Why did you start your business? Business owners start their businesses for a whole host of reasons. I have come across people who have started their business when they:
- thought they could do better on their own, rather than stay with their employer;
- were made redundant and rather than go back into employment they took a risk and went on their own;
- had an idea to make or do something new and different. A new niche or market encouraged them to take a risk.
For many business owners, that initial reason for starting up is wrapped up with a sense of having more freedom. That could be freedom to make their own decisions, take their own risks. Equally it could be the freedom to work where and when it suits their lifestyles.
Typical Business Owners
Unfortunately, for far too many business owners, that freedom doesn’t come in big measures. That work / life balance is always round the next corner. There’s never enough money to buy free time. The business demands more time and effort than expected. That freedom to make decisions turns out to be regularly reacting to problems that seem to get in the way of growing the business.
And that probably describes the world for many business owners, call them ‘typical owners’. Especially with COVID and a recession, they are aspiring just to survive.
Value Builder Owners
But there are some business owners who aspire for more. The research done by the folk at The Value Builder System, shows there are owners, let’s call them ‘value builders’, who apply 9 principles of business that build solid companies and personal wealth. I’ve been looking at those principles in greater detail over my last few blogs.
The first six principles were:
- Start with the end in mind
- Prioritise value over revenue
- Own your product
- Protect your equity
- Win subscribers not customers
- Build a business that runs without you
Principle 7: Sell a few things to many
Value Builders are careful not to become too reliant on a single customer. Their goal is to sell a few things to a lot of customers rather than the other way around.
One of the most overused rules in business is the Pareto principle which, among other things, suggests an owner should focus on 20% of their customers generating 80% of their revenue. While this may be true if one’s goal is to build a larger or more profitable business, it can make a business less valuable in the long run.
In stark contrast to most small businesses — Value Builders diversify their risk across a large number of customers while concentrating their bets on a small number of products and services. This means they are not dependent on a single customer and have the resources to invest in further differentiating their products and services.
Applying This Principle
You may recall me talking about a client of mine, Matt Driver, who owns Mint IT Support. The business provides IT support to primary schools. Matt knows how to deliver IT services to primary schools. He grew up doing it, knows how schools work and what is important to head teachers. He is good at it. Has he launched into secondary schools or private businesses or other public sector organisations? No, he is sticking to his knitting – geographic expansion to other primary schools and adding value to each school – taking away their worries about technology, regulation and managing a tight budget.
He has built up a portfolio of primary schools using his services. He is not reliant on one school.
As a crude guide if one of your customers represents more than 15% of your annual sales then you should be taking action to dilute that reliance.
Another Business With Many Customers Buying A Single Product
Jill Nelson started her career, after college, as a receptionist and used her effervescent personality to greet callers. Eventually, she moved into a sales career but never forgot her time taking phone calls. As a sales professional, she interacted with a lot of receptionists, and most left her with a diminished view of the companies she was calling on.
Nelson reasoned that if a company were to answer phones in the same chipper, positive tone she did, it would give a much better first impression. In 2003 Nelson founded Worksource Inc (later rebranded as Ruby Receptionists), a telephone answering service for small businesses that strive to give their customers a great first impression.
Small companies hire Ruby Receptionists to offer their customers a friendly voice when nobody in the company is available to take a call. Nelson’s receptionists work from home thanks to the routing software Nelson’s team built that enables her to direct calls to an available receptionist. This technology ensures all of her customers will have their calls answered by a friendly voice no matter how busy any one receptionist may be.
Most telephone answering services grow by winning contracts with large enterprise companies looking to outsource their call centre. Not wanting to become too dependent on a single customer, Nelson grew the hard way, signing up small customers that paid a few hundred dollars a month each.
Between 2012 and 2014, Ruby Receptionists grew to 6,000 customers and doubled its revenue to $11 million in the process. Nelson, who had become something of a minor celebrity in Portland entrepreneurial circles, started talking with Jon Seeber of Updata Partners, an investment firm focused on technology companies. Seeber was impressed with the software Nelson had built to handle thousands of customers and millions of calls a year. On January 6, 2015, Updata announced it had bought a majority stake in Ruby Receptions for $38.8 million.
You can hear Jill’s full story in her interview from John Warrillow’s Built to Sell Radio, a regular podcast revealing the stories and advice of business owners who have sold their businesses. To hear the full interview, click here.
So, are you building value in your business?
Try to ensure your business is independent of any one customer, employee, or supplier.
To start, take a look at your employees. Try stack ranking them from most difficult, to replace, to least difficult. Then make a list of the things you are doing to minimize your dependence on the most difficult to replace employees.
You can also take the value builder assessment to see where you are in your business now and identify where you need to make improvements.
In the meantime, please get your free copy of the eBook, Famous Or Rich: 9 Ways Value Builders Prioritise Wealth Over Recognition.