So your business is in a slump? It happens. Don't worry. It happened to me too. I lost my first business in a blink, had to start from scratch with no money, lots of employees I couldn't pay for, and no product. You can read about it here.
Starting a new business can be tough.
Starting over from scratch is tough, but at least you have the advantage of experience.
Reviving a business that's in a slump is tough, too, but this time you have a lot more advantages than you may realize. Here's why:
A business, kind of like a human, can be sick, depressed, or otherwise sluggish. But a business is not nearly as complicated as a person. Humans are hard to diagnose.
Businesses are much easier to diagnose.
Once you've diagnosed the right problem, the right treatment will be obvious.
There are typically only about 5 major reasons that businesses get in trouble. And you'll need to focus on only one at a time.
Here's what I have found are the 5 major reasons that businesses get into a slump:
If it's not one of these, post a message below. I'd really like to know.
Let's get to the first one:
1) Lack of profitability
a) Symptom: You aren't focusing on profit and are letting costs get out of control.
You need to watch your profit continually. Brainstorm ways to save. Costs can creep up and without you even noticing. (Things like bandwidth, communications, electricity, shipping, transportation, rent.) Attack expenses and aggressively reduce them at all times. Renegotiate your lease. Switch phone services, data services, and shipping services every time you can get a better deal. It's a mindset.
b) Symptom: You're spending too much money in the wrong places so there's no money left for marketing, executing the right projects, or to just simply put a good amount of profit in your pocket.
This happened to me for a while, and fortunately, it can be fixed. In my case, I had a lot of IT people, mostly developers and system administrators. We were already spending a lot of money on a critical piece of software that we could not operate without. I got the brilliant idea in my head that we'd build our own. Fast forward a year and I'd spent millions of dollars on an unfinished, sub-par product because:
a) I didn't have enough time to pay attention to development while trying to grow the businessb) It was cheaper to keep paying for that piece of softwarec) I wasn't profitable enough to be spending that kind of money on an "ego" project (my partner has started calling anything that isn't profit-building an "ego" project)
Lesson learned? Focus on your core area of profitability first. As you grow, there will always be time to expand your skills, your influence, and all the "ego" projects you (I) want.
c) Symptom: You are spending all your money on new customers & ignoring generating revenue from existing customer base.
If your business is anything like mine, then you have some understanding about getting new customers. That's how you built your business in the first place.
It was really easy for me to get new customers. A lot of them. You could say I was at the right time at the right place - PayPerClick advertising was cheap, and prices for our products were high.
So I got new customers in droves.
Sounds awesome, right? In fact, it caused me to not focus enough on my existing customers… and by that I don't mean how well I serviced them (obviously that is important), but how well I tended to their other needs. Because trust me, they have plenty.
Don't fall into the trap I did. Eventually competition caught up, getting new customers got a lot more expensive, and now I wish I had spent the time to build systems and funnels to sell additional, highly relevant products and services to my existing customers.
Doing so not only increases your revenue, but also your profit. It makes each customer more valuable, so that you can now afford to spend more to acquire a new one. It's a virtuous circle of sorts.
By the way, the revenue I generate from a customer in the first two years isn't even enough to pay back the cost of getting that customer. I absolutely have to make sure I keep them happy so that I can start to make a profit from recurring revenue in the following years (see #3 Recurring Revenue below), and so they would be willing to buy more services from us that meet their needs.
d) Symptom: You are paying too much for the people you hire to produce or maintain your product or service.
Especially for online related tasks, you might be able to save a lot by hiring staff outside of your country, in areas where hiring costs are lower. We have teams of creative designers and customer service in India, technical support in the Ukraine and developers in Romania.
You might frown upon hiring outside the country. But if you're not profitable because you're not outsourcing work that you could be, then you're not doing yourself,your business, or your country any favors. You're just less profitable, and less competitive. And that may cost you, and all your employees close to you, dearly one final day when the competitor with the better margins crushes your business.
