First learn walk, then learn fly

My company reached an important milestone today, though I doubt anyone but the three partners will notice. After nearly five months of business, we implemented formal cash control on our tills. Now, that may seem like we’re closing the barn door after the horse has fled, but in reality, the timing was right.

Not every business could get away with waiting so long to start watching the cash registers more closely. But in our case, it was a good move. Why? To start with, there are only three of us running the company and the store, and there is a lot involved in running a store. There were plenty of things that were a higher priority, at least at first.

Furthermore, we’ve spent a fair amount of time just getting used to our POS system and working out how to handle the myriad of situations that come up in normal business. For the first several months it would have been especially difficult to determine just where any error might have come from. We were also still working out many of our processes and policies.

Also, we’re all three of us old hands at retail. We don’t make many of the money-handling mistakes minimum-wage sales clerks make. And if we did, the amount of money we may have lost was fairly small in the big picture. It was an acceptable risk to take in order to get other things done that we felt were more critical.

But now many of those original priorities have gone away or shifted. We’re used to our POS system now, and our business processes are largely set. It’s now safe to say that most mistakes are from user error and not from not knowing how our POS reacts in certain circumstances or how to run a transaction correctly. We know we can trust the reports we receive. Now we have a pretty good chance of identifying the root cause of any errors we detect.

Now that all those building blocks are in place, we recognized that there is a benefit to be gained from exercising tighter control over certain aspects of the business; cash management being one of them. We now have a good chance of succeeding, too, rather than just making ourselves even more stressed and causing ourselves even more problems.

Similar compromises are made in most new businesses. You simply aren’t capable to doing everything you know you should do at first. Some things will rightfully need to be set aside until the organization is mature enough to handle it. The time will come when you can now implement additional controls or processes with a much lower impact than if you’d started out with them right away.

The key is to keep evaluating your businesses so that you don’t forget to implement those changes later on down the road when the situation is more amenable. Don’t just forget or forgo important processes in your business just because you weren’t ready for them initially. The time will eventually be right.

This is not an excuse to throw caution to the wind and have no controls in place at all. On the contrary. The point is to choose wisely so that you have just enough controls in place, and then keep adding on as your business becomes more capable of handling it. Recognize that, like a kite, a business needs constraints to keep it aloft, but too many constraints can keep it from ever leaving ground.

Balance, Daniel-san! First learn walk, then learn fly!

What do you think? Do as much as you can up front, or introduce incremental improvements? Leave a comment below!

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Social Media requires vigilance, not obsession

One of the hardest tricks of social media is balancing the amount of time you spend on it. It’s addictive, as most people on Facebook will likely attest. It’s easy to keep logging in to see if anyone has commented, and before you know it you’ve spent all day just logging in and out.

But just as bad is to not check back regularly and miss an important post from a customer. Customers may not respond to your posts for hours or days after the fact, but let one of their questions go unanswered too long and you may lose them forever. It’s not fair, but it’s true.

That’s why to maintain a successful social media effort, businesses need to develop a habit of regularly checking for customer interactions without getting caught up and distracted.

Oddly enough, your best friend is an “old” technology: email. Most social media platforms can be set up to send you an email notification when someone posts a comment or question. This allows you to monitor you social media channels without actually logging in and getting sidetracked, or having to jump back and forth between channels.

Once a customer does interact with your channel, don’t wait too long to respond. Most people don’t expect near-instantaneous responses, but more than an hour or two could be seen as being unfriendly–at least during your normal business hours (here is where a brick-and-mortar store may have a bit of an advantage, as people expect online stores to be open 24-7-365).

And never, never let a question go unanswered. Use your judgment , but err on the side of responding too often rather than let a comment directed to your business go unacknowledged. Your customers may be wishing to interact with the community of your fans rather than you directly, but make sure you’re never entirely out of the conversation.

It’s true that effective social media requires time and effort (my company’s Facebook page, for example, took three or four months before customers began regularly interacting with us, but now we regularly field questions and customer service issues through our company profile). But with a little discipline and balance you need not let the rest of your business suffer from lack of attention. It’s possible to effectively build a social media fan base without spending most of your day checking your channels.

Vigilance, not obsession.

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Writing good blog posts

Wendy Maynard, marketing maven and social media mentor over at Kinesis, Inc. has some pointers for writing good business blog posts. Her tips apply to most any kind of more serious posts, really. I already had to bust myself for not doing some of these.

Compelling blog posts require you to hold back the reins a bit on your passion. Most people want to read articles that are lively, tight, clear, and short. In addition, they should be optimized for search engines using key words and phrases.

