By Chesney Bradshaw
Two small restaurant businesses started up, one after each other, in the same premises. After 18 months, the first business went to the wall and had to shut its doors. The second business took over the same premises also with a restaurant but business is strong and growing.
What made the difference between these two small businesses? What made one unprofitable and the other profitable?
If you are looking to open a new business, what key fundamentals will you look for when it comes to profitability? Even if you are presently running a small business it’s worth looking at these key fundamentals because you may be missing out on profit opportunities. Without running your business profitably you are unfortunately not going to make it over the medium-to long-term. As a start-up or any individual who is starting any income-generation opportunity, you need to carefully consider how profitable your business is going to be.
Let’s start with profitable customer segments. The first business I mentioned was unable to attract a profitable segment. The second, successful business, targeted an above-average income segment where customers are not feeling the same belt tightening as other segments. But they still want value for money.
Next up – profitable products. It’s no use offering products and services that are going to be unprofitable. If you’re starting out, you need to do the maths to determine the profitability of your product or service. Profit is affected by revenue and costs. I know it’s more complicated than this but if your sales are not high enough and costs are too high, you would have to seriously consider going ahead.
You also need to look at your sales acquisition costs. How much will it cost you to acquire a customer? If you think you are going to rely only on word-of-mouth and foot traffic, then you will most likely only succeed if you are in a high-volume shopping centre. You need to attract customers to your business. Your sales acquisition cost includes everything you do to attract customers to your door. It doesn’t matter whether your business is located at physical premises or online. The successful restaurant owner didn’t take out fancy, unproductive advertising but used a small gift as an incentive to reward customers for their patronage. I suppose you might call this customer retention rather than acquisition but generosity gets quick word-of-mouth.
Decide upfront how much you are going to need to spend on marketing to attract customers. Take a look around and see what other marketing concepts or campaigns have worked. It’s no use coming up with something “brilliant” but it doesn’t work. You can’t waste your money on nonsense. Talk to other business owners and find out what worked for them. When you have a winning marketing campaign go with it for as long as you can. You might quickly tire of your marketing campaign but new potential customers who have never seen or heard it won’t be. A small business doesn’t have the luxury of the marketing spend of a national chain which can change its advertising or marketing approach two or three times a year. You need to keep your costs down otherwise your profitability will take a nosedive.
Examine these four areas of profitability in your business whether you plan to start one or if you are already running a small business. Use these four levers of profit and you will have an upper hand in keeping your business profitable in these rough and uncertain times.