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Why It’s So Hard to Scale a Great Idea

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For the last several years, I’ve been at the forefront of a movement known as implementation science, or the science of scaling. In this work, we are trying to understand why some products, companies, and social programs thrive as they grow, while others peter out.

When a seemingly promising idea loses efficacy or profitability as it expands, we call it a “voltage drop.” These failures to scale never happen because of one single reason.

Over the last 25 years as a behavioral economist, consultant to companies large and small, and former White House economic adviser, I’ve identified five causes, what I call “vital signs,” of voltage drops.

1. False Positives 

This occurs when you interpret a piece of evidence or data as proof that something is true, when in fact it isn’t — for example, as we’ve seen with inaccurate Covid test results. For scaling, a false positive is an erroneous sign that an idea has voltage when it really doesn’t.

Sometimes a false positive occurs because of a statistical error, as was the case with the famous drug abuse prevention program, D.A.R.E. After an independent study showed promising short-term results, the program received an influx of funding from the U.S. Department of Justice. However, there were several problems with the study: It excluded drugs like alcohol and marijuana, focusing on tobacco; it was based on a small sample size; and later studies and even metanalyses could not replicate the results.

In other cases, false positives result from intentional lying. Think of Elizabeth Holmes and the purportedly groundbreaking blood-testing technology of Theranos, which didn’t actually exist.

When possible, the solution for rooting out false positives is to have at least three independent replications of the idea that show early promise. In companies with confidential research, employees must be incentivized with financial rewards that encourage them to question results.

2. Biased Representativeness of Population

Once you’ve reliably demonstrated the efficacy of the endeavor you hope to scale, the next step is to answer the question “How broadly will the idea work?”

All ventures must understand their potential audience. The first way to do this is by making sure your test samples in the small scale reflect the larger population at scale. Otherwise, you’ll be like McDonald’s, which fell victim to selection bias when it launched the unsuccessful Arch Deluxe. Focus group participants loved the new product, but they weren’t representative of the majority of Americans, who simply wanted to keep eating their Big Macs.

To weed out such biases, make sure your early adopters are a random sample. You should also make sure that your survey respondents have appropriate incentives to tell you the truth. A focus group participant who says they would purchase a product if it was introduced could simply be saying, “I would love the option to consider that product in the future,” as opposed to “I will be purchasing the product in the future.”

3. Non-Negotiables That Can’t Grow or Be Replicated

For an idea or enterprise to hold strong at scale, you need to know whether your “non-negotiables” — the drivers of your success — can be replicated at scale.  In other words, is your secret sauce the “chef” or the “ingredients”? Since people don’t scale well (i.e., they can’t be cloned), talent-centric ventures often don’t either. You can’t afford all the talent you need as you grow, so you hire fewer high-performers and quality suffers at scale — a cruel voltage drop.

But, this vital sign is about much more than just people. As you scale, regulatory constraints, resource constraints, fidelity concerns, and a host of other issues might arise. In the end, we must bring these scaling constraints back to the petri dish and make sure the idea works with them in place.

4. Negative Spillovers

A spillover effect is the unintended impact one event or outcome can have on another event or outcome. A classic example is when a city opens a new factory, and the air pollution it produces impacts the health of nearby residents.

As you scale, the likelihood of spillovers increases dramatically. General equilibrium effects, or natural readjustments of the market, are one chief cause. I saw this firsthand when I was the chief economist at Uber. A coupon that led to more riders in one area of Seattle failed when we scaled it to the whole city because surge prices kicked in, and users found cheaper ways to get around that night.

Positive spillovers exist too, like network effects that make a social-media platform more valuable as more people join it. When designing your idea early on, you must anticipate negative spillovers and look for opportunities to engineer and benefit from positive ones.

5. The Cost Trap

To scale successfully, you need to determine not only how many people like your idea, but also what they’re willing to pay for it and, crucially, how much it will cost to provide.

