Last week, we presented one of our most comprehensive guides yet on how to expand your business sustainably. This week, we are taking it back to the basics: research, resources, and creating value.
In an analysis of the top 20 reasons why startups fail, the number one cause was “no market need.” In other words, despite the lofty visions, mythical investments, and a reliable product, startups continually fail to understand their intended markets.
Why is this? How is it that major companies continue to create promising ideas but fail to attract a long-term customer? According to entrepreneur and consultant, Nick Freiling, it’s all because of market research or lack thereof.
“I’ve worked in market research for years. If there’s one thing I’ve learned,” Freiling wrote in a Medium post, “it’s that market research often makes or breaks a product launch.”
Freiling advocates starting with defining your company’s niche. Before selling anything, you need to understand who is not your target audience. Then you can concentrate on the people who are interested in paying for your product and avoid chasing after the wrong customers.
The competitive analysis may help you narrow down your ideal customer. Analyze existing companies and the audience they serve. What are they doing right and how could they improve? More importantly, how will you stand apart from your competitors?
Entrepreneurs must learn the answer themselves. This involves conducting primary research through the following methods:
– Interviews – Ask people on the street if they would buy your product. Ask users in Facebook groups or Slack channels. The more you ask people you don’t know, the more honest the feedback you receive.
– Surveys – If you need a larger sample size, then you may want to put out an online survey. Not only do places like Google Forms and SurveyMonkey make this a simple step, but you can analyze data in ways you couldn’t before.
– Online analytics – These days, you don’t even need to pay anybody to yield actionable data. With a Google Analytics or Facebook account, you can develop personas of entire audiences just by observing users’ online interactions.
There are many other ways you can collect relevant data on your customers, but these three represent the most simple yet effective way to get inside their heads: listening to them directly.
In the past, businesses determined their success based on sales projections— how much money they will make based on past performance. Today, sales projections alone cannot guarantee the growth of a startup. Entrepreneurs must learn to understand their customers first and the intentions behind their purchasing decisions.
Utilizing business resources
Fortunately, entrepreneurs have a multitude of tools at their disposal to streamline production and deliver a quality experience. These are known as business or organizational resources, and there are four main types:
– Human resources – the employees within a company
– Capital resources – the machinery and equipment used to produce products
– Financial resources – the money used to purchase raw materials or compensate workers
– Raw materials – the most basic elements needed to create a product or service
Human resources describe the employees who work for a company, as well as the department that manages resources related to the employees. Originally, the term caught on as a way to describe humans as living, social beings—deserving of respect and dignity within the workplace. But today, some believe HR, by design, propagates beliefs that humans are merely resources to be managed. The field’s language and literature continue to evolve as executives and laborers seek to understand the other party’s perspective.
Capital resources refer to the physical assets of a company—land, buildings, tools, equipment, and machinery. They are goods that help produce other products and services. Capital resources are different from factors of production, in that capital resources are man-made only, while factors of production can refer to both man-made and natural resources.
Financial resources refer to the money that can be used by a business in the form of cash, liquid securities, and credit lines. Companies need to maintain a steady stream of money, whether by cutting costs, increasing market share, or consulting investors.
Every product is merely a collection of inputs. Trace these inputs back far enough, and you’ll understand the most basic elements that form a product. This includes the wood used for reams of paper, and the silicon for computer chips— anything that is an ingredient in the primary production of goods.
Entrepreneurs and other stakeholders in business must carefully balance these four elements to create a long-term, successful business.
After carefully researching and identifying your target market, the next question becomes, “how can your business provide customers with true value?”
Keep in mind that this is not the same as offering products or services for low prices (like major retailers that brag about “great value”). Instead, value is a quality, feature, or experience that your brand can provide that no one else can.
More importantly, value is also a matter of perspective—the best way to think about it is through the lenses of real value and perceived value. Real value refers to the actual cost of production or service—total labor hours, capital, financial investments, and other assets. Perceived value is the worth of a product or service assigned by a customer.
Perceived value is an abstraction. Depending on the product, brand, and even country, one value may be higher than another. One of the keys to a successful business is to create a higher perceived value than real value.
For example, fast fashion companies like H&M, Zara, and Fashion Nova produce clothing using cheap labor and materials. These brands rely on the brand name and the design of these clothes to appeal to customers. This is a case of perceived value being much higher than real value.
Perceived value can increase through added features and benefits, including:
– Convenience – Restaurants and stores that offer online delivery have an added layer of convenience (and therefore, additional value) to their dine-in competitors.
