Tom Peters reviewed a new business book over on his blog, and his closing comment claims “Canaries applies to GM .… and a new one-person business … equally.” IMO, this is hard to do! But based on the few quotes from Tom, this book succeeds. And it definitely applies to the web development business.
In the past 10+ years, we’ve seen several of our colleagues go out of business. We rarely win RFPs, as we typically come in as the highest bidder. I remember talking to one associate several years back, whose company had grown considerably. She described her company as a shark; it had to keep getting new clients to underwrite the cost of the existing clients.
That’s not a sustainable business model. They are no longer in business. That’s a small business story that relates to Corporate Canaries. This is my favorite excerpt from Tom’s review of the book:
bq. There are parables and such, but the bedrock notions are simple, profound, frequently ignored—and use-able starting today. There are just 5 key ideas. The first, “You can’t outgrow losses.” E.g.: “New business is a great thing, an important thing, and critical for success. But trying to sell your way out of profit problems only magnifies the trouble. Fix profits first. Then add business.” Margin (profit) problems won’t be solved by selling more low-margin, no-margin stuff. The malaise, “trying to sell your way out of losses,” Sutton claims, “is the most common cause of business failure.” (Yikes, does that strike—again and again—close to home.)
Living and working in such a price-sensitive culture does make it really hard to hold the line on prices. High prices that is. Most customers really believe they will be better off if they pay less. This is often not the case, but at least it seems to protect people from thinking they got screwed.
Only problem is, they may be getting screwed on the other end! What if your vendor goes out of business? What if your vendor does not have the margins to invest in training to stay ahead of the curve in helping you protect your assets? What are you saving by having a smart vendor, “on your team but not on your payroll” as we say about us here at Bare Feet Studios?
Large companies are now setting up software escrow accounts to essentially bank a vendor’s code, to access should the vendor go out of business. We all depend on software and the internet to function minute by minute. It makes sense to be proactive in this way from the customer point of view.
From the vendor point of view, it makes sense to keep prices set at a sustainable level while educating customers on all the aspects of the value proposition. We have kept our prices above many (though not all) of our competitors, and are in our 11th year of business. We are also deeply appreciative of our clients, several of whom have been with us for nearly a decade. Lowering prices on services (unless there is some aggregation component to the price restructuring) usually ends up being a lose-lose proposition IMO.
So for any service vendors out there reading this blog, and especially small businesses, know that I’ve got your back and encourage you to find a way to let your pricing strategies keep you in business as a more competent professional, rather than being bullied out of business by well-meaning customers who just haven’t yet learned the intrinsic value of your skills.
And to all of the investors and support professionals who advise start-ups and entrepreneurs, beware of the “penny saved, pound lost” approach to hiring professional services. Knowing when and were to bootstrap is a key decision. Knowing what is a commodity purchase and what is a value purchase is not the most obvious thing in today’s marketplace.
AUTHOR: Mary Schmidt
DATE: 02/10/2006 05:57:06 AM
As you know, I’m a huge fan of Peters. It’s unfortunate that more people don’t truly listen to him. As he titled one of his posts, “If I’m so smart” So, even he gets frustrated.
The challenge for any size company is to have the guts to be different, to not only talk but to act, and to recognize that you have to spend money to make money (a hoary old maxim, but oh so true, particularly when it comes to technology.)
One of the things I constantly hear from small businesses is that they desperately want and need more help with marketing. And, yet, they are very reluctant to pay for it. Of course, I can understand, it’s tough carving out the budget for the seemingly “out there” and “soft” stuff (such as web sites and advice) when you’ve got to pay the light bill and employees. But, it really all comes down to: Do you want to be mediocre, constantly trying to “make it up in volume” or do you do want to be great (which isn’t necessarily the same as big) and have terrific margins, loyal customers and an infrastructure (people, processes and technology) that enable to anticipate new opportunities and – yes – even create them? If you think small, you’ll be small. And, cheap looks cheap.
P.S. I highly recommend “Good to Great” as additional reading. One key point: Being good at something doesn’t necessarily mean you can become great at it. Recognizing this hard cold reality means a company may well have to move out of its comfort zone to be great.