When designing your enterprise, you must account for two types of costs: upfront fixed costs, like the one-time investment for the research and development to create a new product or service, and your ongoing operating expenses. Upfront costs can be recouped, but operating ones can bleed you and lead to a voltage drop, as happened to the innovative scientific wellness startup Arivale, which was poised to change preventative health care, only to go bankrupt a few years later, because it couldn’t find a viable price point for its services.

One strategy to escape the cost trap of scaling is to make sure you benefit from economies of scale, a skill Elon Musk excels at in all his ventures. Ever since he helped transform the world of online banking at PayPal, each major innovation he has undertaken thrives on scale economies. Consider Tesla. Its massive success can be traced to economies of scale of its two most important components: batteries and solar power generation cells, both of which can be manufactured significantly cheaper in higher numbers. In addition, everything at Tesla is geared toward increasing the efficiency of “the machine that makes the machines,” or what Musk affectionately calls his “Alien Dreadnought” — that is, a highly advanced, fully automated production facility.

Another strategy is to create models that don’t rely on top-tier talent. As you scale, finding and paying high-performers will become prohibitive. The solution is to create products that can give their full value to customers even with average performers delivering it.

When I give talks on this topic, I like to invoke the famous opening line of Leo Tolstoy’s novel Anna Karenina: “Happy families are all alike; every unhappy family is unhappy in its own way.” Similarly, scalable ideas are all alike; every unscalable idea is unscalable in its own way. The difference with scaling is there are only five main obstacles you face. And once you anticipate and avoid them, you can scale your idea for the highest voltage possible.

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Finance & Accounting

4 tips to find the funding that fits your business

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The facts are clear: Startups are finding funding increasingly difficult to secure, and even unicorns appear cornered, with many lacking both capital and a clear exit.

But equity rounds aren’t the only way for a company to raise money — alternative and other non-dilutive financing options are often overlooked. Taking on debt might be the right solution when you’re focused on growth and can see clear ROI from the capital you deploy.

Not all capital providers are equal, so seeking financing isn’t just about securing capital. It’s a matter of finding the right source of funding that matches both your business and your roadmap.

Here are four things you should consider:

Does this match my needs?

It’s easy to take for granted, but securing financing begins with a business plan. Don’t seek funding until you have a clear plan for how you’ll use it. For example, do you need capital to fund growth or for your day-to-day operations? The answer should influence not only the amount of capital you seek, but the type of funding partner you look for as well.

Start with a concrete plan and make sure it aligns with the structure of your financing:

  • Match repayment terms to your expected use of the debt.
  • Balance working capital needs with growth capital needs.

It’s understandable to hope for a one-and-done financing process that sets the next round far down the line, but that may be costlier than you realize in the long run.

Your term of repayment must be long enough so you can deploy the capital and see the returns. If it’s not, you may end up making loan payments with the principal.

Say, for example, you secure funding to enter a new market. You plan to expand your sales team to support the move and develop the cash flow necessary to pay back the loan. The problem here is, the new hire will take months to ramp up.

If there’s not enough delta between when you start ramping up and when you begin repayments, you’ll be paying back the loan before your new salesperson can bring in revenue to allow you to see ROI on the amount you borrowed.

Another issue to keep in mind: If you’re financing operations instead of growth, working capital requirements may reduce the amount you can deploy.

Let’s say you finance your ad spending and plan to deploy $200,000 over the next four months. But payments on the MCA loan you secured to fund that spending will eat into your revenue, and the loan will be further limited by a minimum cash covenant of $100,000. The result? You secured $200,000 in financing but can only deploy half of it.

With $100,000 of your financing kept in a cash account, only half the loan will be used to drive operations, which means you’re not likely to meet your growth target. What’s worse, as you’re only able to deploy half of the loan, your cost of capital is effectively double what you’d planned for.

Is this the right amount for me at this time?

The second consideration is balancing how much capital you need to act on your near-term goals against what you can reasonably expect to secure. If the funding amount you can get is not enough to move the needle, it might not be worth the effort required.

