Tuesday, May 23, 2006

(Small) companies that I recently hired, Part 2

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Yesterday's Be Yor Own article talked about a few small local businesses that I hire in order to make my life more efficient. It is very important to understand that the entire point of being in business is to provide a service or a product for someone else at a price cheaper than they could do it themselves. One outcome of being a competitive business is the realization that somethings, over time, can be done more efficiently than before. It is in this situation that we see the most failures of small businesses, especially ones that refuse to adapt to the new market.

When you can do something quicker, cheaper or easier, you'll find a real conundrum: your time can become less valuable. In most markets, the quicker you can provide a service, the more customers you should hope to acquire. I've found that in some very competitive markets, I can acquire many more customers the faster I can accomplish a task. If I can do a job in half the time, I can more than double my customer base.

Yet there is a limit to the number of customers in a given market, and you might find yourself becoming very adept at your skill, but as you become better at it, you also find that your pay is decreasing. In economic terms, this is considered "deflation," which to many business experts, is a bad thing. I don't see it this way. Over the nearly 2 decades that I have been in business, deflation in income has led the way to new markets that previously haven't existed. I used to run a successful BBS -- the predecessor to the Internet that we see today. I shut down my BBS just before the Internet pre-boom. I knew I could try to become an ISP, but I was tired of the market and wasn't ready to take on a huge new education.

Many BBSes refused to admit that their business would soon deflate into non-existance if they didn't accept the new market. I saw many friends go bankrupt within 6 months, friends who had been very profitable for 10+ years. This is a lesson that many businesses should learn, but ignore. They feel that if they do the same job they have always done, they'll be OK forever. That is completely untrue.

If you're in a business that is becoming more efficient at doing its task, there are 3 long term views you should consider:

1. That you'll be the only company providing the service/product, so you can try to keep charging what you've always charged.
2. That you'll acquire new competition who will be happy to provide the same service/product at a cheaper rate.
3. That a new market will emerge that could change your market entirely.

In retail, we're seeing many stores going under because the Internet stores can provide the same product or service cheaper. At first it was eBay, then it was Amazon, now we're seeing Craigslist all "hurting" local businesses. Many of these businesses that fail had been in business for years or decades, and were unable to cope with the market that emerged. Others were wiped out when a larger store or chain of stores came into their market. Some had a mini-monopoly in their area, but they didn't adapt to the customer's needs, so the customers did without the product or service.

In every business you go into, you have to think of what your next step will be if you are to face competition -- either direct or indirect. A new emerging market is just as much competition as a small business that opens next door. Part of becoming more efficient at your job is to balance getting new customers with learning new tasks to fill the time saved by performing the old task quicker. If you're seeing that there aren't new customers to find, you have to start immediately at looking what the next step is. It might be moving from a local business to an online international one. It might be cutting out some of your most basic services/products and replacing them with specialized ones that you can sell for a higher price. It might even come to the point that you need to think about switching markets entirely.

The risks a small business owner takes are more than made up for by the rewards you'll receive if you're constantly adapting and looking for the change that will occur. Don't sit back and think that money will always just roll in. In my experience, my most succesful business ventures were the ones where we worked to make ourselves useless. As customers found savings in hiring us, we were able to transition them to the new markets we were looking to. Over time, faith in your ability to save someone money is what brings people back. Even if it means switching from a PC repair company to a company that organizes desks and files, the best commodity you have to rely on to help you transition is the faith you've built in the customers you have helped in the past. Don't fear change, embrace it. Don't ignore market changes, find out where they're heading.

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