Just as important is to watch what you get when you hire. Especially watch the cost of your managers. You need to pay them well, but make sure they are pulling their weight. They should be worth their weight in gold. But don't just think of that as an empty expression. Over a period of years, you will probably end up paying them their weight in gold -- quite literally. (I'm 150 pounds, but 150 pounds x 16 ounces x $1250 an ounce is $3 million, which is 150,000 a year for 20 years.) Make sure your people work for you, make you happy, and are productive. Make sure they produce profits for you. Learn more about this in our upcoming video series, "How I Get Stuff Done".
e) Symptom: You have financing issues or debt repayments that put you in a bind.
So this is the only thing that can actually kill your business… owing money, and being unable to make the payment. Even worse - if you signed for it personally, which you probably did, it can mean your house, any other assets, and whatever else you hold dear.
If you're in this predicament - follow the standard advice. See if you can refinance. See if somehow, you can agree on a different payment plan. But do so IN ADVANCE. No banker wants to be surprised by non payment.
The sooner you know that you may face difficulty meeting your obligations, the sooner you can let your banker know. Too many people sit on the news that they can't pay because they're embarrassed, scared, or hope they'll be able to turn it around somehow. But if you can go to them while they still consider you credible, they'll work with you and give you a chance to get to a better place.
In any event: if you're in this situation, it's crunch-time. Heed every word of advice mentioned here, and implement like a mad man/woman. You may be able to shovel yourself out of the hole.
2) Lack of new leads, new customers
a) Symptom: You have financing issues or debt repayments that put you in a bind.
You need customers. If you have a recurring business, you will naturally lose them on an ongoing basis to your standard customer churn. You need customers to replace them. And even more customers to grow. Well, customers come from leads - website traffic, cold calls or appointments, opt-ins, social media, or form inquiries.
How can this be a reason your business is in a slump? Well, let's face it. You probably neglected this area. You took your flow of new customers for granted. And now that neglect came back to bite you, hard.
Keep in mind: This is probably one of the hardest things to fix, with the lowest ratio of effort to success. You should try to implement as many of the advice I gave you above as you can before tending to new customer inflow. But let it be a warning if you don't have this problem to day -don't take your new customer flow for granted. Make a conscious effort at improving it at all times.
So how do we approach fixing it?
The cure is to spend more on marketing. You are asking how, of course, since we're talking about your business that's in a slump, right? Well you can take all the money you can get from cost cutting. But before you just start spending, let's make sure you are spending in the best places. You should have a way of measuring your results, the return on your investment (ROI).
We'll use terms like ARPU and CPA. These are best understood from a simple example.
ARPU is Average Revenue Per User: "User" in this case is the user of your services or your customer. If you always sell one item per customer for $50, and they don't buy anything else,then your ARPU Is $50 for this example.
You need to calculate: ( ARPU - CPA ) x #Customers.
So you fill in numbers: ( 50 - 100 ) x 10 = -$500
You will lose $50 on each customer. So for an investment of $50,000, you could pay for enough advertising to get 1,000 new customers. But, you can't just say, no new customers.
You need to find a way to make ARPU higher and CPA lower.
Let's make it a more specific example, but an easy one: Let's say your baseline of $50 ARPU is from selling digital cameras at a $50 margin (after unit cost, shipping, etc) on an ecommerce site. You are spending $1000 a month to get those 1000 people to click on your ad whenever they look up "digital camera" in Google, and it results in 10 sales, on average.
But you hear that there's a way on Facebook, to get to a more targeted group of people for the same ad costs. So you try it out. (You can always make a small test at first.) You write up an ad that says "The best Digital Camera. Free Report. Best Deal." Facebook gives you a way to target enough people for $1000 a month so that 2,000 people click on your ad. Just like before, only 1% of them buy your camera, but that's 20 customers this time. And your CPA is now $50 instead of 100. (CPA =1000 / 20 )
You're making $0. But there's plenty more you can do.
You study the marketing and realize that all the people you are trying to sell cameras to have iPhones or other smartphones. So you come up with a new ad that says "Best Camera for iPhone Owners. Best Deal. Free Report!" You run this in Facebook at $1000 a month and Google at $1000 a month after getting an idea of the response from a small test.