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Starting A Business

What to keep in mind when updating your business plan

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Why, when and how

Did you know updating your business plan should be a part of your regular business practices? If not, don’t worry — a lot of people skip this step. But it could benefit you to make this effort.

Read on to learn why updating your business plan is so important, how to tackle this task, how often you should make updates, and key things to keep in mind.

Let’s get to it!

Why should you update your business plan?

Black and white photo of man looking at laptop screen
Image source <a href=httpsunsplashcomphotosLks7vei eAg target= blank rel=noopener nofollow external data wpel link=external>Unsplash<a>

Outside of updating your business plan as a standard course of doing business (which we’ll discuss in detail shortly), there are a few noteworthy situations that warrant a full business plan overhaul:

You need to raise funds

If you need capital to make tech upgrades, grow your team, or expand operations, you’ll likely need to raise funds. Before you can reach out to new investors, however, your business plan must be up-to-date and reflect your company’s current financial situation, including operating costs, cash flow, business goals, and income projections.

Related: 10 small business funding options

You want to refinance

Similar to potential fundraising moves, refinancing your business loans requires an updated business plan because it outlines operating costs, your company’s challenges, and forecasted revenue. No lender will entertain refinancing or even new loans without an updated business plan and financials.

You want to launch a new product

Big business moves necessitate an updated business plan and launching a new product or service qualifies. A new product means new potential revenue, so updating your business plan to reflect that fresh revenue stream is critical. Be sure to include everything you would’ve when writing your business plan the first time around — like costs, vendors, time frames, target demographic/segmentation, and financial projections.

You want to expand your company

Company expansion can take many forms. Perhaps you’d like to open up a second location in another city. Maybe you want to purchase more warehouse space for your products. Large technological upgrades are considered expansions, too. No matter what type of growth you have in mind for your business, updating your business plan to reflect this intention to grow is a key step before reaching out to investors and potential lenders.

You’ve changed your supply chain

Supply chain issues have become an acute problem since 2020. However, there has always been a need to update business plans to reflect changes in the supply chain and/or a change in the vendors you decide to use. Any time you make changes to your vendor list, put updating your business plan on your schedule.

Related: How to overcome supply chain challenges in 2022

You have new competitors

If a new major competitor enters your industry, it’s likely to affect how you do business. Whether that means your share of the industry “pie,” so to speak, decreases, or it means a new brand changes the expectations for your industry and you need to now follow suit — a  business plan update is in the cards to reflect these changes.

When and how often should you update your business plan?

As you can likely see by now, updating your business plan is an essential part of having a business plan in the first place.

It’s a dynamic document that needs to be updated to meet where your business is at right now.

Though you don’t need to update your business plan to reflect every little change, making regular updates is a solid business practice.

If your company is chugging along with no major changes, giving your business plan the once-over at least once a year should be sufficient for updating financial data and projections. However, if your company undergoes a major shift, you’ll want to update your business model when you expect that change to occur.

How to update your business plan

Close-up of person looking at charts next to smartphoneClose-up of person looking at charts next to smartphone
Image source <a href=httpsunsplashcomphotosjrh5lAq mIs target= blank rel=noopener nofollow external data wpel link=external>Unsplash<a>

Now that you have a sense of how often you should update your business plan and why you need to do so in the first place, let’s turn our attention to the real meat of this article: how to update your business plan. Here are six key things to keep in mind when updating this most important document.

1. Make updating your business plan part of your regular review process

One of the biggest obstacles to updating a business plan is scheduling the time to do it. Business owners are busy people, and it’s all too tempting to leave these sorts of tasks until tomorrow. However, you can get around this by simply incorporating a business model review into other processes you already complete.

If your company does quarterly financial reviews, add in a business plan review during this time. You’ll already be taking time away from day-to-day business operations to complete the financial review, so you might as well spend a couple of extra hours updating your business plan.

You could even schedule it for when you do your taxes or prep documents to send to your accountant. Add the business plan update to your to-do list for those days.

