locations?

Experiment with delivery. Does it make sense to open another location? To offer home delivery? To create e-products that can be sold everywhere? Will customers pay extra for quicker delivery or more efficient locations?

Experiment with promotions. Is advertising the best method? What about networking meetings, or a booth at local events, or seminars at your local library? Are your customers on Facebook? Would they like to receive information via text message or email?

Keep what works, get rid of the rest

Eventually you’ll have a fantastic marketing mix — product, price, distribution, and promotion — that is great for your customers, and gives them a reason to bring their money to you.

Resources for Further Reading
Seth Godin on Competition
Risk Analysis

Are You Using Kamikaze Pricing?

Reed K. Holden and Thomas T. Nagle coined the term Kamikaze pricing to refer to companies’ engaging in dive-bombing price wars that lead to a race to the bottom where nobody wins.

So much advertising focuses on price that we forget that customers buy for other reasons, too. After all, how many people do you know who buy exclusively from Wal-Mart? Or who eat exclusively off fast-food dollar menus? Is price a factor? Certainly. But most people actually prefer high-quality-at-a-fair-price to low-quality-at-the-lowest-price. (Holden, 1998)

Can you compete at the bottom?

Who has the lowest prices in your industry? If you sell clothing or basic products, the answer is probably Wal-Mart; if you sell services, the answer might be a virtual assistant in India, and so on.

How much do they charge?

If you charged that much, could you make a profit?

I mean, really make a profit? Not only make more than you spent on the product, but pay your office rent, buy pins and paperclips, cover the advertising costs, and still have enough left over to pay yourself a living wage?

If the answer is yes, then you have to decide if you want to compete on the basis of price. Read on, then make your decision.
If the answer is no, then you’re not competing on the basis of price.

    I want you to sit down and write that 100 times: I am not competing on the basis of price. Or put it on a sticky note by your sewing machine or drill press or laptop. Or whatever else it takes to get that idea into your head. I am not competing on the basis of price.

Competitive Survey

Since you’re not competing on the basis of price, you want to take price out of the equation. This is called a neutral pricing strategy, if you ever need to impress someone.

How do you do that? You charge (essentially) the same as your competition. Not your lowest-price competition, but the people who actually sell the same stuff you do. How much do most artists charge for a one-of-a-kind shirt? How much do most business consultants charge for an hour of assistance? How much do most ebooks charge for a high-quality document that can really help you solve a problem?

Find a couple of genuine, equal-value competitors. Take the average of their prices. Round that to the nearest dollar. Charge that.

Compete on the basis of something else

Now, when prospective customers look at your prices, they’ll think to themselves, “OK, so basically the same as everyone else.” And having established that the prices are basically the same no matter where they go, they’ll forget about prices and start looking at what they can get for their fixed-amount-of-money.

This is where you have a chance to shine. What can you do better than your competitors?

  • Make a product that’s more durable?
  • Make a product that’s more flexible, more useful in more situations?
  • Make a product that fits better with their values (environmentally-friendly, free-trade, etc)?
  • Be more responsive to customer requests?
  • Stick with it until you’ve given the customer exactly what they want?
  • Randomly upgrade some of your customers to overnight shipping?

Not only will you make more money, but you’ll have a lot more fun.

  1. I am not competing on the basis of price
  2. I am not competing on the basis of price
  3. I am not competing on the basis of price
  4. I am not competing on the basis of price
  5. I am not competing on the basis of price

Resources for Further Reading
You Need a Business Plan — Maybe
Marketing for Entrepreneurs: Should You Sell on Price?

Bibliography
Holden, R., Thomas (1998), “Kamikaze Pricing”. Marketing Management, Summer pp. 33-39

Risk Analysis

When you’re writing a business plan, one of the things your investors would like to know is how much risk you’re taking. It’s possible that you might also want to know.

A brief diversion into game theory

As I type this, I’m sitting at a tournament of Magic: The Gathering, semi-eavesdropping on a conversation between two of the lowest-ranking players in the tournament.

“That takes you to 10 life. Then next turn I can draw a Chalice and you won’t be able to play your cards, and I’ll win.”

It’s a good strategy as far as it goes. Chalice of the Void is a good card, and it does cause a lot of problems for his opponent’s deck. But he’s relying on an awful lot of luck. What if next turn he doesn’t draw a Chalice? What if his opponent has a way to get around the Chalice and still play cards? What if his opponent wins this turn, and he never gets a chance to draw a card? If any one of those things goes wrong, he’s in trouble.

A Pithy Mantra for Strategy

In The Vor Game (a wonderful series if you’re into philosophical sci-fi), Miles Vorkosigan is given advice on planning a military campaign:
“The key of strategy, little Vor, is not to choose a path to victory, but to choose so that all paths lead to a victory. Ideally.”

That is, it’s good to have a plan based on what you think is most likely to happen. But it’s better to have a plan for anything that might happen… and best to have a such a plan that leads to success in all cases.

OK, so I should…?

Make a plan

While you put together your plans, write down the things you know for sure. This is mostly confined to things that you’re going to do (you can be pretty confident that you’re going to run an ad in the newspaper or that you’re going to pay your workers $7/hour), but may include information you have from others on what they’re going to do.

