Archive for February, 2013

Essential. Non-Essential. Everything in between.
February 18, 2013

I have a lot of friends that own businesses.   In the last four years, each of them (myself included) has had good times and bad.  We’ve each had months or quarters where business is booming and months or quarters where there simply seems like there is no business to be had.  However, one thing has been consistent with each of our struggles and successes:  being non-essential makes you expendable.  

(Frightened Rabbit – The Woodpile.  Dig it.  (although it is a little disturbing…sorry))

Janet has owned a dog-walking and dog-poop-yard-pickup service for a while.  She didn’t buy a franchise but rather started from scratch on her own.  First she signed up neighbors and eventually started doing some light advertising in the local paper.  There are times when Janet spends four or five hours in the morning and three hours in the evening walking dogs and cleaning yards.  No, it’s not glamorous but she owns the business, sets her schedule, and makes a lot more money than you might imagine.   Two summers ago an odd thing happened: she started getting a lot of cancellations, primarily for the yard cleanup (typically done once or twice a month depending on the number of dogs and their size).   People were saying, “We’ll have you keep walking Fido each morning but let’s cancel the yard stuff for a while, okay?”   They didn’t want to clean the dog-doo out of their yards if they didn’t have to, but they would do it in a pinch.   However, walking the dog when they were at work or on a business trip?  That HAD to be done.  Janet was smart enough to recognize this and quickly redoubled her dog-walking efforts and focused on that.   Now she primarily walks dogs and house-sits for their owners.  And she doesn’t clean many yards at all.   She recognized what part of her business was “essential” and what part wasn’t.

My friend David has an HVAC repair business.  His work is essential where he lives in the south because most offices can’t have their employees working without proper air-conditioning.   He’s never seen a drastic downturn due to being non-essential.  But right now his business is slow.  Why?  Because smaller companies are putting off the repair until it starts to heat up outside.  They’d rather tolerate a little bit of discomfort then spend the money right now.  His business will no doubt pick up as winter thaws in to spring.  And by summer he’ll no doubt be putting in 10 hour days like he does every year when it warms up.  But for now he’s working for big customers and getting very few bites from small businesses and landlords of vacant commercial properties.

When things get tight financially, people first look at what they can put off.   Let’s get a swimming pool next year.  Let’s not get the yard service started just yet.   The main reason cable companies tie customers in to annual contracts is so they have leverage in negotiating with content providers.   The second – and nearly equally important reason – is because when people decide to reduce their home expenses the main “Disposable” item that stands out is the cable bill.   So the cable companies are smart enough to make it nearly impossible to cancel DirectTV or Dish or ATT “for a couple of months” until things get better at home.  

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The best way to build a business is to offer something unique and essential or scarce.  Caskets are pretty recession proof.  Ranch land doesn’t often go down in price even when the broader housing market is collapsing.  Having a product or good that is not easily replicated is a great way to make money.  Yes, it’s also the most capital intensive.

The next best way is to offer a service that is essential.  HVAC repair or tax-preparation services.   A customer might be able to do these things themselves but most people know they won’t get the desired results without a professional helping them.  Offering a specialized service is another great way to start a business, although you can’t just wake up one morning and be “specialized”; you will likely need some training along the way that isn’t readily available to everyone else.   

Next is offering something unique and non-essential.  No one NEEDS a Mercedes, but the uniqueness and quality of the product mean that sales will continue even in a bad economic climate.  If you are the only person making an adapter that converts an iPad to a guitar amp then you will have cornered a market….just be prepared for market demand to be out of your control.   (*Note – a lot of companies make this product, but it was a quick example I thought of).

The worst business to have is offering a service that is non-essential.   If you offer a service that serves to save only time or money for the customer (which is basically the definition of  “service”) then you had better be damn sure that you are saving them either a LOT of time or a LOT of money.  It’s nice to have a detailed car, clean and shiney and good as new.  But when people tighten their purse strings it’s easy for them to justify buying some Armour All and washing it on their own instead of paying someone else $30 to do it.  If you are in the enterprise space and offering engineering services, for example, then you need to make sure your price is low enough or your quality superior enough that your customer doesn’t go hire their own in-house engineer to save money.  

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Interesting is the case of Dell.   I’m of the opinion that Dell went from being a unique/essential company to a non-essential company.  Years ago, buying a Dell computer meant a product 100% specific to you.   Choose your processor, swap out the memory, add a bigger hard-drive…presto.   Add in extremely good customer service and competitive prices and there was a time a decade-or-so ago that buying a computer OTHER than a Dell was a questionable choice if you had time to wait for Dell to build what you wanted.  However, for some reason Dell started in to the commodity battle with IBM and HP/Compaq.  Gaining market-share trumped being unique.  They made computers that were not customized and fought with the competition in a race to the bottom on price.  Suddenly buying a Dell was not special; it was a decision motivated by availability, aesthetics  and price.  As a result, the dream of being a $100B company vanished in to thin air.  To the company’s credit, they appear to be moving back to essential/unique by offering total solutions in the enterprise space like IBM does.  I’m optimistic about the company’s future but imagine there are a number of people in-house who wonder where the company would be if it hadn’t taken a detour from what made is special in the first place.

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If you were starting a business tomorrow I’d suggest you build something unique.  It doesn’t have to be “new” or a better mousetrap or a machine that turns sand in to oil.  But the people and companies that MAKE things are in substantially better shape then those that resell what others make.   Unique is always better than common.  Essential is always better than not.