This time you get twice as many clicks Google, and twice as many clicks on Facebook, although when they find out your Free Report is only sent with the purchase of a Digital Camera, you still sell to only 1% of those who clicked on the ad.
But that's still an improvement:
Google: $1,000 bought 2,000 ad views and 20 customers, so your CPA is now $50 on Google. No loss this time. ( $50 - $50 ) x 20 = $0.00
Facebook: $1,000 bought the same as before ($50 - $50 ) x 20 = $0.00.
Now you aren't operating at a loss, but there is no gain either.
You could (and should) continue to tweak your marketing to get CPA costs even lower than $50 so that your $50 on each camera produces a profit. But you can probably see where we're going with this…
3) No recurring revenue component
a) Symptom: You are not maximizing ARPU
The examples in #2 above showed that it's quite possible to get a lot of customers and not make any profit. In fact, a lot of companies are in this position. Think about the iPhone game model - you can have many users, but not necessarily a lot of money depending on what you charge for the game. The money comes from upsells to that same customer.
In fact, customers are built-in "leads" for all of your future products. You know how to contact them, and you know they are potential online buyers, not just people who want to click ads, and "kick the tires" as they say in auto sales. These are people who were willing to click on and buy from an online ad.
But your main advantage here is the ability to amass a list of customers that you could sell to again... immediately. With some social media expertise you might be able to keep these customers coming back for more. Offer coupons, maybe a buy one, get one half-price for a gift. Look for our other articles on marketing ideas.
The main point is that if you can get even a small percentage of your customers to come back for more, then your ARPU goes up. It's not just the $50, but the fact that a percentage of these customers will find value in the other items you offer.
Let's go back to the math from before:
The CPA is still the same $50 per customer, but our ARPU is now going to be $50 + 10% x $50 + 10% x $50. In total that's a new ARPU of $60.
Now maybe a $60 (ARPU) minus a $50 (CPA) doesn't seem like a lot. It's just a $10 difference. But remember, too, that this is the ecommerce world. If you can spend $1000 in marketing to get 20 customers and make $200, there's a good chance you can find a way to scale this to $10,000 in marketing to get 200 customers and make $2,000. A $100,000 investment could make $20,000. Obviously there might be limits for a specific product marketed to a specific demographic segment, but the more you learn, the more you test, the better your chances of improving those numbers.
Learning to "own" the marketing aspects of your business can become very important, because this is the key to your profits in the long run. In my own case, I have, when necessary, scaled my advertising expenses to a few million dollars per year, in pursuit of new customers. And it paid off because of what I did after I acquired the sale. Remember what I said about my customers not really being profitable for me until 2 years after they sign up? This is the way I make sure that I'm profitable, and they're happy.
We forgot one major principle here:
Your customers want to buy more from you. The proof is in the profit.
b) Symptom: You are not charging enough.
This is common. Many business owners are hard-wired to believe that their customers won't pay more. They worry that they'll upset a delicate balance by raising their prices and the business they built will disappear. I mean, it's what I believed.
My first price increase was a test. I rolled it out tentatively to a small group of customers who had been customers for a really long time. Some of them hadn't seen a price increase in over 10 years, although we had expanded our business, upgraded our data center, moved to a better location and hired more qualified employees.
We kept the increase below 30% and gave original pricing to anyone who complained. Our customers got ample warning, and in that time we braced ourselves for thousands of customers to jump ship or at least call and complain. Very few did.
Fast forward to today and my business is probably 50% more profitable because of price increases. We roll them out strategically, and we talk about this in our webinar on How to Double Your Business. Check it out if you get a chance.
You too may find you have ignored a simple path to profitability.
Keep in mind that you can't win a big market share by overcharging. And you should explain to your customers what your reasons are (the good ones at least), especially if this is a recurring cost that customers have come to expect. But what you can do is offer a package that is more than just the simple product or service. In ecommerce, you can offer an experience that includes better service, future offers, an entire community of users, additional support information, online research, coupons, multi-purchase discounts, ongoing email communication. When combined with a basic product, you may be able to offer much more than is expected for a price that allows you a higher profit margin.