2. Include your team in the process

If you have any kind of team for your business, you must include them in this process. They are likely involved with the day-to-day functions of operating your business and can provide key insights into what the future of your company looks like. For example:

  • Ask the marketing team for reports on trends they’ve noticed over the past six months or so.
  • Ask sales about any demographic shifts they’re noticing in the customer base.

Those who are doing work within your industry daily are going to feel the subtle shifts within the market before anybody else. And they might have insights into what projections look like — things that you might not come up with on your own.

Leveraging your team means getting a more complete picture of what your company has accomplished, how it’s currently positioned, and where it will go from here.

Pro tip: You can manage these tasks directly in Microsoft 365 as well. Sharing documents is a snap and you can collaborate on your business plan in real-time.

3. Note regulatory changes

When updating your business strategy, take some time to research any regulatory changes that have taken place in your industry. New rules, regulations and laws are passed all the time and many can have a direct impact on how you do business.

For instance, payment processors now must report your earnings to the IRS. This change could affect how you report income and change your relationship with contractors. The implementation of sales tax on internet sales made in the state where your business is located is another example from the past that had a profound effect on companies doing business online.

Such changes can impact your financial reporting and/or make your business more competitive, and less competitive, and otherwise change your approach to how you do business.

4. Note vendor/supply chain changes

Another factor to take into consideration when updating your business plan is any vendor or supply chain issues or changes that have occurred since your last plan update. If a vendor suddenly changed their billing system or adjusted their fees, you might need to account for this in your business plan as it could cut into your profit margin projections.

Or, if the supply chain has made it so you need to use multiple vendors to meet your company’s needs without experiencing disruptions, your business plan should make note of this change — and even indicate that supply chain issues are an ongoing problem.

To be honest, nearly every company has experienced some issue with the supply chain since 2020, so if you haven’t updated your business plan since then, now is probably the time.

5. Keep broader economics in mind

The overall state of the economy can directly affect your company’s performance. And while economic downturns can leave some industries untouched, it’s rather rare. But even if your company is lucky and hasn’t been affected by broader economic fluctuations as of yet, keep updating your business plan on your radar.

The economy as a whole can impact your vendors, shipping, packing, contractors and other services related to how you do business. It can also affect staffing and the accessibility of talent. So even if your company hasn’t experienced negative effects, acknowledge the general state of the economy in your business plan and include contingency plans should issues arise.

6. Follow demographic changes

We’re currently in the midst of huge demographic changes in the United States and all over the world, which will have a direct impact on how you do business and what the future might bring to your company.

As of 2022, the median income among the middle class is going down, the income of the very wealthy continues to go up, and the median age of workers is going up, too. People are having babies later in life and at lower rates than in the previous generation.

All of these factors can directly impact your revenue potential as well as who your target demographic or ideal customer even is. And this means you need to update your business plan to account for these shifts. Continue to revisit demographic data and projections a couple of times per year to ensure your internal projections still apply and to see if your processes need updating and track your actual results. If so, a business plan update is in order, too.

What to do next

If you haven’t even so much as glanced at your business plan in a bit, now’s the time to dust off the document and give it a once-over. Times are changing — seemingly faster than ever before — so it would behoove you to set aside some time to update your business plan sooner rather than later.



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Business Ideas

Build your own brand (and stop reselling!)

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Take control of your own branding

I used to think that every “brand” was supported by its own factory and an army of in-house employees. I was wrong. Branding your own product doesn’t mean you need to design and manufacture it yourself.

Rolls of frabric with prototype clothing in background

Of course, most brands partner with factories, freelancers and agencies for extra support. But many others use white label designs straight from a factory. Here’s how it works:

  1. You find a manufacturer with a product design you like
  2. Add your brand name on it
  3. Sell it as your own

Sometimes there’s simply no need to design a product from scratch. There are plenty of well-designed products out there that just need a brand to sell them.

Where can you source white label products?

You can use sites like Alibaba and AliExpress to find pre-designed products ready for your brand name. No need to invest in product development, which can take months (or sometimes years) before a final sample is ready for production.

