Expenses That Startup Businesses Can Avoid In The Early Years
There it was: right next to the popcorn machine at the movie theatre:
“Buy and Sell Bitcoin Here”.
A TV-size screen with instructions, and the current price for Bitcoin, in U.S. dollars.
At a movie theatre.
Seems unnecessary. How many people need to exchange Bitcoin at the movies?
Which brings me to this question: What expenses can you avoid in the early stages of your startup? To answer the question, you need to think about some factors that impact the amount of spending you’ll need to make.
Every successful business goes through a similar process for validating a product or service offering, and you need to spend enough money to complete the validation:
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Start with a need- an urgent need
It’s obvious, but every successful product solves a problem or fills a need- if the problem must be solved quickly, even better. What’s an urgent need? How about a car repair when you’re stuck on the side of the road (‘had the transmission on my car give out on a highway exit ramp. I don’t recommend it). Another good example is heat or air conditioning repair at home.
You’re willing to pay to solve an urgent problem or need.
What makes you mad- annoys you?
I am a huge fan of the How I Built It podcast, hosted by Guy Raz from NPR. As the name implies, the show interviews company founders- and every episode is worth your time.
A recent podcast was an interview with Marcia Kilgore, who founded the Bliss spa and skincare company, along with several other businesses. She tells a moving story about being young in New York and saving money for a facial at an expensive spa. She was treated poorly and thought to herself:
“No one should ever feel that way after a facial- it was supposed to be great experience”.
And that was her first business.
Where the rubber meets the road
So, I’m sure you can jot down some realistic business ideas. Once you do, you need to take a hard look at three factors:
- How urgent is the problem or need?
- What’s the size of the market?
- Can I scale to meet the market’s size?
If you don’t have specific answers to these questions, you’ll struggle to get your business venture off the ground.
Spend enough money to validate your idea. If you don’t you’ll really be flying blind as you start your business.
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Sell hammers, not lawn mowers
How much will you charge for your product- and what profit margin will you generate? A product with a high profit margin probably means that you can justify spending more money in the early years.
Sometimes it’s smarter to sell a $5 hammer, rather than a $300 lawn mower.
Huh?
That doesn’t make sense- I’d rather sell a $300 item than make $5. Well, if you consider profit margin- and not the sale price- you might be better off with hammers.
Profit margin is defined as (net income / sales), and it represents the dollar amount of profit you make for each dollar of sales. Profit margin is a great tool to measure profitability because you can assess products at different sales prices. If you earn $1 for each $5 hammer, the profit margin is 20%. On the other hand, a $45 profit on a $300 lawn mower is only a 15% profit margin.
Speaking strictly about profit margin, you’re better off selling hammers.
Sony Betamax: Make the tent bigger
If you have growing interest in your product, spend the money to get it in the hands of customers.
I was fortunate to experience the huge changes in media and entertainment products over the past 45 years or so. In music, we went from albums to cassettes, to CDs, to steaming music (I love my Spotify and Pandora).
It was cool to go to “record stores”- glad to see that vintage albums are making a comeback.
We also had radical changes in entertainment over that same period (remember Blockbuster Video?). One big change was the home video battle between Betamax and VHS in the mid-70s.
It’s the classic case of limiting access. Sony started selling the Betamax in 1975, and rival business started selling VHS machines at the same time. Sony kept the Betamax technology as proprietary, meaning that other firms couldn’t make the same type of machine and expand the market.
The result: VHS won the market- partly because there were simply more VHS machines in consumer’s hands.
On the flip side, Apple does a great job of creating a “big tent” when it comes to iPhone Apps. Come one, come all: Apple welcomes iPhone App creators, since more Apps may lead to more iPhone users.
Keeping a great product’s technology to yourself may limit the growth of your market. Take the risk, spend the money- and grow your market share.
Spend money here:
- Legal fees: Hire an expert to help you form your business and decide on a business structure (corporation, partnership, etc.). Have the discussion about profit sharing and exist strategies now- it will save hours of headaches later.
- Tech engineers: These experts can make or break the visibility of your website, and your ability to operate a business.
- Interns: They don’t cost much at all, they can learn from you- and they might become great employees later.
Don’t spend money here:
- Office lease: I can’t tell you the number of business owner I know who are still making payments on office space they don’t use. Work remotely.
- New equipment- or anything: You can buy everything used- and with a warranty included. Don’t buy new, with the exception of laptops.
Good luck!
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
Co-Founder: accountinged.com
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl
This post was originally posted on my Quora page. This post is for educational purposes only.
Image: Bullseye, Jeff Turner CC by 2.0