In this edited extract from the newly published second edition of Entrepreneur Revolution: How to Develop Your Entrepreneurial Mindset and Start a Business That Works, Daniel Priestley shares four common product strategies that don’t work for small business.
I’ve worked with thousands of small business owners over the last 10 years who have come into contact with my training businesses.
What I have noticed is that many of them have a flawed product strategy. From day one, I can tell they will fail simply by the way they are taking their product to market.
Let me share four common product strategies that don’t work for small business.
- Only one product or service (oops) – too brand dependent
This is where a business only has one product or service. You either take it or leave it.
When you ask the owner of an OOPS business what range of products they can sell you, they are likely to say things like: ‘I do plumbing, you can buy plumbing services from me.’ ‘I sell IT services, you can get me to help with your IT problems.’
This is the most common strategy in a traditional small business, and the reason these businesses stay small. An OOPS business creates a binary choice for a customer, and often the price is too high for people to feel comfortable buying for the first time.
On the flip side, the OOPS business might focus on a single product that is priced low but requires huge volumes of sales to become viable. It can work if you build a massive brand behind that single product, like Zippo lighters or Tabasco sauce did. In most cases, however, a small business rarely ever builds a big enough brand to make an OOPS business work.
- J-curve – too capital dependent
This is by far the most common and most dangerous business model that people lose money on.
The ‘J-curve’ describes a business that predictably needs a lot of money invested before it makes a profit. The ‘J’ refers to the shape of the profit or loss chart, where the initial period is negative, before eventually making a profit.
Typically, this kind of business requires high set-up costs or running costs but sells something that has a low unit cost. This creates a scenario where sales volumes have to ramp up quickly in order to cover basic overheads. If you have a slow month, chances are you will lose a lot of money.
A typical small example is a restaurant. It costs a lot of money to set up a new restaurant. There’s the deposit, the leases, the fit-out, the equipment, the stock, the marketing, the hiring and training of staff. The restaurant owner has to spend hundreds of thousands of dollars before the doors are even open.
It can take months, or even years, to build up a loyal following of customers who make a restaurant profitable. If you don’t have the capital to stay open, you will go broke before you get through the dip.
Often J-curve businesses can lose money for three to five years before they hit the critical mass of customers to be profitable. If the J-curve business didn’t raise enough money early on, it’s likely to run out of cash before it hits enough sales volume to cover its costs. The good news is that if they make it through the dip to become profitable, they can be very valuable to an acquirer who doesn’t want to ride out the initial loss-making period.
- One-stop shop – too systems dependent
A one-stop shop is a business that tries to sell a vast number of products, or tries to offer a wide variety of customisation options. A one-stop-shop business offers clients hundreds of product choices and tries to make sure every customer gets what they are looking for, no matter what it is.
Amazon, Wal-Mart and Spotify are all one-stop shops. These businesses offer millions of choices for the most varied tastes.
The problem with this type of business is that there are too many moving parts for a small business to cope with. Too many things can go wrong. It’s too easy for your customers or staff to ‘break’ the business.
- Brokerage model – too time-dependent
Brokerage businesses sell other people’s value. The typical example is a real-estate agency or a car yard. They don’t own the assets they sell, they just connect buyers and sellers.
The long-term outlook for brokerage model businesses is pretty bleak, because technology is more effective at connecting buyers and sellers than people. Cars, houses, stocks and shares were all typically businesses that employed lots of people to broker the deals; today, these businesses are moving online and the deals are being done with very little human intervention.
Outside of the traditional brokerage businesses, there are still many exciting opportunities to identify a product or service that isn’t being sold effectively and to bring it to market. A product that is selling well in Australia might be absent from Canada, and this could represent a brokerage opportunity.
My first ventures were all brokerage model businesses. I would go and find a product that I thought was going to be hot and I would take it to market.
Despite turning over millions, I was always shocked to discover that these early ventures were not worth real money to investors or acquirers.
Whenever I got my business valued, I would be told the same thing, ‘you are the business’ or ‘there’s no real asset in this business that you own’. One person described my business as a ‘sales engine’. They would tell me that despite our team, our seven-figure revenue and our offices, if we stopped working the business would grind to an immediate halt.
What I didn’t have was intellectual property. It would be cheaper for someone to set up in competition with me than to buy my business.
Despite the downsides of this business model, it is by far the best way to start out in business.
If you’ve never been in business before, don’t go out and invent your own products. Go and find someone who has a successful product and help them to sell more of it or help them to sell it in a new territory.
Two years working as a broker for someone else will teach you about business. You won’t need to worry about product development, you will just need to get good at sales, marketing and administration. Vital skills for any entrepreneur.
About the author
Daniel Priestley is a successful entrepreneur who’s built and sold businesses in Australia, Singapore and the UK. He’s the co-founder of Entrevo, the Key Person of Influence Accelerator program/training for entrepreneurs and leaders. Daniel is also the co-founder of Dent Global – the organization which provides the training and services around the Entrevo program. With offices in London, Sydney, Singapore and Tampa, the Entrevo program is endorsed by the Institute of Leadership and Management. Over 500 entrepreneurs and leaders each year participate globally to develop their businesses with the support of high net worth mentors. Daniel is also now a KPMG ambassador and was named as one of the top 25 entrepreneurs in London influencing the business scene (Smith & Williamson Power 100).