How big can you make your business?
What does it mean when we ask, “How big can you make your business?” Can you achieve economies of scale?”
In other words
Can you produce enough output to make this a real business?
Can you turn your business into a multi-million-dollar operation?
Is your future better spent on something else?
Making a gig big is the essence of understanding the difference between a job and an investment. Scalability is the ability to make something bigger. Many people assume that once they have a successful business it will become bigger on its own.
At Landon Fillmore Systems, we have seen this question go unanswered so many times that we have decided to dedicate an entire page to just beginning to talk about it.
It is far easier to start a business than make it big.
The difference between a business with $500,000 in sales and one with $500 million is like the difference between being a taxi driver and being a car manufacturer. They are entirely different skillsets.
But also, making a gig big has a lot of factors people may not think of. These factors should be well thought out BEFORE a venture is started.
Many years ago, we had a client that casted a part for cooling units for restaurants. He did about $1.2 million per year in sales and had a net pretax profit of $400,000. His problem was the world simply did not need any more of these parts.
They could not be shipped long distances because of their weight and the cost of insuring the shipment. (It can cost a lot to ship metals) It was a regional business and would always be regional. For his, expansion meant designing a new product and as smart as he was, he was a brilliant engineer, he never made any new headway.
There are several factors that you should ask before thinking your business will be big.
What is the cost of making products in large quantities?
In general, it costs less to make more, but it is not always the case. In many sales and services business, expansion means adding managers and that can cut deeply into profit margins. If you have a family business, this means you will be adding non-family members! And in some businesses, especially those involving design and artworks, finding a few skilled people will be enough of a challenge.
What skill sets do you need when you get bigger?
One of the most successful restaurant managers we work with started out as a McDonald’s manager. There she learned how to hire, (and fire) how to control shrink, how to manage workflow and how to be a tightwad with money. McDonald’s is one of the best run companies in the world.
Can you make the leap from designing jewelry, to catalog design, to marketing manager to executive?
How much money will you need to expand?
Going from nothing to gig is cheap. Going from gig to big is not.
Click here to read “why misers are great businesspeople.
In business, you must produce before you get paid. Sometimes this can take weeks or if you are contracting to major corporations, months. This means either going to bank hat in hand or hitting your savings. In business this is referred to as the capital account.
Capital can be either money or stuff. If it is money, you use it. If it is stuff you borrow against it. Once you start to borrow, your risk rises. Add managing risk to the skill set you need to go from gig to big!
How regional is my business?
Regions may be cities, but also may be neighborhoods.
If your gig is great pizza in a stone oven, and your customers love it, why not open another location. But if your business is software development, one might be location fine.
If your gig is stone over pizza, you would do to your database…
Click here to read how to create a local business database.
To see perhaps where your new location might be would go to your Google maps account and look at road access. You would go to selected locations at busy pizza buying times and look at traffic, etc. Can the neighborhood support another pizzeria?
If you are in software development, do you need face to face meetings? If so what is the cost of traveling. (It is a lot)
What will ultimately happen to your profit margins when you gig becomes a company?
I once had a client that manufactured parts for auto companies. When he was small, he was a niche. He did all the quoting of jobs himself and spent 30 hours a week on the shop floor.
As his company grew, his orders got bigger. He moved into a bigger space and finally a HUGE space. By this time, all he was doing was quoting jobs 60 hours a week. He did not make any more money than when he was small, had over 100 employees and owed the bank his first born.
Why? Because the bigger he got, the bigger the orders had to be. He could no longer just do niche jobs. If work slowed down, he took more days off. When he had 100 employees, they had to be paid, regardless of whether orders came in.
Eventually, one of his customers filed for bankruptcy and he followed right behind.
We have a client that operates shoe stores. A few years back he bought several hundred pairs of winter boots. It did not snow and he sold almost none. They went into inventory until the next year. That tied up about $80,000 in working capital. (money)
That same year he bought, as an experiment, a few dozen leather Harley Davidson logo jackets. They were nice but also expensive. His store manager laughed at him. They sold out in a week and he could not get more. This is the art of inventory.
But he was smart. He was a miser and only borrowed when he had to.
Another aspect of scalability is marketing or operating outside your footprint.
Just because something can be done locally does not mean it works nationally.
If you look at the grocery store “Wegmans,” it took decades to move away from its Western New York footprint. In a small business sometimes moving a few miles is not worth it.
Operating locally and outside a locality are two totally different practices.
Read “Creating a local marketing footprint”
Once you get outside your footprint, shipping costs go up, meaning you may need out of town inventory space to be efficient. You will need out of town labor and believe me, finding someone in an area where you don’t know anybody is hard!
I once knew a man who opened a Tim Hortons coffee shop in a small city in a rural area. He and his wife were Armenians that had franchises around Toronto. In other words, they knew squat about the city they were opening in.
I met him because I noticed his wife was a gorgeous blonde that drove a $120,000 Mercedes sportscar and came to work in a striped brown and white Tim Horton’s shirt and a name tag. The couple lamented to me that they had never seen worse employees.