I think most of Wendy’s tips can be summarized with “Don’t be lazy”. Guilty as charged. Far too often I’m pushing just to get something posted, let alone reviewing and optimizing. I will probably print out her list of tips and tape it up near my monitor so I can spot-check myself for awhile.

What do you think of her tips? Agree? Disagree? Have more to add? Leave a comment below and/or leave Wendy one at her post.

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Patience and balance

Since I’m the one who loves to measure things, it’s become my role among my business partners to track our business metrics. I enjoy keeping data, analyzing it, and reporting on it, but time after time I am reminded of why I’m better off having a financial adviser taking care of my investments: I lack patience.

Take our company’s last month for example. Early on in the month the numbers were looking pretty good. We were on track for a better month than the one before. But by mid-month things were appearing to slow down. Going into the last week of the month I was beginning to think we were going to have our first month where we sold less than the preceding month.

The last week really kicked butt, with six strong days in a row, and we handily beat our previous month’s sales. I suddenly felt a bit embarrassed by my pessimism the previous week. Especially since it was not something new. We’d had similar weak-strong cycles previously.

Just like wise investors invest in the markets for the long-haul, businesses should look more at long term trends rather than short term performance. As frustrating as a slow day or week may be, one should not let emotion run the show. Maintaining a higher level view and long term perspective can help you avoid over-reacting.

Not that a case of nerves now and then is entirely a bad thing. After this latest low-high business cycle I decided I needed another metric. Though I’ve found it useful to look at our average sales throughout the month, I’ve now taken it a bit further and added a standard deviation analysis to give me feel for just how much volatility we experience day to day.

To my surprise, last month showed the lowest volatility in four months. Yes, our daily highs were not as high as they had sometimes been in the past, but our lows were not as low, either. The latter helped make up for the former, and produced a solid, steady month without my realizing it.

This is also not to say that one cannot be too patient. It is just as dangerous–if not more so–to stubbornly hold the course long after the data has truly begun to indicate problems. Waiting too long to acknowledge problems and correct them can be dangerous to a business. A slow week, or even two slow weeks, may not be indicative of a real problem, but a poor month or more might just be a warning sign.

So don’t get too caught up in the daily ebb and flow of business or you’ll go nuts. But also don’t relax too much and fail to notice danger signs. Work for that “sweet spot” of having your finger on the pulse and both hands on the wheel. Just know, too, that it’s often easier said than done.

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Use more than one metric

The company my friends and I started five months ago is finally showing a profit. You’d think we’d be thrilled–and we are, but only cautiously so. Our monthly profit-and-loss sheet is looking fairly good. Our income is exceeding our expenses.

The problem is that our bank account continues to shrink. One of the most important lessons in accounting is to know what each of the standard accounting reports really show. Our profit-and-loss sheet may show a profit, but that’s not the entire story. It doesn’t look at cash flow. And the truth is, we are still spending more every month than we take in.

The reason is that we are still increasing our inventory. The purchase of inventory doesn’t figure into the profit-and-loss report. We are taking cash–an asset–and turning it into inventory–another asset. The profit-and-loss (or P and L) is only looking to see how much you sold, how much those goods cost to sell, and what other expenses you had during the period. If your sales minus cost of goods and expenses is greater than zero, congratulations! You’re profitable!

Unfortunately, you need cash to run a business. In most cases you can’t pay your bills with inventory. So any time you convert cash to inventory, that’s cash you can’t use to pay expenses. If you don’t balance your acquisition of assets with your inflow of cash your business can end up in serious trouble–starving in the midst of plenty.

So we’re pleased that our P and L shows our income is exceeding our expenses. But we don’t rely on just that one metric to measure the health of our business. Coupled with the Cash Flow report, we get a clearer picture. Our business is indeed growing, but we know we still need to get our spending under control before we are truly on solid ground.

Never rely on just one metric in your business. Make sure you have as many as you need to help you understand what is going on within your business (we currently use at least five different metrics). While it is possible to measure too much in a business, I suspect very, very few businesses ever come close to having that problem. Multiple measurements are key.

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Measuring marketing ROI

There’s nothing like the smell of a new business in the water to bring out all the marketing sharks. In the few months my business has been open we’ve been contacted by numerous radio stations, newspapers, magazines, phone directories, discount coupon websites, even a company that puts video ads in taxi cabs. Every one of them has tried to convince us that they are the best avenue to reach our target demographic.

Of course if we’d listened to them we would have spent all the money we had to start our business in the first place and had no business to advertise. And I doubt most of them would have cared.

