I thought I would use this shortened week's blog post to share a recent discussion I had with a client of mine. I felt compelled to share with my connections as there are some tidbits of great advice that can help anyone with their particular business model.
Don: Let me get this straight, you already built the factory in the North pole
Don: ...and you've already agreed to a contract that provides full lodging and meals to your workers....including unlimited dessert?
Santa: Of course. Happy workers make better toys!
Don: Ok...and to meet your year end goals you need to travel around the world within 24hours to each of your 108M customers residences so you can deliver all your inventory in the course of one evening...for free.
Santa: ....but I get 31 hours with the time zone changes....and yes...
As you can probably tell, Santa didn't really check with any business consultants as part of his go to market planning. You, on the other hand, are trying to make money with your solution and there is some advice that I am certain will help you deconstruct the problem and get you well on the way to enjoying a more profitable holiday season.
Follow the money
Now, I'm pretty sure we can all agree that Santa does not have a great business model and can only survive based on a really rich angel investor that is playing a very long term game. However, there are some lessons we can learn from this really bad business model and it starts with understanding your revenue, margins and expenses for your product line. A lot of small and even medium companies get very excited with orders for their products from real customers. It feels great to have someone not related to you buying into your idea and placing orders. Before you wear out your shoes dancing, it is important to take a step back BEFORE you take orders to really understand the Profit and Loss (P&L) for the product line or service. You have basics like cost of goods, shipping, and duty. Forget to add in line items for things like funding payment terms to your vendors while you wait to get paid by your customers, warranty accrual and ongoing support costs could result in some really good revenue and horrible profitability. Every business I talk to starts with a discussion about how they make money. Not all of us have a mysterious angel investor who is more interested in volume and not interested in profitability.
Go talk to your customers
We aren't all in the luxurious situation where we have our customers line up to visit and tell us exactly what they want from us....down to the UPC code in the case of my kids. This means we need to get out and talk to actual human's who are already getting the product from a competitor or we believe will be a target for our pain killing solution. Many of our ideas start off with a pain we are feeling and have not been able to find a solution on the market today. This is a great data point and can certainly validate the need for further investigation. However, it should not be the only data point used as part of a customer discovery plan. From watching customers purchasing behaviours in the wild to asking people if they could spare a moment to share their decision making process, you need to get data before you invest a lot of money developing a solution. Failing to do this increases your probability of ending up on the naughty list without a home for your inventory even if Santa is giving it away for free...
Create recurring business
Every year at the same time our jolly old friend comes like clockwork to deliver his unwanted inventory on the world's children. It's a great concept minus the profitability. As entrepreneurs, we need to be focused on not just the initial sale, but a recurring annuity type profit margin that continues to deliver month after month. This can be in the form of replacing after it has been used a number of times like printer ink or can be a level of service support that customers find recurring value in the use of your product. Either way, we want a sticky solution that builds brand loyalty and trust that we can continue to deliver month after month not just once a year. A lot of this comes down to how you've planned to build your business model, what you have done to understand your customer needs and how much homework you have done to understand your competition so you can disintermediate them in the market place. Don't use Santa as the example of how to create a loyal and rabid fan base unless you intend to give away the inventory every year and go for a new round of funding...
In summary, before you get too excited by the product or solution idea you have make sure you create a sustainable business. One where your bottom line is well understood, your potential customers are involved in the decision making process and is built for the long term. Happy Holidays and all the best for the New Year!