Know the Customer Before Business Planning

Previously, I have referenced the column from Inc.com on “Herding Gazelles,” written by Karl Stark & Bill Stewart. These guys have a consultancy that works with businesses on strategy as it relates to attracting investment. Their contributions to Inc are well thought out and I enjoyed this morning’s edition:

We have been working with an early-stage enterprise tech company to help them get their product to market. We recently gathered to watch their first customer installation. They were naively fearless–they knew things would go wrong, but they didn’t know what or how severe the problems would be.

No one, however, expected the install to go as badly as it did. If there was a feature that could be broken, it was. If there was a process that could be challenged by the new technology, it was. If there was a remote possibility that some network setting would cause chaos, it did.

All the testing they did in advance didn’t prepare them for “real” users. The tech team was at first horrified by the volume and severity of the challenges they experienced. But then something amazing happened. They showed us exactly why we are excited about their potential.

They took a deep breath, stopped trying to gloss over the challenges, and instead embraced their flaws. They encouraged users to try to break things. They feverishly took notes as they learned what they needed to do better.Customer insight wordle

The customer wasn’t scared off by the bugs because our client had prepared them for possible issues. The team was honest about where the problems were, but more importantly, they showed the customer their resolve to learn everything that they could to develop a great product. The customer’s attitude actually shifted from tolerance to excitement as they realized the system was going to be refined beyond just fixing flaws and that they were going to be a part of designing a system that they would love to use.

The tech company accepted that they didn’t know it all and eagerly solicited feedback from the customer. The experience gave them the best free product development input they could ever expect.

We thought to our own client experiences, and the experiences our other clients have with their customers. If we can all listen to customers as openly as this tech start-up did, we will not only build great products and services, but we will forge the sort of lasting relationships that most companies seek.

When developing new products and services, it’s good to trust your intuition and your internal expertise–to a point. But when an opportunity to learn from a real live customer presents itself, you need to be all ears. You can’t possibly know it all if you don’t recognize the wisdom of others.

What is recommended here echoes what I am sharing with entrepreneurs on a recurring basis: until you fully understand the needs of your (target) customer, you are fooling yourself as to the viability of your business model. Taking the time to first identify target market segments, then messaging appropriate to each, followed by testing your proof of concept in an effort to revise your offerings is Business 101.

We are passionate about the need to understand how your target buyer thinks, what is important to them, and how you can produce something that they perceive as highly valuable. Asking is a great start! Slowing down from product or service development, let alone ongoing business operations, and asking yourself tough questions requires discipline and commitment. Kudos to those who are strategic enough to realize the potential compound payback on the investment!

 

Consider 8 Ways to Start a Business

Through the non-profit EntreDot, I have the opportunity to work with entrepreneurs on a daily basis who are trying to commercialize a business idea. Yet, some people are concerned about their ability to generate original ideas. Last week I had the opportunity to attend a book club meeting in Charlotte, courtesy of BiG Council. The book being considered was entitled Idea Stormers, written by Bryan Mattimore. Bryan shares ideas for brainstorming that can help most anyone in any situation generate new ideas. While some of his methods are whimsical, others are more structured–something for everyone!

In a blog post for Entrepreneur.com earlier today, Jane Porter tackles the challenge of coming up with good ideas to start a business. She cites Stephen Key, the cofounder of inventright.com, and author of One Simple Idea for Startups and Entrepreneurs: Live Your Dreams and Create Your Own Profitable Company as an authority on the subject.

Porter considers the following 8 methods significant from Key’s work:

Ask yourself, “What’s next?”
Think about trends and technologies on the horizon and how you might move into those areas, says Sergio Monsalve, partner at Norwest Venture Partners, a Palo Alto, Calif.-based venture capital group. He suggests, for example, thinking about innovations related to the living room and home entertainment systems now that companies like Apple are developing new television technologies. “What can that mean in terms of new ways to live in your house and be entertained?” he says.

Do something about what bugs you.
When Colin Barceloux was in college, he thought textbooks cost far too much. In 2007, two years after graduating, he decided to take action and founded Bookrenter.com, a San Mateo, Calif.-based business that offers textbook rentals at about a 60 percent discount. What began as a one-man operation created out of frustration now has 1.5 million users and 200 employees. “You just have to look at what frustrates you,” he says. “There’s your business idea right there.”

Look for new niches.
Take a look at what some of the big players in an industry are missing and figure out if you can fill the gaps, Key says. In 2003, for instance, he started the company Hot Picks, now based in San Jose, Calif., after realizing the major brands in the guitar pick industry weren’t offering collectible novelty picks. Key designed a skull-shaped pick that filled an empty niche and was sold in 1,000 stores, including Wal-Mart and 7-Eleven. 

