Seth Godin is a bestselling author, entrepreneur and agent of change. He is author of six books that have been bestsellers around the world and changed the way people think about marketing, change and work. Seth is a renowned speaker as well and was called “the Ultimate Entrepreneur for the Information Age” by BusinessWeek. Recently I'm reading his book Bootstrappers Bible and this post is one of among fantastic ideas shared in this book.
Profitability: Do you think your business model can make profit to survive? Many people start business that with minimum profitability and end up in losing money. Don’t start anything that is lame from the point of making profit.
You’d be surprised at how often people start businesses that lose money on every product and then try to make it up in volume! That lemonade stand you ran when you were seven was a great lesson—you need to make money to stay in business. The only thing is that when you’re seven, your mom gives you the lemons for free. Almost no business is profitable on the very first day. The baker has to buy ovens, pay the rent, and purchase ingredients. The consultant needs business cards and brochures. The question is: How long before profitability? Write down a target date. If you go way past it, figure out how to fix the problem or quit. Staying in a losing business because you’ve already lost a lot of money is a bad business strategy. Learn how to detect the factors that change a business from profitable to unprofitable.
Protectablity: How protectable your market is in terms of entry barrier? Answer this question honestly. Is it like that, anybody can get entered and kick you out? How protective your market is from competition is vital because it defines a lot of your success.
A profitable business, as mentioned earlier, is going to attract competitors. What are you going to do when they show up? If you’re accustomed to making $1 on every ice cream sandwich you sell and suddenly thereʼs a price war, you may make only a nickel. That’s not good. It’s called a barrier to entry or competitive insulation. Barriers can include patents (which don’t work as well as most people think), brand names, exclusive distribution deals, trade secrets (like the recipe for Coke), and something called the first mover advantage.
Self-priming: How many people use your product? Is it a new idea that takes people to think before buy? Is it have any barriers in using it? Create something that has no using barriers.
One of the giant traps bootstrappers fall into is inventing business models that don’t prime themselves. If you want to sell razor blades, for example, you’ve got to get a whole bunch of people to buy them. Without a lot of razors out there that can use your blade, you lose. Is it possible to build a paradigm-shifting business with just a little money? Sure. It’s been done before. But nine times out of ten, you’ll fail. Why? Because you’re going to run out of money before you change the world.
Adjustability: Flexibility matter. Don’t start with anything rigid that cannot be adjusted in required time. Don’t create any pressure artificially that prohibit your ability of adjustability in a given situation. Rather keep your door often always.
Remember how excited everyone got about the missiles the U.S. used during the Gulf War? Here was a weapon you could aim after you launched it. You could adjust the flight along the way. You need a business model like that if you’re hoping to maximize your chances of success. If you’ve got to lock it, load it, and launch it, you’re going to be doing more praying than you need to. A business model that relies on a huge number of customers or partners is far less flexible than one you can adjust as you go. Subway sandwich shops, for example, have more than 13,000 locations, each individually operated. If Subway decided that the future lay in barbecued beef, it would take a lot of persuasion to get each of these entrepreneurs to go out and buy the necessary equipment. They’re pretty much stuck with what they’ve got. Compare this to a local restaurant with one or two locations. If everyone suddenly wants fresh oat bran muffins, they’ll appear on the menu in a day or two.
Exit strategy (optional): Simply, think, if you want to sell your business will anyone buy it. Keep an exit strategy if incase you need to use it.
If you can build a business and then sell it, you get to extract the equity you built. If you can’t sell it, all you get is the annual profit. There can be a big difference. About eight months after going public, Yahoo!, for example, had equity worth about a billion dollars, but it made only $2 in profit last year. That 500,000,000-to-1 ratio is huge, and it’s unusual, and it doesn’t last forever, but if your goal is a retirement villa in Cancun, the exit strategy it allows is very nice indeed. Selling ice cream sandwiches offers no exit strategy at all until you reach a certain scale. When you’re small, the business is just you. A competitor can buy trucks more cheaply than buying your business. But once you hire employees and build a brand and create trade secrets and systems, then you’ve built a business.