This Reddit post shows you how to use Alibaba or AliExpress to build your own brand step-by-step with just $1,000, a little imagination and a healthy amount of drive and ambition.

White labeling gives you so much freedom compared to reselling other brands’ products.

It can be the stepping-stone you need to put your brand on the map — even if you do end up reselling in the future or invest in R&D for products down the line.

1. Building your own brand means having control

When you buy stock from other brands to resell on your website, you’re not in control. They are able to dictate things like:

  • Singular keyboard buttons on blue background that spell CTRLSingular keyboard buttons on blue background that spell CTRLThe price you pay
  • Whether you can discount it and for how much
  • How you can and can’t market it

When you start your own brand, you have control. If you source directly from a factory, you can afford to drop prices to undercut competitors, while still making large margins. The tough design decisions have already been made, but you still get to make the product yours by customizing its look and adding your branding.

Where the brand goes in the future is up to you — it’s your adventure!

2. It reduces competition

Selling other brands’ products seems like an easy way to get rich. But often, you end up competing against other companies selling the exact same products. It’s not easy.

When starting your own brand, you’re the only one selling the products with your name on them, so you can build your own reputation.

For example, if I sell Beats headphones, I have to compete against all the big names already selling them. Those bigger companies can undercut me because they buy the headphones in bulk, which means they can sell them at a cheaper price.

So without competitive pricing, I could be crowded out of the market altogether. There’s just no way for a one-person company to achieve meaningful success by selling Beats headphones.

Black headphones laying on white desk

Black headphones laying on white desk

That said, if I launch my own brand of headphones called Nick’s Brilliant Headphones, I’ll still be competing against other companies making headphones. However, I’ll be the only person in the world selling Nick’s Brilliant Headphones.

With proper branding, some good reviews and the ability to maintain a good reputation, I could be on my way to the top.

3. It’s a stepping-stone to success

Perhaps you’ve heard of the popular saying, “Mighty oaks grow from little acorns.” The understanding of this quote means that sometimes something grand can stem from a small venture.

It doesn’t matter if you start out selling water bottles you bought on Alibaba, then rebrand them in your living room. After all, Jeff Bezos started Amazon out of his home.

The biggest brands have humble beginnings. There’s no telling how far you’ll take your brand once you get off the ground.

You could be importing en-masse from factories this year, developing your own products the next and building your own factory in five to ten years. As your brand reaches more people, it’ll gain recognition and loyalty. You’ll be able to take the brand wherever you want from there.

Importing products and adding your brand name to them may seem primitive, but it’s the first step to success and ownership over your future.

4. You can become the distributor

Today, you might approach Beats by Dre to resell their products. But instead, imagine if people approached you to sell your product?

You still get a cut of every sale, but you also get the following perks:

  • Increased brand exposure
  • Added benefit of a new revenue stream
  • No burden of selling to customers all by yourself

You can go from begging other brands to let you work with them to the person whose products everyone else wants to stock.

I know several companies whose products are stocked in brick-and-mortar stores — and they all tell me it adds cushy extra income. There are always people who prefer to shop in a store or buy important last minute purchases in-person so they don’t have to wait for delivery.

5. Increase profits by cutting out the middlemen

If you resell products from an existing brand, you pay a wholesale fee to them. This helps cover their margin, plus the cost of the product, but may leave you with a lower profit.

Scissors next to orange thread and measuring tape

Scissors next to orange thread and measuring tape

If you start your own brand and sell it online, you only pay the manufacturing costs and any import and shipping fees.

That wholesale fee you would’ve paid another brand is money in your pocket.

You can then afford to undercut other sellers of similar products, while still maintaining a great margin.

It’s time to build your own brand

There are many merits to selling other people’s products. But the advantages speak for themselves when you have:

  • Time
  • Determination
  • Personal drive to start and build your own brand

And with white labeling, it’s easy to get started with a small investment.

Save the time and effort of marketing someone else’s products and promote your own instead. It could be the start to your brand becoming a household name.

Have thoughts on building a brand? Share them in the comments!

Image by: Mediamodifier on Unsplash



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