I was recently hanging out in one of my favorite small business forums, and I came across a thread that has stuck with me for weeks since I read it. Here’s what the post said:
“We opened our shop about 8 months ago and every month have been operating 13-30% in the red. Is this normal? Our savings are starting to run out, and we’re not sure how much longer we can go on like this.”
Honestly, reading this post and the couple replies made me really, really sad. Most of the replies were people telling this person not to worry, this was normal, they’re on month 10, month 16, year three and they’re still not profitable. This is normal when you open a new business. This is what you should expect.
I opened a bakery with my sister about six months ago. We invested arrrrround $100,000 (makes me cringe a little typing out that number...) in the renovation of our retail space, purchasing equipment, supplies, and ingredients, hiring employees, the whole 9 yards. Newsflash: 100K is a lot of money. Actually, it's a whole lot of money!! We both basically drained our savings, took out a modest loan (~20K) from Accion, and borrowed money from our family to get our doors open. The day we opened, I was nervous (duh). But I also had 100% confidence (okay, maybe like 99% confidence...there’s always a little bit of doubt!) in our business plan, marketing plan, and most of all our product. I know it’s early days, but today (only 6 months in), we’re operating at an almost 10% profit margin. We've paid sister and her husband, who both work full-time for the business, each a modest, yet regular + predictable salary for the past 4 months. We’re paying our bills, and the business is slowly but steadily growing. We’re expanding into wholesale and educational courses this year.
Bottom line -- I never really had any serious doubts or worries that our $80,000 investment, even though it was a HUGE leap for us to pull that amount of money together, would be worth it. I felt more sick writing those big checks to the general contractor during the construction process (I dunno about you, but up until that point the biggest check I had written was for around 10K, and that was for the downpayment on our house….GULP), than I did at any point after we opened.
So what the heck? What sets profitable business apart from other who are...
- Laying up at night wondering if their business will succeed?
- Worried they’ll never make any money?
- Asking Internet strangers if it’s “normal” to shell out tens of thousands of dollars from their savings every month because their business isn’t making any money?
I’m not saying there is any silver bullet here, but I can tell you that I think there are some absolute key steps you really must take if you’re planning to open a profitable, sustainable small business. If you are doing this as a hobby, or for fun, and aren’t concerned about profitability, or supporting your family, or making a living off of your idea...then this advice is not for you.
BUT, if you legit want to take your idea and turn it into a business that makes a difference in your community, serves your customers, and actually pays the bills, then please...please...please make sure you do the legwork before you invest your hard-earned money, time, & energy into your business idea. Before we get into the process here, let me get up on my soap box and debunk a common myth I keep hearing these days about running a business, making money, and how “easy” it should be.
I am a firm believer that every business, especially if you’re planning to open a brick and mortar business, needs a business plan. I know it’s trendy right now for people to say that it’s overhead, that you’ll never use it, that they built a million dollar business without one. I don’t know about you, but when we opened our business I wasn’t setting out to be a millionaire. I was setting out to open a family-run bakery that I hoped would become a go-to place for my neighbors to grab coffee, have a slice of pie, hang out with their kids, visit on their way to work when they felt like taking some awesome pastries to the office. I pictured a neighborhood place that would become part of my family for generations to come and, who knows, that my kids would take over some day and run.
" every business, especially if you're planning to open a brick and mortar business, needs a business plan. "
Sure, if it ended up doing amazing and we expanded to a second location, or opened a spin-off place, awesome. BUT, I never wanted to build an empire with this thing. That’s not what we set out to do, and I can’t really envision a time (at least right now), where that’s ever a reality for us.
To run a profitable, family-run, local small business is hard these days. We compete with Starbucks, which is right down the street. We compete with Whole Foods, who sells mass-produced apple pies for $10 a pop and sets the expectation in our neighborhood that high quality products can come at a really, really low price (these days, they can!). We fight every day to get the message out about our products baked with ingredients from local farms, homemade, handmade, in our store, by real people and not machines. It’s not easy!
At the same time, we are making a go of it. For us, this started with a solid business plan that I spent two months really researching and putting thought into. It started with a blueprint for how we’d pay the bills every month and attract customers to our shop. When we opened, I felt like I really knew our customers and deeply understood our market. In order to learn about your customers and market, you need to get out there and do a little research!
I think there are two ways to approach market and customer research, and both are totally valid depending on your situation. You will either have a product-first or a market-first approach to this research process. Both are totally valid, great ways to help ensure you launch something profitable & awesome from the very start. PLUS, these methods work whether you're opening a brick & mortar store, a consulting agency, an Etsy shop, or you're selling a service online. I promise it is worth your time to do this exercise ... you will hone in on your target customer, refine your product, and set yourself up to launch something that actually sells!
