Business Banking E-Newsletter - June 2013
How Much Confidence Is Too Much?
Being right feels awesome. There's nothing quite like discovering that you had an idea or made a decision that didn't just work--it rocked. But while ending up in the right is lovely, stubbornly refusing to give up on being right is not good for business. Just ask Jeff Booth, president and CEO of BuildDirect, a Vancouver, British Columbia-based retailer of flooring and other building materials. He's been there.
Booth and business partner Robert Banks launched BuildDirect at just the right time. It was 1999; the dot-com boom was on and home sales were on the upswing--big time. They built solid relationships with suppliers, skipping the middleman and passing savings on to consumers. The company took off quickly, growing from a kitchen-table operation to an international success.
But nine years in, confidence got the best of them--and that's when the problems began. "When you're right and have crazy success with that right, you can become jaded--and quickly," Booth says.
After nearly a decade of can't-do-wrong, the real-estate market turned. Booth and Banks, however, kept going in the same direction. They ignored the market. They ignored their team. After all, they'd been right for nine years. And their business tanked--spectacularly.
It woke them up. "In a situation like this, it would have been easy to blame outside forces for what was happening to our business," Booth says. "Rather than laying blame elsewhere, we decided to look inward, to analyze what we had done to contribute to the situation and to figure out what we needed to do to make our way through it.”
"We quickly realized that our need and attachment to being right was our biggest problem. We'd focused on the wrong thing," Booth says. "We finally saw that making the best decisions for the company, its customers and our team should be our No. 1 goal."
So how did BuildDirect come back from the brink? Booth says the key to reversing the "I'm right" trap is to widen your circle of trusted advisors.
Two founders was too small of a feedback group. Booth and Banks brought their entire management team into the loop, encouraging them to ask hard questions and offer honest answers. This led to a less biased decision-making process and better alignment of the team.
Just as important: They began avoiding the head-nodders. Sycophants don't help you run your business; they just boost your ego. Smart entrepreneurs embrace the value of debate and diverse opinions.
So do you want to be right, or do you want to make the best decisions for your company? The upside to the latter is that many times, those decisions will prove you right in the long run--not a bad deal.
7 Ingredients to a Successful Business Dinner
Taking clients out for an enjoyable dinner can help you build the long-lasting relationships that your business needs. But you need to plan carefully so you're sure to make the best possible impression.
For example, choose a restaurant willing to accommodate people on a vegetarian, gluten-free or other special diets, says Mark Hemmeter, founder of Office Revolution, a provider of virtual office space in Boulder, Colo., who often meets with investors and potential franchisees over dinner. "I don't want to put someone in an uncomfortable situation."
Here are seven of the essential ingredients to wooing clients during a business dinner:
Research your dining companions.
Take time to read up on your guests using online search tools or LinkedIn. If you know the business and personal backgrounds of the attendees, including personal interests and hobbies, you can use the information to help build your relationship, says Deborah Goldstein, a founder of Goldie's Table Manners, a New York City-based dining etiquette business. "If you find a hobby in common, you can steer the conversation to 'stumble on' that commonality."
Getting to the restaurant ahead of your guests can help ensure that the dinner goes smoothly. For one thing, you'll have time to control the noise level by making sure you're not sitting next to a large group of people and that the table isn't in the path of traffic, says Lydia Ramsey, a business etiquette expert in Savannah, Ga. Also, she says, if the guests arrive first, they may not feel they're a high priority with you.
Prepay the bill.
Seeing the bill arrive can be awkward for your business guests even though they aren't expected to pay. If it's a restaurant you're comfortable with, let the server run your credit card, designate a tip percentage and sign the bill either before your guests' arrival or when you discreetly step away from the table mid-meal. You can either pick up the check as you exit or have it mailed to you, Ramsey says. "That way the check never comes to the table. It makes it very comfortable for the guest."
Match the client in consumption.
