Thursday, October 9, 2014

Business Basics–2 of 5

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This is the second in a 5 part series of articles about improving your business. it is aimed at those people who run a small business but could just as well apply to anyone earning an income. In the article I'll focus on one or two main points around the theme but remember there is a lot more to explored in each topic.

The 5 topics that I will cover in these articles when it comes to business are:

1. Reason

2. Revenue

3. Resources

4. Risk

5. Reduction

These topics are drawn from the mentoring model I use with my students and is somewhat unique to other methods that are common place. This means you'll need to prepare yourself for concepts that are very different from 'industry standard' so I encourage you to keep an open mind on what I present here and at least test it against your current version of business reality. Please feel free to provide any feedback on what I present here either in a comment or to me directly. I welcome all feedback and opinions. All I ask is that you be respectful because if you don’t I reserve the right to remove or ignore such comments.

If you haven't done so already, I encourage you to read the first part in this series - Reason - to give you a better context of my thought process. Also don't forget that this is only part 2 of 5 in series and I'd encourage you to read them all and then let me know what you think.

Now part 2 - Revenue

Once people have the reason why they are in business the next question to ask is how they plan to generate revenue? The reason that you should focus on revenue is that revenue is about unlimited opportunity. If you focus on expenses and cost cutting there will always be a limit to can be done here, however there are no limits when it comes to revenue. You can generate revenue from multiple streams, multiple products, multiple locations, etc and there is always opportunity to generate more revenue, you simply need to put in the effort. So don’t let anyone tell you that there is not the opportunity to earn more revenue. There is, any the blocker is simply the work involved to achieve that. However, if you are already clear about your reasons in business then you are willing to do what it takes to generate the required revenue. It is no longer hard work, it is simply what you need to do to achieve your goals. That is why I say that you need to get your reasons in business right first.

When it comes to revenue there are really only two important questions that need to be answered. The first is:

Are you selling something people want to buy?

You can have the greatest product in the world (in your own mind) but if no one wants or needs it you really aren't going to sell a hell of a lot are you? Along with considering whether people would buy your product you also need to consider whether people will continue to purchase it. Have a look at desktop computers as an example. Yes, people still buy desktops however they are purchasing fewer and fewer in favour of things like tablets and mobiles. So the percentage of people who want to buy a product like a desktop computer is actually declining. To have strong revenue in a business you really should be looking for products and services that are in or will be in high demand rather than decline.

The second question, just as important as the first is:

Will people actually pay you for what you are selling?

Lots of people want a high performance supercar like a Lamborghini Aventador but few have the means or the willingness to pay the significant price tag for something like this. Let's again look at technology offerings here. One of the reasons that people regularly choose tablets and mobile devices is that they are generally cheaper than desktops. They are also typically available on a monthly instalment plan for a low per month cost. The fact that over time these costs may up to more than the cost of a desktop belies the fact that most desktops are a total upfront cost while a mobile device is the total cost spread over a few years which people are happy to pay. Part of the concept around payment is not only about the amount they are willing to pay but also how that payment will be transacted.

If the answer to the above two questions can be demonstrated in the affirmative the next consideration when it comes to revenue is how you plan to increase this because at the very least, the longer you are in business the more your expenses will increase and if you plan to expand your business you are going to need more revenue. It is therefore important to always be planning for revenue growth.

At its most basic:

Revenue = units sold x unit price

Given that formula, it seems pretty simple to work out how to increase revenue. Most people would say that you increase units sold or you increase unit price over time. Doing either of these will certainly increase revenue but it will only increase it linearly. What many overlook in this simple formula is the opportunity to increase revenues exponentially. The way that you do that is increase both units sold and unit price simultaneously. Remember, your aim in business is to maximize the revenue you can generate for your efforts (i.e. investment).

Doing so should be what you are aiming to achieve when it comes to revenue. This is really going to provide you with the growth engine your business deserves and allow you to achieve your goals. However, doing so is not simple or straightforward, it is hard work and requires a well-developed plan but it is certainly attainable. If you approach revenue with the aim of increasing both units sold and unit price and maybe only achieve an increase in one then you are no worse off than if you only focused on that now are you? If you want to really be successful in business look to accelerating your units sold and the unit price, simultaneously. That should always be your goal.

There has never been a better opportunity than there is today to increase the units sold. The reach of Internet provides a business with access to almost every person on the planet, instantaneously. If you want to grow your revenues you really need to be offering something via the Internet. As for increasing the unit price that is also easily accommodated in this Internet age. Platforms like Azure, WordPress, Amazon and the like allow you to quickly and easily build products and services. They allow you to create mobile apps, they allow you to create web services for any demographic and they do this all without the need for huge investments in infrastructure. Tools like Google Analytics, Ontraport, Infusionsoft and the like make it easy to understand what you market wants and will pay for. Metric collection and analysis has never been easier.

I hear the argument from many people that the only opportunity they see to remaining completive is for decreases in unit pricing. If you are in a commodity market I agree, but why do people buy high end luxury cars? Why doesn't everyone drive the cheapest car they can find? Why do makers like Aston Martin and Rolls Royce continue to prosper even in poor economic conditions? It is because they understand their market. They understand the emotion of their product and they build products people are willing to pay for. Don't fall into the trap that just because your peers are talking down the opportunities in the market there isn't revenue just waiting to be collected. Remember, money is the easiest thing to get more of in the world. You just have to put in the work, because for most, it simply doesn't magically appear.

So there you have it, the second item I'd suggest you consider when it comes to business, how you plan to generate ongoing revenue for the business. If you have no path to revenue growth then you really don't have a business and you test that revenue path by answering the two questions I proposed - Does the market want you sell? And secondly, are they prepared to pay for it? If you can annunciate those in the affirmative then the next target to aim for is to generate exponential revenue growth by selling more items and selling them at higher prices. Achieve that and revenue will never be an issue. However, it won’t simply drop in your lap, it requires a lot of time and effort but never the less should be your goal.

Once you have your reason and revenue sorted the next item to focus on is resources which I'll cover in the next blog post in this series. Remember, I'd love to hear what you think about my ideas here. Have it got it right? Have it got it wrong? Do you have you own twist on this that works for you? I'd love to hear, so feel free to comment or contact me directly (director@ciaops.com).

Image courtesy of luigi diamanti at FreeDigitalPhotos.net