Will your new business make any money?

By: Kevin Duncan

Date: 31 October 2011

Cash{{}}All successful business owners can work out very early on whether an idea is likely to make them any money. The skill prevents you from making poor decisions, stops you fooling yourself about likely success and is invaluable when you introduce new ideas post-launch. Here are some money-related points to consider.

Concentrate on the money – but don’t become obsessed with it

Wandering round with a spreadsheet all day won’t get your business underway. If the idea is sound, the money will follow. Don’t just go for cash as an objective – it will prove unsatisfactory in the long run.

Weigh up the service v product distinction

Are you offering a service, product or both? It is important to look at the distinction between the two. A product is tangible. A service involves interaction that often goes beyond the moment of purchase. A combination is acceptable so long as you know what percentage comes from each.

Work out how to have a high margin

Can you offer something that relies purely on your skill or experience? If so, you may be able to keep your costs down to near zero. This gives you great flexibility in pricing, and the amount of time you spend working each year.

Try to sell what you do, not materials with a mark-up

Products have price points that are easier for the customer to guess. Services can be priceless. Even the most inexperienced customer has a rough working knowledge of what something should cost. They will understand you have to make a mark-up, but there will be an upper limit that could hinder your profitability.

The price-quality equation: If you cost a lot, you must be good

People like paying for high quality goods and services. Don’t sell yourself cheap. Most people starting a business undervalue what they do. This is a mistake. Think carefully about your true value and make your prices match that.

Aim for 50 per cent repeat business within three years

It costs a lot less to gain repeat business than to start from scratch, so aspire to the high standards that generate it. 50 per cent is, of course, an arbitrary figure, but try to design something that encourages repeat purchase. This will save you reinventing your business every year, and all the cost and effort that goes with it.

Don’t be small-minded about money

Speculate and you will accumulate. Invest upfront, within reason. Be generous and put something in before you expect something back. Treat your customers well and pay your bills on time. Develop a reputation for generosity and fair dealing.

Be canny about requests for free or ‘win-only’ work

If you spend your first year behaving like a charity, you’ll go bust. It’s okay to provide a judicious amount of trial product or service as a taster for what you offer, but only to a certain level. Then you need to be paid.

Consider flexible pricing

If you achieve a certain (non-discounted) price for something, consider charging more next time. This point is specifically for service businesses. Start with a fair price and review it periodically to see if your market can tolerate higher prices based on the quality of what you provide.

This extract is taken from Kevin’s recently published book – What You Need to Know About Starting a Business

Kevin Duncan – business adviser, marketing expert and author