To keep a balance throughout the meal, let your guest order first. For example, skip the appetizer if your guest orders only an entrée -- ditto when it comes to dessert. Even if you order the same courses, adjust your pace so you're eating at a similar rate, Goldstein advises. Sitting in front of your finished plate may make it awkward for your companion if he's only half way through the meal. If you're having drinks, it's also important to follow your guest's lead, Hemmeter says. "I want to relate to the person I am dining with, and unbalanced alcohol consumption can make that difficult." If the guest starts drinking too much, however, keeping pace clearly isn't a good idea, he adds.
Respect the wait staff.
How you communicate with restaurant staff can affect your business relationship by changing the way your guests feel about you. So don't lose your cool even if dishes or service are not up to par. "I can't stand it when people are rude or condescending to servers in a restaurant," Hemmeter says. "They usually carry that attitude to their workforce, and I don't want to work with people like that."
Take advantage of the small talk.
Inviting a client to dinner doesn't mean you need to talk about only business. In fact, it may be appropriate to avoid work topics altogether and simply get to know each other on a personal basis. Small talk can often be a great way to assess another guest: Does he dominate the conversation or is he a good listener? Does she act in a respectful or demeaning manner toward subordinates? If you do need to discuss business matters, Ramsey recommends that you save them for after the main course when there will be fewer interruptions from the server.
Be sure to follow-up on the dinner conversation.
Take note of what you may need to do post-dinner and be sure to follow through on any requests from your guests, such as making introductions to third parties or tracking down information. "Many people promise action, but don't follow through," Goldstein says.
How Much Did That New Customer Cost You?
Every business should look at its cost of customer acquisition twice a year and after each campaign. The old business adage goes, "You can't manage what you don't measure." Yet we fail to measure these costs all the time. We seldom take the time to see how effective our marketing was.
A poor return on investment can have a variety of causes. Maybe your demographic has shifted, or maybe your prospects are getting their information from a new source. Or maybe a particular campaign was never effective, and you just didn't know it.
Here are some typical industry standard cost of customer acquisition values, the amount of money each company spends on average on marketing and advertising to acquire just one new customer:
- Travel: Priceline.com: $7
- Telecom: Sprint PCS: $315
- Retail: Barnesandnoble.com: $10
- Financial: TD Waterhouse: $175
One miscalculation that many business owners make involves the ease with which they will attract customers. This is called field of dreams marketing. Small-business owners are generally experts in some other areas and somehow they believe that if the core message of their marketing is, "Hey! We are selling XYZ, and we're now open!" people will start pouring through the door.
This is why most startups are short in what they budget for marketing, which is often less than 10 percent of their operating budgets. The idea of a saturation campaign across a variety of media is foreign and would be viewed as an unnecessary expense. After putting out a big opening-day announcement, a banner, some flyers and a few small ads, they are astounded that they sit around all day looking at their expensive inventory.
Professional marketers understand the importance of marketing. The amount of advertising "clutter" is so vast that trying to gain new customers with a few ads and flyers is like trying to make a splash in the ocean with a handful of pebbles. According to the Small Business Administration, 30 percent of all new businesses fail within two years and 50 percent fail within five years.
While there are a variety of reasons for this astounding failure rate, the primary cause is usually a misunderstanding of marketing and a failure to budget the necessary marketing dollars.
To begin an analysis of your marketing campaigns, pick a relatively quiet day and lock yourself in your office with your accounting reports.
Using a whiteboard, a spreadsheet or a yellow pad, create separate headings for every campaign you did last year: newspapers, telemarketing, trade shows, door hangers, whatever. For now, let's stick to traditional media marketing, as it has a higher cost of implementation than social media marketing.
You are going to measure your marketing by using actual numbers -- a scientific approach -- and not fictitious "impressions" to gauge the effectiveness of your campaigns. Impressions is the term used to quantify the number of people who will see your ad. Actually, it is the number of people who will receive the magazine or newspaper, not for the number of people who actually read it. When you buy radio or TV ads, your cost is based on the number of listeners or viewers the program had in the latest ratings book.
