12 Most Common Mistakes of Small Business

(I originally posted this on August 8, 2011 in the 12most.com blog)

Many of us face challenging economic times with uncertain tax and new mandates that causes business planning challenges. It’s been my experience that success in small business has as much to do with avoiding operational mistakes as it does with doing the overall economic environment. With many small businesses not making it during the past several years, I want to highlight 12 common mistakes made by business owners so that you can avoid them.

1. Focus

A common mistake is lack of focus. Small businesses often do not have the resources to go after multiple markets simultaneously, and if they try, their marketing message is sure to be muddled. Specialization simplifies your life and maximizes your profits. Focus helps you define your customer and minimize competition.

2. No Tracking

Many small businesses do not routinely monitor key business indicators and process measures. This reduces the ability to more timely respond to business issues or to identify problems in the making. Track your lead generation activities as well as your production or service processes.

3. Selling

Another mistake is not spending enough time selling. This is particularly a problem for sole practitioners without a dedicated sales person. If you are a one-person shop, spend at least 25 percent of your time selling. Your business cannot grow without new customers. It’s tough, but you must make the effort to contact new prospects each week. You need to keep the future funnel filled while working on your existing projects.

4. Planning

Without a plan you can’t know where you are going. You normally wouldn’t take a vacation without a plan, so why would try to run something as important or complex as a business without a plan? The plan should be where you document the reasons for your major decisions. You then need to monitor the plan to understand deviations. There is a reason no bank will loan money to persons without a business plan. People who plan are generally more successful.

5. Pricing

Pricing is a key. I see too much discounting. Why sell at a price lower than you have to? Charge for your product or service based upon value to the customer rather than what you think they are willing to pay. Target the customers who can pay for your value. Understand your competition’s pricing put don’t get into a pricing war. A key is to deliver a quality product and service at a reasonable price.

6. Customer

The next mistake is not clearly defining your customer. Without a clear definition of your customer, you cannot be focused, and with a clear definition of your customer, you are much more likely to be focused. Describe your ideal customer profile in specific words.

7. Poor Budgeting

Many small businesses do not create a budget to set goals or plan key expenses. The key is to plan for profit and make sure your revenues and expenses are aligned to support that goal. Too many times, I see profit as a “leftover” versus a specific goal.

8. Repeat Business

Another mistake is not going after repeat business. The best customer is the repeat customer, and many studies show the repeat customer is the most profitable customer. Attracting new customers is expensive and can be time consuming, so avoid this mistake. Maintain a database of your customer’s likes and dislikes and figure out how to sell more products and services to them. Also thank them and follow up in a non-sales mode. Your social media network would be one great tool for this follow up and to stay top on mind.

9. Employees

The first employee mistake is not hiring employees to free you up to do what you do best. Your greatest constraint is time, and the best way to leverage your time is to hire employees and delegate work that can be performed by others. Some of these tasks could be virtual assistant part time positions which is a growing field. Take time to hire the right employee. Mistakes here will cost you dearly, both emotionally and financially. And once you hire someone, clearly define job responsibilities. Write job descriptions beginning with the first employee you hire. You do not want finger pointing or misaligned priorities.

10. Bookkeeping

Financial records provide you with the information you need to manage your business. Data, in particular financial data, should drive your decision making. Operating a business without financial records is like driving a car without a dashboard. Don’t do it. There are a variety of low cost options out there to help you.

11. Technology

Next to employees, your best productivity boost will come from maximizing technology. If you are weak in the areas of word processing, spreadsheets, bookkeeping, and utilizing Social Media tools, take classes. You can outsource these tasks, but computer skills are becoming basic requirements for today’s successful business owners. If you run a retail operation, a point-of-sale system is essential, and a computerized customer database is key for maximizing repeat business and identifying your ideal customer. More importantly, a business without a web presence is potentially losing a lot of leads.

12. Capitalization

Not having enough capital – cash in the bank to support yourself and to get the business off the ground. Your car and mortgage/rental payments still have to be paid. Once operational, sufficient working capital is needed when customers are slow to pay or when you have the dry spells. Working capital becomes even more important to support growth. You don’t want to outgrow your working capital capacity.

What other common issues have you seen

Featured image courtesy of  licensed via creative commons.

Pricing for Overall Value

Image via CrunchBase

In my Social Media research, I have read about a lot of places where you can get inspiration for a blog posting.  Going over a Direct TV ad was not one that was listed.  I noticed that a lot of the Disney Channels came in the lower cost plans while other high interest channels were in the higher pricing buckets.  Somehow, this made me think about Disney's pricing strategy.  I don't have any insight as to what they actually do, but this process is one many small businesses should use to create overall enterprise value when they have a family of product offerings.


Lets look at some of Disney's Children oriented segments leaving out their ESPN and ABC segments.  To attact families with children they have:

• Numerous TV Channels via cable or satellite
• Theme Parks
• Disney Stores
• Branded Products
• Disney Movies and DVD's
• Online Disney

Now my children love the Disney Channels and I would pay more to have them if they weren't in the lower priced bundles.  However, by having the Disney channels available to more customers, Disney is generating a brand presence that helps drive demand for their Branded Products that you can find in many retail stores in addition to Disney Stores.  It also helps drive demand for Movies and DVD like the Hanna Montana and Wizards of Waverly Place movies.  If they had priced their channels so that they were in the higher bundle cable or satellite packages, then they may not have as large an audience to drive sales for their other products.


