“The first blow is half the battle.” – Oliver Goldsmith (1728-1774), She Stoops to Conquer
Two separate start-up ventures recently profiled in Success magazine illustrate the importance of what I will pompously dub MMFs First Rule of Business: Sell first. Ask questions later. What I am about to say applies to starting new businesses in which you dont have proven profitable experience.
An Expensive Lesson in Marketing
Jeff Landers, a New York real estate broker, discovered what he considered a very big, untapped market: Many large companies had surplus space or offices they wanted to rent, but few commercial real estate agents were interested in brokering those deals. The solution? www.offices2share.com, a cyberspace advertising business that Landers believes will make him the next Jeff Bezos.
To lure customers to his site, Landers posted a special introductory offer that gave away a free ad for a year. His objective: convert them into paid listings ($59.95) in subsequent years. That sounds like a dubious marketing strategy to me, but its how Landers pursued this strategy that interests me here.
Landers spent most of his $10,000 life savings on building his website. When it was done, he was happy until he realized hed forgotten to do the First Thing. Hed failed to find a way to make a profitable sale!
So at the eleventh hour he hired an expensive advertising firm and spent the rest of his nest egg on various selling schemes. Unfortunately, the advertising company he hired wasnt composed of marketing geniuses. They tried this and that . . . and his bank account got lower and lower . . . and before long he was broke.
A more experienced businessman would have stopped there, but Mr. Landers was still convinced his product would work and his advertising company was still convinced he should keep advertising, so he went to the bank and borrowed money.
Its Way Too Easy to Throw Good Money After Bad And Its Hard to Admit You Are Wrong
What will happen to Mr. Landers? I wish him the best, but my guess is that he will be out of business within the year. Unless, of course, he can find another, richer Mr. Landers.
A Much Smarter Approach
Meanwhile, car repairman Jack Panzarella had a very different idea for starting his business: those silly, neon glowing things underneath car frames.
When he invented this toy in 1990, Panzarella had a mere $1,000 to his name. About a third of this paid for the installation of his first two neon light systems, with the balance and most of Panzarellas time devoted to selling his idea to auto shops and hawking his wares at car events.
Panzarella spent all his spare time then traveling around, showing off his invention and signing orders. They came slowly at first, but single sales often led to repeat customers, because his products attracted a lot of attention and word spread by mouth.
He took deposits, enough to build the systems ordered, delivered them, and then reinvested the profits in selling more systems. For months, he put nothing in his pocket, spending nothing on office space, executive perks or product improvements. He just sold and sold until he knew exactly how to sell his product profitably.
After about a year of this, he had a working business. (20 hours a weekend times 50 weeks equals what? Can you guess? Yes! 1,000 hours!) It wasnt perfect, but it was profitable. Gradually, using only the cash flow he could spare, Mr.Panzarella began making improvements fixing up his shop, buying some new tools and ordering inventory.
By devoting his attention to selling first, and taking care of the other, secondary business concerns later, Panzarella ensured that his fledgling enterprise would not suffer the normal (and normally lethal) cash shortages most first-year businesses encounter.
Today, Street Glow Inc. garners $8 million in revenues and has shown a consistent profit, year after year.
Without sales, as they used to say at The Rockville Center Billiard Parlor, you got gots.
Business plans, product revisions and customer service programs are all very important. But for a new business, nothing is more important than sales.
It may be the single most common mistake in starting a new business spending your precious capital on secondary considerations. What is secondary? My list would include real estate, office equipment, stationery, business cards, employees, software even (sometimes) the product itself.
What is primary? Id put it this way: The first and most important consideration of any new business is the fundamental selling proposition. Can you really sell your product/service the way you want at the price you want?
For example, say you wanted to open a steakhouse in your hometown. There are many considerations you would have to take in, including location, décor, staffing, menu and so on. But before you spend too much on that, you should find out somehow or other if people in your area want to eat steak for dinner? Doesnt that make sense?
Its amazing how much money people will throw at a new business without ever getting an answer to this simple question.
Ill give you an example. This happened just the other day.
I got a call from EP, who had a young man in his office who was in the process of setting up an Internet counseling business. He (and his backers) had already spent a fortune on the website and he wanted my advice on putting together a huge network of counselors to respond to the big advertising blitz he was planning. What is the best way to attract these counselors? he wanted to know.
I told him I thought he was making a big mistake. I told him that the primary business consideration is this: Can you provoke (through advertising) people to log on to and pay for counseling online? And if so, how much would it cost?
I tried to explain to him that his current business plan would have him spending over a million dollars before he answered this primary question. The first thing he needed to do and the main thing he should be spending his money on now was to find out how much it would cost him to acquire an online client and how much net revenue that client would be worth. That, I said, would cost him about $50,000, not a million. And, when he was done in 30 days he would know with confidence if he had a viable business idea.