Under each heading, list every expense associated with that campaign. In marketing, a "campaign" often includes several different media, such as a print ad, flyers, radio ads, web site promotions, and others. You'll have to separate out the costs and results of each component of each campaign.
For example, you probably executed a direct-mail campaign during the past year. Direct-mail campaigns are time-consuming, labor-intensive and usually expensive. You must increase revenue at least enough to pay for your activities in order to justify doing those activities in the first place.
Direct-mail campaigns involve many obvious expenses, but also many that are not so obvious. First comes the development of the mail piece, which includes writing copy, artwork, logos, images, possibly photography and layout. Then there are the costs of getting the piece to the printer, redlining proofs and the printing itself.
You can test to see which envelope, headline, offer, price and even color combination gets the most response, which costs money. Then there's the cost of paper. And once printed, the piece needs to be machine folded and stuffed into the mailer.
There is the cost of the mailing list, postage and labor -- your staff and yours. You may also want to prorate your cell phone, landline, auto and even technology costs, because without them, you'd be working on your campaign from a park bench. Remember to add in public relations and sales costs if they contributed to lead generation.
Congratulations. You've calculated the costs associated with one direct-mail campaign. Now repeat this process for each of your other marketing campaigns. If your campaigns included trade shows or conferences, add in airfare, hotel, meals, taxis and your travel time. The more accurate the expenses are, the more accurate your results will be.
Don’t Grow Your Business Into Failure
Whether you are an entrepreneurial CEO or an investor, you are probably focused day-to-day on the basics of growing your business. Growth is about defining and penetrating your core customer base. It's about scaling your operations profitably. It's about making the right investments.
Sometimes, however, growth is also about slowing down. Too much growth, or growth with the wrong customers, can lead to failure just as quickly as a lack of growth.
In an article, Take a Crooked Path to Growth, the need to grow slower, rather than faster, to create sustained growth is discussed. Taking a look at some portfolio companies lately, the question has been posed, can too much growth drive a business to fail? The answer was yes. You need to moderate growth to keep the business from failing.
Another recent article about a failed start-up, Ecomom, whose founder tragically committed suicide after growing his company to failure, touches on the same point. This is a classic case of a company growing faster than it could financially support, and its customer acquisition costs sunk the business.
How do you avoid letting a high growth rate sink your company? Jess Eddy and Crista Freeman, two entrepreneurs who are building Phin and Phebes, a high-growth ice cream company are faced with the strategic decision of how fast to grow given limited capital. Even though they have increasing demands from grocery and specialty retailers to supply their ice cream, the company must invest in inventory and distribution for each new store they serve.
Eddy says: "As a company with limited capital we have to align our growth with how much money is in the bank now and when invoices are paid. It's sometimes an accounts receivables game."
Freeman adds: "If a great opportunity comes along we try to make it work and maybe that means getting a short-term cash infusion like a line of credit. However, the worst thing that could happen is we grow faster than the money in our bank account, and then it's game over. It's all a balancing act."
Here are three things to consider when managing growth:
Map your cash flow.
The easiest way to fail is to run out of cash. Most businesses require some level of cash outflow prior to cash inflows. Analyze the impact that your growth will have on your cash needs and predict when you will run out of cash. You have to make a product, before you sell it to customers, and then get paid for it later. This order-to-cash cycle can sink a growing company quickly.
Understand your customer acquisition costs.
What is the cost for you to acquire a customer? In the Ecomom case, the company relied on discounts to acquire customers, which means they lost money on each new customer and would only be profitable if the customer made repeat purchases. This strategy can be especially troublesome if you acquire the wrong customers--those who won't buy from you again--and are never able to return a profit.
Secure funding options early.
Look to secure a line of credit or equity capital that matches your growth plan. This is hard to do at the last minute. When you need the cash, you need it immediately, but fundraising takes a long time. Make sure you have secured growth capital before you make the sale.
Growth is good if you grow in the right way. Make sure you understand the specific risks that growth creates in your business and mitigate them. It will allow you to grow at a rate that creates a sustainable business.