If you already have a product (like we did with our bakery), then you’re approaching your market & customer research from a product-first perspective. What this means is that you have to find the customers that are willing to pay for your product, figure out what market they are located in, and find a way to get there. For us, we never would have been able to be profitable (for example) in a super rural area where there isn’t a ton of foot traffic. Knowing what our product was--artisanal baked goods made with seasonal, locally-sourced ingredients--and knowing the price-point we’d need to sell it at in order to be profitable, we were looking for a few things:
- Customers who had a reasonable amount of disposable income to spend on higher-end baked goods
- An area where there was solid foot traffic so we could do high volumes
- A neighborhood/town where there were other businesses who would want to wholesale from us
- Low overhead costs...rent and licensing couldn’t be astronomical because we were really new, we were bootstrapping our business, and we wanted to reduce risk
The area we ended up in is a (fairly) affluent, demographically diverse, and pretty liberal collar suburb just outside the city. This market “gets” the locally-sourced/seasonal ingredient angle we are going for, commercial rental units are fairly affordable, the city is small business friendly, we still have easy access to the city via a few major train lines, and we’re on a major street with plenty of foot traffic.
" If you're taking a product-first approach, you're going to have to make some sacrifices. "
If you’re taking a product-first approach, you’re going to have to make some sacrifices. One thing we had to compromise on was neighborhood. When we first started looking for spaces, we were looking a super hip up-and-coming neighborhood within the city limits. Rent for retail spaces was astronomical, most of the people in the neighborhood were generally lower income families or students, and most of the other bakeries were wholesalers or family-run places that had been there for 50+ years and were catering to the ethnic communities that predominantly lived in the neighborhood. We would have been taking a huge chance on this market...we weren’t sure people would be willing to pay for our product, we weren’t sure we could do enough volume, and we would be paying a ton of money in rent and licensing fees to take a chance on this area (even though we loved it, and had lived in the neighborhood ourselves for 5 years). We had to give up our idea of being located in a hip, urban area because we weren’t willing to compromise on our product or change how we make it or market it.
If you’re taking a product-first approach, you have to get to know who will pay for your product and service and then go to where they are. If you know this up-front, you won’t waste time trying to fit a square peg into a round hole with your new baby business, and you’ll be more likely to end up with a profitable venture instead of one that costs you your nest egg.
I put together a worksheet to help you conduct your customer+market research for your business idea. Sign up below and I'll send it to you right now!
The other option is to take a market-first approach. This is the method I hear most people talking about today online, and it’s a great way to make sure you build a product that people will buy. This approach could be right for you if:
Your idea is totally new and you’re not sure if anyone’s ever offered this service or product before (and you can’t afford to take a risk on it not being successful)
- You don’t have an idea yet
- You know you want to serve one particular market, but aren’t sure what exactly to offer (for example, you know you want to be located in a certain area, you know you want to sell to yoga teachers, you know you want to serve families with newborn babies, etc)
The basic premise with the market-first approach is that you go into your target market, find your target customers, and then ask them what their problems, pain points, or desires are. Then, you build a product or service that solves those problems, or meets those desires. Taking the example I gave above with our bakery, if we had been taking a market-centric approach and didn’t want to give up on our desire to be in the hip, urban neighborhood, we would have had to adapt our product to be successful in that particular market, for the types of customers who we’d be selling to their. We would have had to find ways to lower our price point, maybe add additional product offerings to our menu, and market it differently.
So...market-first approach: locate your customers, learn about their pain points & desires. Easy enough, right?!
If you’re building an online business, start with:
- Facebook Groups
- Twitter + Instagram hashtags (check out Hashtagify if you need help finding relevant hashtags for your target customer / market)
- Industry or niche-specific forums (Artists will hang out in different places online than moms, moms will hang out in different places online than accountants, or yoga teachers, or students interested in low-budget travel. Google is your friend here … find your peeps!)
If you are hoping to open a brick & mortar business, I would:
- Talk to your local small business association or economic development center
- Attend events where people in the community gather in a casual setting … street festivals or other outdoor events where people are relaxed and in the mood to talk to their neighbors are great for this!
- Community meetings (great for hearing complaints + pain points)
Want to grab my free worksheet for conducting customer research? It will tell you exactly what you should be looking for + what questions you should be asking while you conduct your customer research! Sign up below and I'll send it to you right now.
Once you start getting some ideas together about your product or service offering, the next step is to figure out if people in your target market will actually pay money for your product or service. It’s one thing if you hear people complaining about something, asking for something, or insisting they will buy...it’s another thing if they will actually pull the trigger and purchase what you’re selling! Three great ways to validate if your target customers will purchase your product or service are to:
- Pre-sell your product online
- Host a pop-up (great for physical product lines!)
- Set up a booth at a fair, festival, or conference where your customers will be (this can work for services OR products!)
All three of the above ideas will definitely take some time to execute, but if you have already done the legwork to find where your target customers are, and validate that your idea is good then this step is more than worth it to guarantee with 100% certainty (or 99% if you are skeptical like me:)) that your idea will be profitable. Before you invest a ton of money and time into launching a product line, opening a store, or marketing your service offering, you’ll have definitive proof (via $$$ in your pocket!) that customers are willing to pay you for it. This has the added bonus of allowing you to get feedback on your product or service. You can use that feedback to improve your offering, and also to sell to future customers by demonstrating that other people have bought from you, loved it, and have gotten some positive outcome from it.
So, what questions do you have? Will you use some of these methods to validate your business idea before you launch? What other methods have you used? Let me know in the comments!
PS -- Don’t forget sign up below to grab the free worksheet I created to help you do your customer research! This will save you a lot of time when you’re learning about your customers + target market.