Take a guess…

Then, for each thing you have to guess, make your best guess based on the data you have. This could include the number of customers you’ll get (based on the number of people who will see your ad or the number of people who drive by this location), the weather where your products are made (based on NOAA’s forecasts), or whatever. Calculate how you’d do if those numbers were correct. Will you be making money? Will you be making enough money?

…and cut it in half…

Now take all of those numbers, and cut them in half. Assume you’ll get half as many customers, or that they’ll pay only half as much as you thought, or that you’ll only get half as much product as you expected. How would you do if those numbers were correct? Will you still be making money? If not, how much do you lose? What can you change in your plan to accommodate and mitigate those problems?

…and double it

Now take your original best-guess numbers and double them. Assume you’ll get twice as many customers as you thought, or that you’ll get twice as much product as you expected. How would you do if those numbers were correct? Would you be able to meet demand? Would you have enough employees? Would you have space to hold the extra inventory? If not, what can you change in your plan to accommodate and mitigate those problems?

And synthesize it all together

You don’t want to act as if your half-as-much or your twice-as-much numbers are accurate when your best guess puts it right in-between. It’s silly to cut expenses for a customer drop you haven’t seen: all you do is guarantee that your customers will in fact drop. And it’s silly to buy storage space for inventory you don’t have; it may never come.

But if you know what you would have to do, you can keep yourself more flexible. You can buy your advertising in 3-month chunks instead of paying for the full year upfront (in case you need to cut expenses). You can keep an extra $1000 on hand to pay for a storage unit if necessary. And the things that remain the same in all three plans you can implement with confidence.

Risk Analysis, not Risk Elimination

Depending on your business, your industry, and your situation, your half-as-many numbers may look pretty bad. Your twice-as-many numbers may also. This method doesn’t guarantee that you’ll have no risk. It only tells you how much risk you’re taking on, letting you know upfront what you might be getting yourself into. You have to decide for yourself if you’re ok with those consequences.

Resources for Further Reading
My Business Plan Isn’t Feasible
Tactics vs Strategy

Monetize Yourself Case Study

The last 3 posts have talked about specific ways you can monetize yourself: by selling your time and expertise, by selling your expertise directly, and by giving your expertise away. But in actuality, these categories are not so clear-cut, and the applications get a bit messier. So I thought it would be helpful to look at an example of someone trying to plan out a monetization mix.

    Jargon Alert: in marketing, a “mix” is the list of things that you’re going to do for a particular purpose. So a product mix is the products you intend to sell; a promotional mix indicates how much of your budget is going towards TV ads, how much towards radio ads, and so on. In this case, a monetization mix is a list of which monetization methods you wish to use, and to what extent you intend to use them.

Case Study: Andrea the Accountant

Andrea is in her mid-20s, with a bachelor’s degree and a few years of work experience. She’s determined that, although jobs have their uses under certain circumstances, she doesn’t want to have a job as a long-term solution; her independent and creative spirit will be happier without a boss, and she feels she can provide more and better value to the world by sharing her expertise directly.

Andrea has an interest in personal finance, and a talent for organization and practicality. Over the last few years she’s done a lot of research on budgeting, investing, and getting out of debt. From what she’s learned, she’s created a few spreadsheets to help keep an eye on her family’s finances. Lately she’s found that she has enough knowledge and information to be able to help others out: she’s taught college friends about debt management techniques, and helped her grandmother create a monthly budget.

Andrea’s Monetization Mix

Sell your time
Although Andrea doesn’t want a job long-term, she has bills to pay right now, and she doesn’t want to have to worry about whether or not her business will be able to support her instantly. She calculates that she needs to bring in $900/month to supplement her husband’s income and keep the family budget running smoothly, so she’s going to get a part-time job while her business is getting started.

She also is going to sell her services as a consultant to anyone who wants help with setting up a budget or making a financial management plan. Because she wants to be affordable to those who need help, and because she doesn’t have a lot of experience as a consultant, she decides to charge $25/hour.

Sell Your Expertise
Andrea’s done a lot of reading about personal finance, and she has noticed that some books on personal finance are too theory-oriented, with not enough information on how to actually use those theories.

She’s written an e-book with practical tips on how to actually track your expenses and calculate your cash flow. It includes example categories of spending, ideas on how to figure out how much you’re spending in each category, and the equations you need to do the necessary financial calculations. It also includes a link to a spreadsheet that Andrea made, that will do the calculations for you. She plans to sell this ebook, but she hasn’t decided on the price yet.

Share Your Expertise For Free
Andrea still has student loan payments, and remembers how hard it is to manage your money when you’re not sure what to do. So she wants to make sure that she’s providing free resources as well. She’s going to set up a website and a blog, where she can provide information on personal finance, and keep it up-to-date with whatever she finds during the week.