– Customer service – According to Salesforce, a customer is four times more likely to buy from a competitor if a problem is service-related rather than price or product-related.
– Craftsmanship – Brands like Mercedes-Benz and Rolex have become synonymous with quality and attention to detail, which is why customers will pay exponentially higher for their products than their competitors’.
– Exclusive features – While voice assistant speakers are made by Google, Apple, and Amazon these days, customers will flock to certain speakers because of their unique features, like HomePod’s integration with iOS, or Alexa’s ability to order from Amazon.
Creating and providing value to customers is one of those tenets extolled by entrepreneurs everywhere, but only a handful put it in practice. Brainstorm the ways your product or service can add greater value to your customers, starting with minimal resources if your company is a startup. You may find that these elements end up being the main selling points of your brand.
Business concepts to understand
As your business continues to expand, you’ll become more familiar with certain concepts in entrepreneurship, even if you don’t refer to them daily.
We’ve discussed the importance of value creation when building a startup. Still, some entrepreneurs believe that it’s more accurate or useful to refer to value as a USP or unique selling proposition. While value indicates something of worth to a customer, a USP suggests a feature or quality about your brand that they cannot get anywhere else. This exclusivity is what keeps new customers flowing in, and past customers coming back for more.
For a business to pinpoint its USP, first, it must analyze its competitive landscape. Perhaps the most commonly taught model is the SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
This tool allows business owners and entrepreneurs to identify which aspects of a business to focus on internally and externally. For example, an app development company may fill out the SWOT analysis as follows:
– Strengths: Experienced team members, prestigious clients using product, talented leadership.
– Weaknesses: Lack of long-term engagement (high-drop off rates), poor app learnability, small team size.
– Opportunities: Early access to the newest iOS and Android updates, growing audiences in the European market.
– Threats: Similar startups copying previously successful apps.
Simply listing out the pros and cons of business in this manner will allow one to better prioritize current tasks and avoid the pitfalls of wasted work.
Perhaps the most critical concept to understand is ROI or Return on Investment. How much did your business gain or lose from a financial investment? This is usually calculated as a ratio, as seen below.
Business owners and entrepreneurs tend to place the most emphasis on ROI. After all, businesses must turn a profit to survive.
But it’s easy to get too fixated on the amount gained, and not enough on the actual costs. That is why businesses must divide their costs into fixed and variable costs. Fixed costs are a set amount each time, such as monthly rent, software subscription fees, and salaries. Variable costs change over time, depending on factors like labor or customer traffic; these include supply costs, taxes, and contracted work.
Understanding which costs can be cut without sacrificing the overall quality of the business can lead to a higher ROI and a leaner production or service. Continue to explore these concepts in further detail—how do they apply to your own business?
Tapping into business partnerships
The true beauty of a company is in working with others to accomplish a common goal. Even businesses listed as sole proprietors have found value in partnering with vendors and suppliers.
Among the benefits of partnerships include:
– Cheaper supplies, raw materials, and cost of production
– Increased efficiency (such as delegating design work to a partner agency)
– More business leads and referrals
– Increased brand awareness and prestige
– Greater reach
– Faster distribution
There are three main types of partnerships: general partnerships, limited partnerships, limited liability partnerships. Let’s break down what each one entails.
General partnership, also known as a joint venture, typically involves two or more owners united by a single business goal. The partners share equal rights and responsibilities when it comes to management. Each partner then assumes full responsibility for all business debt. Fortunately, general partnership businesses are not taxed to the company but pass through the partners themselves as gains on their tax return.
Limited partnerships restrict liability to the amount of their business investment. This also necessitates one participant to accept general partnership status, which in turn means they take on more responsibility. Both partners benefit from company profits, but only the general partner has managing control, while the limited partner has no say in top-level business matters.
Limited Liability Partnership
Limited liability partnerships (LLP) benefit from the tax advantages of a general partnership, but the participants also gain personal liability protection. This means that if a partner or a business were to act wrongfully, the other partners are not personally responsible. Some states also offer non-partnership tax legislation.
The nature of your partnership depends on the relationship of your business with the partnering company. Sometimes strategic partnerships may involve an international campaign to align all teams under one system, while product-specific partnerships can focus on joint ventures in a more specific capacity. Visit the Small Business Administration to learn more about what each type of partnership entails.
Growing a business can be a monumental undertaking—even all the content in this post may only act as an intro to a greater adventure. Use these ideas as starting points, not principles set in stone. Business leaders must be flexible and adapt to the changing needs of the market and the marketplace. As your business makes small steps and learns from customer feedback, you can begin to make micro-adjustments towards a faster-growing business model.