I’m not here to tell you not to spend money on marketing. What I’m going to tell you is to pay close attention to your results and how much it cost you to get those results. And don’t just rely on the marketers to give you metrics as to how you did. Make sure you’re regularly polling your customers about how they found you.

When we first opened up we bought three months of radio advertising at a cost of $2000 per month. For the first month or two most of the people who came in (which wasn’t that many) said they heard about us on the radio. During our third month we got street signage up, including a sandwich board sign of our own design. Ever since nearly every new customer has said they found us through our street signs. Total cost: about $400.

So let’s be generous and say that our first 100 customers came through radio. We spent a total of $6000 on radio advertising, or an average of $60 per customer.

Now let’s be pessimistic and say only about 100 of our 200 customers we’ve added since then has come from our street signage. That works out to about $4 per customer. That’s quite a difference.

I won’t go so far as to say the money we spent on radio was wasted. Word of mouth is the best form of advertising, but you can’t get that without customers. Any customers we got into the store in those early days were valuable, because they started to tell their friends. Some of our best evangelists were found through the radio campaign.

The main point I’m hoping to make is that you must market your business to survive. Very few have the option of not spending anything on advertising. However, do everything you can to monitor the response you get from the different types of advertising you try. You’ll find fairly quickly what approaches work better than others. Don’t rely on your advertisers to come back and tell you how they did.

One other thing: Something we noticed is that nearly every advertiser wanted us to offer something for free to help pull in the customers. There’s nothing wrong with that approach, necessarily, but be careful.

There are three types of people who respond to free offers; people who already shop your store, people who come in for their freebie and then never come back, and people who come in for their freebie and become regular customers. You’ll note that only one of those three are the ones you’re trying to reach. Make sure you track how many new customers who come in come back again when there’s no free offers. Otherwise your results may be inflated, looking better than they really are.

Marketing is essential for business. But with a little extra effort you can find out what works and what doesn’t, which allows you to spend your limited resources more efficiently. There are plenty of advertising channels out there who will be more than happy to let you throw money at them. Just remember it’s not so much what you spend as how much you get back as a result.

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Be ready for opportunities

As I mentioned in my previous post, when my business partners and I first opened our store we purposely did not try to do everything our competitors did. As part of our beginning analysis we looked at each of our competitors and evaluated ourselves against them. There were some things at which we knew we could beat them all of them. There were some things at which we knew we could beat most of them. But there were some things at which we knew they could beat us. Where they could beat us significantly we decided it better not to try.’

One of those things was was renting new release videos. Even though the recent demise of Blockbuster (at least in our city) and Hollywood Video had decreased our competition, we knew that Redbox could beat us on price, Hastings could beat us on price and selection, and most critically, a local chain not two blocks away could also beat us on selection.

Redbox and Hastings we could compete by offering better programs and customer service, but the store two blocks away was just a bit more than we could handle. They had good service, a competitive rental program, and they could get more movies in more cheaply than we could. They would eat our lunch. So no go on the new releases. Videos would remain a sideline, focusing mainly on offering older titles cheaply.

And then the store two blocks away closed down. We were on good terms with them, so they put up a sign in their window referring their customers to us. Suddenly we were swarmed with displaced renters looking for new release videos. We didn’t have them. After a week or so of this we decided to try stocking new releases. About that time the swarm stopped. We’ve been buying new videos to rent for nearly two months now, and the indications are that it’s not going to pay for itself.

Hindsight is always twenty-twenty. We weren’t agile enough. We didn’t recognize the opportunity when it came. We probably should have raced right out and bought a few new titles the very day we saw the surge begin. We missed being able to serve a lot of customers who will probably never give us a second chance.

That’s not to say there haven’t been some other benefits to having tried carrying new releases. Some people have come in looking for them, and they’ve now become aware of our video game business, which is our primary focus. Some of our video game customers have also rented our movies.

And that’s not to say that we shouldn’t have been cautious. In the early, tender stages of a business, jumping on the wrong opportunity can be just as lethal as ignoring the right opportunities. New videos are not our core business, and it’s not entirely unwise to stay focused on what you do well.

But imagine what might have happened if we had been a little more creative in our planning? Is it really that inconceivable that a competitor might go out of business? Is it that big a stretch of the imagination that their customers might come looking to you to fill the void? (I can’t count how many customers showed up thinking we were the company that went out of business!)

Had we done a little strategic planning we might have come up with a contingency plan and accepted the risks of investing a certain amount of capital in an attempt to get a foothold in that market. We might have been more agile in jumping on the opportunity, and our video rentals might have become a viable profit center.