Since the goal is to create a free resource, Andrea doesn’t want to charge for access. Instead, she’ll monetize her website through ads and affiliate programs. Companies that want to reach personal-finance audiences will pay Andrea to advertise on her site (she’ll weed out the ones that she doesn’t want to be associated with). When someone clicks on those ads, Andrea will get paid. Products that are particularly good, Andrea will review and recommend. She’ll set up an affiliate program with those products, and whenever they’re sold, Andrea will get a share of the money.

A Harmonious Mix

Notice that none of Andrea’s monetization methods is operating in isolation, but that they all support each other:

  • Her website is easy to find, and a free resource for those who want help with their finances. It helps Andrea’s customers feel comfortable with her before they purchase: they know that she’s competent, and they know what kind of advice they’ll be getting. With ads and affiliate programs, it’s also a source of revenue.
  • Her ebook is a way for Andrea’s customers to get a little more information than is on the website, without having to go “all the way” and hire her as a consultant. It builds on the information found on the website, and again establishes her competence in the minds of anyone who reads it. It provides another way to monetize the website, and it helps her reach potential consulting customers. She can price it medium-high ($5-$10) to maximize revenue out of it, or she can price it very low ($.99) if she wants to use the ebook primarily as a marketing tool for her consulting.
  • Her consulting service gives Andrea with a way to provide personalized, timely information to her customers. It lets her give a boost to people who have read the ebook but still need a little more help. It also gives her another way to monetize the website, and it lets her practice her financial management skills. Although this is owning a job, because she has to spend time to get money, what she has to spend time on is
    1. helping people
    2. working with money, and
    3. organizing things

    — three things she loves to do.

Also notice that Andrea can add other monetization methods as she has time, resources, or desire to do so. As interest grows in her services, she could set up a class on personal finances at the local library or community college. She could start creating a podcast to complement her blog. If she gets enough traffic, a publisher may approach her with a book deal. She might want to make videos on personal finance: she could post them for free on YouTube, and sell them bundled on a DVD for anyone who’s interested. None of these are critical to start right now, but they leave Andrea plenty of room for development in the future.

Summary: Lessons Learned

You don’t have to pick a single method of monetization — in fact, a diversified income stream is better. And your monetization methods will usually work together in mutual support.

This list of options I gave is neither comprehensive nor exclusive. Use my ideas to get ideas of your own, and experiment with what works for you. My goal is not to make you try to fit into my pre-ordained categories, but to give you as many options as possible to express your creativity.

Monetize Yourself Media – Share Your Expertise For Free

This post is part a series on specific media for monetizing yourself. Today I’m going to talk about another category of potential media: sharing your expertise for free.

That Doesn’t Sound Like Monetizing Myself

This is the least intuitive category, so let’s take a moment to examine it. As I discussed in Distillery Tours and Alternate Monetization, “free” doesn’t necessarily mean that you’re not making money. That post used the example of Maker’s Mark Bourbon, who will let you tour their facilities for free, and make a lot more money selling you souvenirs than they ever could have made on the tour itself.

Free is the newest craze, and it works really well in some cases. The best example is our favorite search engine: Google doesn’t charge you for the use of its amazing search technology. They make their money “through the side door”, as Jeff Jarvis would say.

You, too, can open a side door.

Share your expertise…

Make a website

A website is actually just another form of Information Product: a way to provide information to those who need it. It can be less daunting than writing a book, and may be a better fit for the information you want to provide, since it lets readers easily browse information in whatever order is useful to them. It’s also easier to edit and update than a book, which is great if your area of expertise is expected to change itself in your lifetime.

Start a blog

Blogs are another way to share what you know. Since the days when they began, as a way for teenage girls to keep each other constantly updated on their social lives, blogs have evolved into a great source of information for whatever you may be interested in — from fantasy football to making money. And whatever you’re an expert in, you could write one, too.

…or site-blog

Blogs are great because you can keep them constantly up-to-date, and can write about whatever comes to mind. But websites are really nice because your readers can find the information they’re looking for (without digging through years of chronological posts). A compromise that’s coming into vogue is the site-blog: a blog that has all its posts in chronological order, so you may read back issues to your heart’s content, but also has the posts sorted into categories like a website, so that you can find specific, targeted information.

Make a podcast

Does your area of expertise lend itself better to audio or visual media than to text? Make a podcast or a video podcast. It’s not as hard as you think, and it can probably be done with free software.

Check out my first YouTube video.

You can do better than that. So why don’t you? You get to talk about your favorite stuff once a week, and you can call your mom and tell her you’re in a video.

… and monetize

If you make good stuff — a website with good information, a podcast that’s entertaining, or a blog that keeps people up-to-date in your industry — people will enjoy receiving it. And then all you have to do is monetize. Do this by

  • Selling ads
  • creating premium content, available for a fee
  • selling your services as a consultant
  • selling related products through an affiliate program
  • creating an information product you can sell to people who want more
  • selling t-shirts and coffee mugs related to your work

Low Risk… So Why Not?

All of the above can be done for free, or for very low cost. So why not try it out?

Resources For Further Reading
Site Build It! (A great resource for making a website – but the only resource on this list that isn’t free.)
WordPress (This is where I started my blog)
How to Podcast: 4 Basic Steps
How To Make Money From Your Blog