Joe... As usual, very good information. I, like you, usually try to talk people out of going into business for themselves prior to consulting with them. Many haven't asked the important questions you have outlined here. If they have the right answers to the questions, then I usually encourage them to become an entrepreneur. ...Howard
Seattle Marketing Strategy: The first three numbers
It's tough to focus on marketing strategy when the numbers don't work. When I'm in the dark about someone's business, these are the three mathematical questions that need answering.
I refer readers to The First Three Questions all the time. The article is probably "the most important" thing I've written. The article seeks the three answers needed before we can develop an effective marketing plan.
However, when a small business owner or entrepreneur seeks my help, I have three different questions I ask first. They regard personal finances.
The answers set some parameters for our plan. How reasonable the objective is. And what's it gonna take to make the numbers work for the business model.
1. What is your current situation? A broad question, I know, with lots of little follow-up questions.
- Are you married? Kids? Dependents?
- Do you rely on this work for all the money you need? Does your partner bring in income? Do you have another source of income (inheritance)? I.e., do you need to work?
- How fast do you need the money?
Here, I'm trying to get a sense of the urgency of the work. I make the questions personal because I want to understand the person's support system and relative pressure to perform.
In my experience, support and pressure can make all the difference in the world.
Answers range from "it's a side business and we don't need the money" to "this is my only source of income, I'm already in debt, and about to dip into my retirement."
In a recent conversation I persuaded a friend to give her project up completely. The concept was fine, but she needed income -- and fast! Getting a job was the way for her to go.
The second mathematical question is pretty straightforward.
2. How much are you making now? How much do you need to be comfortable? Just last night I was talking to a graphic designer. He's making around $80,000 and he wants to make $120,000.
He'd wants to lift his income 50%. We'll use his numbers to illustrate question three.
3. How are we going to get from here to there? Here we check how reasonable the assignment is. We overlay some assumptions and determine price sensitivity.
- How many customers make up his $80,000? He said he has about six at any given time. He might do $20K with three of them and the other three make up the balance.
- How many of the six will be your customers a year from now? He said he expects to retain about three of them for about $60,000 in business. (There are many questions about how we'd acquire three new $20,000 customers, but that's for another article.)
- How do you price your jobs? By the project, the hour, or by retainer? He said by the project, but he typically figures a $75/hour rate for himself.
- Do you make anything on markup? Anything besides the $75/hour for his work? He said no. Click here for the ways Lisa Johnson shared at BizJam how monetizes her services.
- How price sensitive are his clients? He said "very" and that the field is competitive for the "commodity-like services" he provides.
I have much to say about that last one. Regarding his "commodity," that's where The First Three Questions come in. Regarding his clients' likelihood of switching, I suggested they have "switching costs" that he's likely not factoring into his price.
If $75 is the going rate but you have a relationship and knowledge about the business, the client would incur switching costs to move the job elsewhere. The client saves time when she sends something your way. You may be able to raise your price to reflect the added service you give.
Months back I spoke with another designer whose top price was $75/hour. She actually did some work for "clients who couldn't afford her" for far less. Charity's one thing. This was another. She wasn't earning what she needed and she didn't know what to do.
I suggested that she raise her prices and effectively fire the clients she couldn't afford to keep. With that free time she could set about acquiring the right clients for her growing business.
She's earning more now.
Why I ask these questions: It's tough to focus on marketing strategy when the numbers don't work. When I'm in the dark about someone's business, numbers first, strategy second.
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Comment on this article
Posted by Howard Howell, Seattle, Washington |
Dec 01, 2008
Posted by Kirsten Mohan, Seattle, Washington |
Dec 01, 2008
Great article! It's so important for folks to ask themselves (or be asked by someone like you) these questions if they're to meet/exceed their goals and have a sustainable business, especially now.
You can't move forward with a winning marketing strategy if you don't know what your resources are, what your goals are, and how you can realistically meet them given those resources. Great reminder. :)
Thanks for sharing! ~Kirsten
Posted by Jessie Upp, M.S., Edmonds, Washington |
Dec 03, 2008
What great timing, Joe.
I was just sitting down with a friend discussing how to price something we are both giving away free right now.
Funny how the question, "How much do you want to make?" rarely enters brainstorming conversations like this.
Everything else just comes from the answer!
I instantly thought this would be a great title for a Biznik workshop and plan to offer this at the beginning of the year. Perhaps we could co-host.
Posted by Joe Hage, Seattle, Washington |
Dec 03, 2008
Sure, let's talk!
- commodity-like services
- lisa johnson
- small business owner
- the first three questions