The poor couple simply didn’t know the hood. I gave him the name of a small town about 8 miles away and told him to put an ad in the post office. Within two weeks, more than half of his employees was from that town. A couple months later he promoted one to manager and he and his wife went back to Toronto.
Other considerations on making a gig big.
Is this cluster**** sellable when I want to bail out?
The short answer is no.
Your business may be sellable, but it is a good habit to think it won’t be. That way you will be reluctant to spend your hard-earned capital until you have gone through an extensive review of profit potential.
So much of what you see in business is wasted money on ego enhancement. Most of these “investments” are like toilet paper. It eventually gets used and is flushed into the sewer.
Nowhere is this truer than in websites.
We had a client that manufactured windows and doors. He paid $5,000 for a website and was paying $300 a month for maintenance.
The site was a picture of his family professionally done. They were in a field, his wife’s gorgeous brown hair flapping in the breeze, his children lying at his feet and the family lab lying next to him.
The problem was, of the 6 people in the picture, only one, HE himself worked at the company. The rest of the 20 employees missed the shoot. Other than this, the site went on to say how great he was, how “revolutionary” their windows were, yada yada.
This is like paying $5000 to have someone hang family photos on your living room wall and $300 a month for someone to stop by and straighten them.
For an investment to be valuable in a business it must have a ROR. (rate of return) But to be valuable as an investment, it must have a residual value. That residual value might be a fraction of its cost.
We had a client that manufactured electronic equipment. The company was not sellable, and he knew it. He was in his sixties the technology was aging out and he had no intention of staying in business. So, he closed and had an equipment sale.
He had spent the 20 years prior to that socking his earnings away in the bank.
Who else sells it and at what price?
Price is strongly correlated with perceived value. Perceived value has little to do with actual value. If you are selling glass jewelry in art shows you will get a far different price than if you are selling them to major retail chains.
To understand this let’s review the difference between a market and a store.
Most people think that products are sold on markets and believe the concept called market pricing. Products are not sold in markets, commodities are sold in markets. Products are sold in stores.
A market is a place that prices things not so much of equal value, but identical things. The oil market prices oil. But the oil you see listed in the paper has identical API grade and sulfur content and is delivered to storage facilities in Beaumont, Texas.
Markets are created by market makers to facilitate the sale of identical things, usually commodities on financial exchanges. When you buy corn on the Chicago Mercantile Exchange, you don’t buy it from a farmer, you buy it from a financial intermediary. A computer.
The last thing in the world you want to sell if you run a business is something on a market.
We have a local farmers “market” here in the city on Saturdays. There’s a farm that sells “local beef.” The quality is horrible, and the prices are astronomical, but people pay for the markup because it’s local. But this is perceived as local. His family sells the same beef to stores who resell it at much lower prices. A farmer’s market is not a market, it’s a collection of stores, like a mall.
I used to know a man who had an apple farm and a cold storage. Once a week he would drive into the city with about 200, 3-pound bags of apples. He sold them for 2X the price that you could buy HIS OWN APPLES across the street at a grocery store.
But he sold out. He would walk into offices, hand over three-pound bags of apples and walk out with $5 a bag. I used to buy them. I didn’t care about $5, in fact, I don’t eat apples. I just left them for my employees. He was a nice guy, my female staff were on perpetual diets and I didn’t have to go to the store.
Here is an example of markets that ARE stores.
Many specialty clothing retailers sell clothing in malls and plazas but also in high-end retail areas like 5th Avenue in New York. They also sell online.
You may already see the problem. Each of these locations has a different cost structure but is forced to charge the same prices. Why would somebody pay more for jeans on 5th Avenue when they can buy the exact same jeans online for less?
People buy things for emotional reasons. Specifically, they buy products to relieve pain. This is explained in detail in the chapter called “Triggers and Pain Points.” But when your product is available at a big box retailer, the emotional aspect is gone. When things are sold on markets, all that matters is price.
Pricing is so complicated it is deserving of an Ivy League master’s degree.
The pricing of a product should always START with an analysis of profit margin, which is covered in the chapter on accounting. Margin is more dependent on where and how something is sold than on what the value is.
If you put a product on eBay, THAT is a market. Unless it is a unique product, eBay is going to put it next to the identical thing which means you can only price cut.
Price cutting is not where you want to be.
Let me give you one last example. The neighborhood next our offices is a university neighborhood. There are several boutique stores here and one that sells greeting cards.
Being a university area there are a lot of gay weddings, unusual events like bar mitzva’s and special holidays, like Kwanza. I went in to buy a traditional card for my niece and her new husband.
The card I bought was on high quality, soft paper, like a fabric. It was $9.99 which is pretty stiff for a greeting card. But that is what that neighborhood can bear. Next door is a bicycle shop that sells brands that you can buy anywhere for insane prices.
If you went three miles in any direction and opened the same stores, you wouldn’t last a month. The people who buy “miss you” cards for 99 cents at Walmart think the people who pay $9.99 for Kwanza cards are nuts and vice versa.
In the end of the day, only you can decide how big to be.
But remember, it’s your baby.
If you end up rich, great. If you end up with a monstrosity you can’t dispose of… not so great.
