High Margin vs Volume

At some point during your business’s life you’re likely going to have to choose between high volume, but low margin sales; and high margin but low volume sales. It can be a very difficult decision, and there’s no one right answer. Generally speaking though, it comes down to profit. Which way will ultimately give you the most profit with the least hassle. 

Recently I was forced to make this decision for one of my businesses, and I ended up choosing to go with high margin, low volume. This particular business has quite a few things that aren’t easily scaled to deal with high volume. Which means that scaling is costly. In hind-sight the decision should have been easy, but when you see the high dollar values of high-volume contracts it’s easy to think about revenue rather than profit. 

The Profit

Whether you’re creating a startup or you already have a functioning business, use whatever tools are available to you to make it better. One tool I’ve found very valuable recently is a TV Show called The Profit. Yes, it’s one of those stupid reality shows, but here’s the thing, it’s not stupid. If you pay attention, it illustrates perfectly a lot of the pitfalls small businesses run up against, and potential solutions to those problems. I highly recommend it.

Asymmetric Dominance (The Decoy Effect)

If you’re trying to figure out pricing for your start up, you should learn a little about asymmetric dominance theory, which is also called the decoy effect. In short, by providing potential customers with an option that is inferior to the one you want them to choose, but superior to the other levels, it will help them make the better choice. 

Failure is an option

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Growth: The Silent Killer

Imagine that your little startup actually does what millions of others fail to do, it finds success! Now imagine what happens if you aren’t prepared to deal with it.

Growing too rapidly can kill your business just as quickly as not being successful in the first place. Worst of all, you’re less likely to be prepared for massive success than you are massive failure. You won’t see it coming fast enough.

Here are a few ways your business might grow that could kill it:

  • You might try to do everything your customers ask for. After all, you want to please them because they’re paying the bills. The problem is, you need to grow at a pace that’s sustainable for your sanity and your pocketbook. If you don’t you’ll either grow broke trying to invest in the next thing before you have the money, or you’ll go insane working too many hours.
  • You might back the wrong audience. Maybe early on both consumers and businesses decide your business is great, and they sign up. Let’s say businesses are more profitable initially because they buy more stuff. So you mould your business around that one audience segment, potentially alienating the other segment. Now the business audience dries up. You’re sunk.
  • You might back yourself into a corner. You sign a lease on an office, warehouse, or retail space. It is 3 times bigger than what you need, but you figure you can grow into it. Well if you grow really fast, you could outgrow the space faster than the lease expires. What do you do then? Open a second location? Move out and pay the lease on both spaces? 
  • Supply lines run thin. Maybe you’re growing so fast that either your suppliers can’t keep pace with you, or you can’t hire enough employees to do all the work. Do you have a plan for that?

These are just a few ways success can kill you. Don’t get me wrong, I’d rather deal with these issues than lack of success any day. But it’s also good to plan for this silent killer in addition to the more obvious dangers ahead of your business.

Vendors Likely Won’t Change, So You Need To

If you’re creating a company that has to deal with outside vendors, you’re going to run into one terrible inalienable fact: MANY OF THEM WILL SUCK.

Some of them will be stuck in the dark ages and want you to phone or fax an order in to them rather than having a web site you can easily navigate, or a web service you can hook into your own systems. Or if they do have a web site, it won’t be easy to place orders on it, because it will be some terrible free thing that was auto-generated out of their ERP system.

Other vendors will take up to a week to reply to your requests. Some of them will take more than a month to ship out the goods once you’ve ordered them. We work with one vendor who’s standard shipping time is 3 months for replacement parts. Mind you that you can get a new machine next week, but if you need to fix an existing machine it will be 3 months.

Some vendors will make it as hard as possible for you to give them your money. Either their sales people are stretched too thin, or they have too many layers of red tape, but you may have to reach out to them many many times in order to place an order. 

These things aren’t going to change. You need to change. If you can, see if you can find a different vendor. Someone who’s easier or faster to work with. Sometimes this might cost you slightly more money, but it’s worth every single penny. If you can’t get a new vendor, then you need to build processes around the fact that the vendor is going to suck. If it’s replacement parts, then keep extra on hand so you can do any repair at a moment’s notice. If it’s consumable supplies, then set a schedule to order them well in advance of running out so that by the time they do get to you, you haven’t yet run out. If it’s a piece of software that needs support, maybe you’ll be better off training your own employees to support it.

Don’t let your business suck just because your vendors suck. Your customers won’t care why something has gone wrong in the back end. It all just look like you are the one failing. So build processes and system in place to mask these problems so that your customers see you firing on all cylinders.