Apply your skills to an entirely new field.
Think about your skills and whether they might be useful in a new area, suggests Bill Fischer, professor of innovation management 
at IMD
, the top-rated Swiss business school, and co-author of The Idea Hunter: How to Find the Best Ideas and Make them Happen (Jossey-Bass, 2011). Consider, for example, JMC Soundboard, a Switzerland-based company that builds high-end loudspeakers. Jeanmichel Capt invented the speaker by applying his experience building guitars as a luthier, using the same resonance spruce to create a loudspeaker that produces a high-quality sound and looks like a sleek wood panel. 

Find a category lacking recent innovations.
For example, when he realized there were few new developments in the product information label business, he created Spinformation, a label consisting of two layers—a top layer that rotates with open panels through which you can see, and a bottom label that you can read by spinning the top layer over it. Companies needing to fit more information about a medication, for example, could use the extra label space for the details.

Make a cheaper version of an existing product.
Take Warby Parker, an eyeglasses company launched in 2010 by four business school friends. The New York-based business sells prescription glasses, which are typically priced at $300 or more, for $95. Since its launch, it has grown to 100 employees.

Talk to shoppers.
If you are interested in mountain bikes, hang out in the aisles of sports and bike shops and ask customers what they wish they could find in the marketplace. If you’re interested in developing an e-commerce business, consider sending an online survey to potential customers to learn about their needs and interests.

Play the mix and match game.
Walk up and down the aisles of a drug, hardware or toy store combining two products across the aisle from each other into one, Key says. That should spark quite a few ideas, but be prepared for most of them to be bad. “You will come up with all these horrible ideas, and every once in a while you will find some brilliant idea out there,” he says.
 

Do these concepts stir your creativity? Great! Go start a business – EntreDot would love to help!

 

New Small Business: Economic Development Catalyst

Small businesses are the backbone of the U.S. economy. This is a statement that is tossed out for public consumption on a fairly regular basis. What data backs it up? What might it mean for job creation and other key indicators of economic health that matter to the general population? In the November 2012 Business Dynamics Statistics monthly report from the Census Bureau, it was noted that hiring and job creation in small businesses (19 employees or less) with two years or less of operations was stronger than in larger companies that had been around longer.

While older firms only hire 25-33% of new employees for newly created jobs, young firms average about two in five (40%)! A substantial fraction of the job creation for young firms is due to the job creation that occurs in the quarter of starting up. However, there is substantial subsequent job creation as well as job destruction in the succeeding quarters in the first two years. The overall net job creation (the difference between job creation and destruction) is much higher for young firms than for older firms.

Small Business strengthThe other area in which startups excel is in worker churning (hiring in excess of job creation and the separations in excess of job destruction.) Job creation measures the employment gains from the expansion of existing establishments and the creation of new establishments. Job destruction measures the employment losses from contracting and closing establishments. The Department of Labor maintains that churning helps the matching of workers to jobs. Hiring and separation rates at young firms are seen as being unusually high. There is also a trend of a marked improvement in hiring and job creation in young firms since 2008 in comparison to established firms. 

The report, entitled “Job Creation, Worker Churning, and Wages at Young Businesses,” draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. On a less rosy note for employees in small companies, the study also showed that their earnings per worker are lower than at more mature firms. Since the wage premium for workers who choose to work for large companies has persisted, earnings growth–even during the most recent recession–is largely attributable to wages paid by larger companies. Some of this decline is accounted for by changes in the industry  composition of startups over the last decade, but the overall trend is downward.

Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. 

Churning rates are said to be “procyclical,” dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.

What does this all mean? Here are the key takeaways:

  • Small businesses create more new jobs than large businesses
  • Pay at small companies tends to be less than at larger ones
  • Turnover is higher at smaller firms than at larger ones
  • Small business bounces back faster than big business after a recession
  • Startups are paying less now than they were a decade ago

 

 

 

Stop the Rhetoric About SmallBiz, Politicians!

We small business owners watched the political conventions over the last month and were listening to what the pols had to say about watching out for our interests. Numerous speakers took the podium to address an economic challenge not seen in this generation. We of the post-Baby Boom era are wondering whether our way of life will bounce back, rather than when. So many people have lost jobs, big companies have lost revenues they had taken years to build, and small business owners have lost both jobs and revenues as well as their livelihoods. We are, to say the least, keenly interested in whether we are being heard by Washington and our state capitals. We are certain that social security and probably Medicare will not be there for us when we reach retirement age. We truly do not care what happens to those programs–tell us what is going to be done to help us with issues we face!

Saying that small business is the backbone of the economy is not enough–both presidential candidates kowtowed to the convention audiences and said what they had to, but it wasn’t convincing. Part of the reason the comments seemed disingenuous is that “small business” is a catch-all phrase that does not distinguish between differing types of enterprises. As  others have pointed out, a restaurant is a very different type of company than a small manufacturing concern.  Dan Danner, the CEO of  the National Federation of Independent Business (NFIB) says, “There is always a tendency for lawmakers to think that small businesses are just smaller versions of General Motors, and they’re not.” Main Street businesses have very different perspectives on policies that are developed by government. Policies  covering health care, trade, taxation, and ecology often reflect the lobbying power of big business over small business. Chris Holman, chair of the National Small Business Association, says that politicians often “go and vote against small business.”