In other words, they could sacrifice a little yield in their TV channels to generate incrementally more sales and margin in their other segments to increase overall enterprise value.  This pricing concept is something small businesses that offer a family of related products needs to consider to optimize their enterprise value.


How does your business balance pricing to drive overall enterprise value?

Related articles

• Disney Earns Its Ears (fool.com)
• Disney acquires Togetherville, a social networking site for kids (globalthoughtz.com)
• Disney Profit Rises 54% on Gains at Parks, ESPN Sports Channel (businessweek.com)
• Disney Channel is TV's No. 1 Network in Total Day for 8th Straight Week with Tweens 9-14 (tvbythenumbers.zap2it.com)
• Disney Channel's Bringing High School Musical To Primetime With Glee-Like Pilot (perezhilton.com)

Business Pricing Strategies

One of the toughest decisions for a small business or start up is pricing their product or service. When we launched Sprint PCS, we had 21 major pricing elements to evaluate for our initial launch pricing positioning. We had to determine what was bundled, what was free, and what was individually priced.  We also had to make sure that the overall yield was consistent with the business plan that supported billions of dollars of investment.  Today for start ups, the choices range from giving it away for free, to pricing based on costs, to charging what the market will bear. The implications of the decision you make are huge, defining your image, your funding requirements, and your long-term business viability.  Your revenue model is the key to your business strategy.  Doing it right the first time is important since making mid course changes can be disruptive to your business.

 Here is a summary of common revenue models used by businesses today, with some of the pros and cons or special considerations for each:

1. Product or service is free, revenue from ads and critical mass. This is a common model used by Internet start ups today, the so-called Facebook model, where the service is free, and the revenue comes from click-through advertising. It’s great for customers, but not for start ups, unless you have deep pockets and can convince investors of future revenue generation capabilities. If you have real guts, try the Twitter model of no revenue, counting on the critical mass value from millions of customers to generate revenues down the road.  Ning, a social network platform tried this with a and had to transition to a "freemium model" to a tiered paid model.
2. Product is free, but you pay for services. In this model, the product is given away for free and the customers are charged for installation, customization, training or other recurring services. This is a good model for getting your foot in the door, but this is basically a services business with the product as a marketing cost.
   
3. “Freemium” model. In this variation on the free model, used by LinkedIn and many other Internet offerings, the basic services are free, but premium services are available for an additional fee. LinkedIn's advantage is that they have been able to attract a segment willing to pay these fees. This also requires a huge investment to get to critical mass, and real work to differentiate and sell premium services to users locked-in as free.
   
4. Cost-based model. In this more traditional product pricing model, the price is set at a multiple of the product cost. If your product is a commodity, the margin may be thin. Use it when your new technology gives you a tremendous cost improvement. Skip it where there are many competitors.  A lot of contractors use this approach.  A key here is to monitor the appropriate multiple as cost structures do change over time.
   
5. Value model. If you can quantify a large value or cost savings to the customer, charge a price commensurate with the value delivered. This doesn’t work well with “nice to have” offerings, like social networks, but does work for products that uniquely solve critical needs.
6. Portfolio pricing. This model is relevant only if you have multiple products and services, each with a different cost and utility. Here your objective is to make money with the portfolio, some with high markups and some with low, depending on competition, lock-in, value delivered, and loyal customers. This one takes expert management and ongoing analysis to work.
   
7. Tiered or volume pricing. In certain product environments, where a given enterprise product may have one user or hundreds of thousands, a common approach is to price by user group ranges, or volume usage ranges. Keep the number of tiers small for manageability and make sure you have a good sense of your products economics with various volumes.
8. Competitive positioning. In heavily competitive environments, the price has to be competitive, no matter what the cost or volume. This model is often a euphemism for pricing low in certain areas to drive competitors out, and high where competition is low. Competing on price alone is a good way to kill your start up. It is important to have strong elements such as service and quality.
   
9. Feature pricing. This approach works if your product can be sold “bare-bones” for a low price, and price increments added for additional desirable features. It can be a very competitive approach, but the product must be designed and built to provide good utility at many levels. This is a very costly development, testing, documentation, and support challenge. At Sprint PCS, we did the first inbound minute free at launch to make customers comfortable in receiving calls and giving out there PCS phone number to generate traffic and awareness since the existing analog cellular service was mostly outbound calling.
10. Razor blade model. In this model, like cheap printers with expensive ink cartridges, the base unit is often sold below cost or with minimal margins, with the anticipation of recurring revenue from expensive supplies. This model that requires deep cash pockets to start, so is normally not an option for start ups.

Your business model interacts closely with your marketing model.  Marketing is required to get visibility and access to the opportunity, but pricing defines how you will actually make money over the long term and drives your cash flow. Your challenge is to set the right price to match value perceived by the customer, with a proper return for you.

I received the inspiration for this post from Martin Zwillings Startup Professionals Musings blog.

Related articles

• Giving Something Away: How Tech Startups Land Their First Customers (dailyfinance.com)
• 6 characteristics of successful Freemiums (techvibes.com)
• The new business model is subscriptions (leadsexplorer.com)
• How to Get More Customers by Adding Value (nichetitans.com)
• Freemium Summit Recap (startupcfo.ca)