Let's say you sell a whole catalog worth of items for a competitive price and you sell 1,000 $10-items each a month, but because the prices are so competitive you only make $.50 on each item. That's $500 a month.
The surprise is that the seller who raises all his $10 items to $15 will still sell about 400 items a month.
Sure, the seller lost a potential 600 sales, but is now making $5.50 on each of those items. 400 x $5.50 = $2,200.00
You don't know what your results will be in any particular line of products. But you can test it. Trust me, the results are worth it...but only if your product is worth it to your customer.
4) Key people unexpectedly unavailable.
a) Symptom: You need desperately to complete a project but the project manager leaves just a month before it's due. The only person who can do payroll leaves just before end-of-year tax forms are filled out.
People are not machines. (This is a good thing!) But there are any number of reasons that key people might leave your company at the most inopportune time.
By "key" people we mean those people you were counting on to turn a department around, complete a necessary project before its costs start to dig a deep hole of debt, or just to handle a necessary part of the business that no one else can handle as well.
Look, I've been through this so much that I've almost stopped worrying about it. When I think back to the beginning, when I couldn't afford the catastrophe of someone leaving mid-project, I think it made me stronger. It made me appreciate my team more and keep the good ones from going.
Understand first that you won't be able to predict all the reasons someone might leave. Often they themselves had very little control of serious issues in their own lives or those of their families and relatives. But there are quite a few things that you do have control over and I'll just list them:
- You should pay people what they are worth. The work has already been done for you. Just find out what people in your area are worth on average for a particular job, hire someone who is better than average and pay them a little bit more than they expected. Then pay them more when they prove their worth. My advice is to never "overpay" until they've over-delivered, but that's another topic.
- Keep morale high. Social events, newsletters, face-to-face meetings, perks...these all encourage good relationships and accountability. But don't neglect their work-life balance, having a positive workplace environment, flexible schedules, and all the other things that make people happy. Money isn't everything.
- Cross-train people so that people can back each other up in case of emergencies, and so that overtime, when necessary, doesn't always fall to the same people.
- Get to know your employees. Allow free expression of concerns without repercussions. Treat everyone and every idea with deserved respect.
- Promote a system whereby promotions and pay are related fairly to performance goals that are understood and acceptable.
- Fire people. Well, I mean, get rid of poor performers in the nicest possible way you need to. But do get rid of them. Doing this will unburden the company from an unnecessary expense, allow the flexibility to get the right person in the job, and it will let other workers see that you are serious about fairness.
5) Slow Execution of Projects, or The Wrong Projects
I already mentioned my multi-million dollar disaster trying to do what we had no business doing in trying to manage a huge software development project. But honestly, even a few small efforts on a lot of little projects add up, too.
We have had cases where we had a lot of really great projects to do, and all of them would have been great for the company, but we tried to do too many at once.
Pick your priorities and then honor them. Every project that isn't on the current priority list is the "wrong project."
Working on "wrong projects" gives an excuse to your managers not to get as much done on the priority projects. Don't accept it. I learned a lot about this subject (out of necessity) and you will find a lot of what I learned in "How I Get Things Done."
The biggest key to fixing slow execution of projects is the matter of only focusing on the priorities, and communicating to the entire company what those priorities are, and making each person responsible for their part in those priorities and their support of the departments who need their input and support to complete these priorities. Getting one priority completed every couple of months, is infinitely better than trying to juggle 10 priorities and finding that they each compete with each other so that nothing gets completed.
Project managers can really, really help...but they aren't necessary when you're trying to patch up other leaks in your company. Just do your best to keep focus and drive the important things forward.
You have your work cut out for you. It probably wasn't easy to start your business and it won't be easy to restart it either. Take it from me, there's something really empowering about turning things around. You will find that on the other side of this struggle is a more confident business-owner who makes better choices and hopefully, more money.
What's keeping your business down? What are you trying to do to fix it?
Fathi CEO at Ecommerce