Data from the Small Business Administration shows that small business has been hit harder than big business by our recent recession. One of the statistics–share of nonfarm GDP from private companies–fell from 48+% in 2002 to <44% in 2010. With home building and related trades suffering from the aftermath of the mortgage crisis, there has been a very slow return to stability –let alone growth–in many small business sectors. Uncertainty over potential changes in the tax code and Obamacare has many small business owners anxious as to what to plan for and how to develop strategies  focused on more than just a few months down the road.

Bloomberg Businessweek writer Peter S. Green profiled several small business owners in the September 17-23 issue who spoke to the issues above. Tom Campbell, who owns the Regulator Bookshop in Durham, NC, spoke out against the unfair advantage online retailers like Amazon have due to sales tax exemptions. He’d like to see the exemptions lifted to create a more competitive playing field. The 20 employees under his supervision have concerns about the future of small bookstores who have to compete in an environment where their customers pay an additional 7+% due to the imbalance in tax liability.

Tom Secor, who owns Durable Corp. in Norwalk, OH, feels that the tax system favors larger businesses. Preferential loopholes in the tax code seem to favor those who have the klout to petition government to listen to them, he says. “Big business is getting the better end of this because they have the money to spend.” Secor’s comments are similar to those voiced by Richard Eidlin, director of public policy at the American Sustainable Business Council. Eidlin decries subsidies offered to big business–whether broadband spectrum or ethanol price guarantees. He says, “If there’s going to be corporate welfare, you could throw some of that at the small corporations.”

In summary, small businesses want someone who understands their needs, can develop programs for sectors of the small business economy, and won’t bog them down in paperwork and red tape. While few actually believe that a president can personally be attuned to these issues, we hope against hope that they will make it a part of their platform and governance!

Ideas to Spur Startup Success in NC

Whether through consulting or working with non-profits who serve entrepreneurs, I am very committed to seeing jobs created through business creation. In my work, I am often scouring research publications to find data and resources that point to trends and patterns. The North Carolina Small Business Technology Development Center publishes data on small business and entrepreneurship trends across the state. The 2012 (results through 2010) report highlighted some interesting trends:

Not only has the number of new employer businesses declined, but so
have sole proprietorships. Only three times in the past four decades
has the total number of non-farm proprietors in North Carolina
decreased from the previous year – twice in the early 1970s and
again in 2008. The only reason there wasn’t a decline in 2010, was
likely due to the growth of the state’s population. NC’s proportion of
business owners to total residents dropped in two of the last three
years – and 2009 was mostly unchanged.

We don’t know exactly who is and isn’t starting businesses in North
Carolina. However, the 2011 Global Entrepreneurship Monitor noted
this trend for the US as a whole and looked deeper into the problem.
Their surveys showed a disturbing decline in entrepreneurship among
young adults. This could be from a lack of interest, knowledge/training,
or capital (unemployment and debt are high among those under 25).

The reason this is potentially troubling is because the experience of
youth entrepreneurship is essential to the pipeline of successful startup
businesses in this country – often created by those in their 30s to
50s. If this trend is real and sustaining, the economic effects could be
felt in years to come.

While the concern about national declines in entrepreneurship among young adults is a valid one, our experience in the Research Triangle area is that more technology start-ups than ever are being initiated by this demographic. What seems to be missing, however, are start-ups from that same age group that are in the category of “Main Street” businesses. Businesses like real estate brokerages, boutique professional services firms, personal services, healthcare related companies, and construction companies or other labor-intensive enterprises are simply not popular among young folks.

Instead, the Baby Boom generation seems more likely to start Main Street businesses. At the Cary Innovation Center in Cary, NC, for instance, virtually all of the entrepreneurs in residence are over the age of 40. They share a common background of having spent years in industry, having developed a little bit of a nest egg, strong skills in unique disciplines, extensive business networks within their industry, and a desire to be self-employed the remainder of their productive work years. 

Perhaps we need to actively engage the 20 somethings in some type of entrepreneurship fair that would expose them to the lower risk/better quality of life aspects of the types of businesses that are residents at the Cary Innovation Center (events planning, a digital marketing company, a career outplacement firm, etc). Most of these businesses require far less capital to get off the ground than their venture-backed and angel-backed peer start-ups. Furthermore, it is easier to generate revenues earlier in the life cycle of these types of companies. 

Alternately, we need to realize the wonderful phenomenon that is spreading throughout the more seasoned crowd. We can–and should–celebrate their excitement about entrepreneurship as a second career.

In short, national trends need not determine our experience. We have an opportunity to be better than other parts of the country if we encourage more of what is working, champion alternatives for younger entrepreneurs, and give them all a lot of support in the form of education and mentoring.