Everyone spends time (or at least should) making contingency plans for things that might go wrong in your business. Don’t forget to spend a little time thinking of things that might go right, what opportunities that might open up, and what to do about them. Though sometimes it may seem like it, not everything that happens in business goes against you. Sometimes things fall your way, and you need to be ready for it.

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When to pull the plug on projects

At one point or another every business will try something new; a new product, a new service, a new process, a new marketing idea. If you don’t I suspect you’re not really growing as a business. And you’ve got your doors locked so no salesmen can come in. And you’re not listening to your customers, either. And you’re not reading the newspaper, listening to the radio, or watching television, reading the Internet, or looking at anything else around you. You probably live in a cave, selling crumbs to cockroaches.

The point is, at some point every business will try something new. That’s a good thing. The only harm in trying new things is a) taking too big a risk with too little forethought, b) not knowing when to pull the plug on the experiment, or c) not knowing what the benefits might be and therefore not recognizing a successful project when it occurs.

Today I’m going to discuss only the second problem: not knowing when to pull the plug. This is when you let an experiment go on and on, burning up time and resources until it start to either drag the company down, or uses up resources that should have been routed elsewhere that would have benefited the company.

The first step in knowing when to put an end to a trial period is to know what benefits you are looking for in beginning the test in the first place. It’s generally pretty hard to notice what you’re not looking for, and therefore quite easy to not notice you haven’t seen it yet, even after a reasonable period of time. Clearly identify what you hope to gain from trying the new idea and how you might see those benefits appear.

The second step is regularly gathering and reviewing results. Are you seeing the benefits you are looking for? Are they meeting expectations? Are the benefits sufficient even at this point to continue? Is there something you can adjust or do differently to boost results? If you’re not periodically studying and discussing your results it won’t be easy to know when you’ve reached the point you need to stop (or to make the changes permanent).

Finally, you need to have some basic idea of how long results should take to appear. You may need to give things a little more time sometimes, but you should at least have a an end point in mind where you know you should have sufficient data to decide. At that point have the guts to decide. The project is either working or it’s not. If not, start shutting it down before it does more harm to the business.

Let me give you an example. In my company we sell and rent used video games and movies. Our stock of movies until recently consisted only of whatever movies our customers traded in to us–very little was more than half a year old. We had no interest in dealing in new release movies. We had a competitor down the street that did that–and did it better than we ever could.

But recently our competitor close their store. Suddenly we had a flood of customers hoping we could supply their demand for new release movies. We didn’t but we promised to think about it. When we did, we decided it might be worthwhile to try it for awhile and see how it went.

We did none of the things I just told you to do. Well, almost none. We did regularly look at how we were doing and discuss whether or not to keep going. But without a real clear idea of what results we were looking for or how long it would take to see them, it has been difficult to decide whether or not to pull the plug. Every week for the last month we keep buying new movies. Every week we take a look at the figures and decide it might be time to put an end to it. Every week we either then see a few customers come in, or we think of a new benefit we might gain, and we decide to give it another week.

We should have identified up front what benefits we expected to see. We should have identified how long it should take to see those benefits materialize. Without that we’ve been flailing around a bit. Granted, the experiment has not been all that expensive, but it could add up after awhile if we remain indecisive about our results.

It’s not too late for us. We can still sit down and identify our expected results and draw a line in the sand as to when we should be seeing those results. In fact, I’m putting that on the agenda for tomorrow right now.

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Howard Schultz and Starbucks’ customer focus

I recently listened to Darryl Campbell’s podcast interview with Howard Schultz, CEO of Starbucks, on his new book Onward: How Starbucks Fought for Its Life without Losing Its Soul, in which Schultz discusses how he revitalized the sagging company even amid the recession. I found Schultz’ focus on rebuilding the company around its core values compelling.

I especially found it interesting how much emphasis Schultz put on integrity, though he didn’t come out and call it that. He feels that a company is much more than how much money it makes. Yes, a company’s purpose is to make money, but it does that by standing for something:

I think for any public company, and certainly one that had great success and significant growth and development like Starbucks, it’s very dangerous—and I think almost seductive—to allow the stock price to kind of put a grade on how you’re doing. That might be okay when things are going well, but when they’re not, the danger and the trepidation of all this is to ensure the fact that you don’t start making decisions that satisfy the stock price as opposed to the customer and your people.

As I say in the book, there were points in time when I thought that Starbucks, not by design but it just happened, that we became somewhat complicit with the stock price and then Wall Street’s mentality. That was a dangerous road to go down. And so the balance, and which is very fragile, is to try to achieve the balance between shareholder value and doing the right thing for the customer and, most importantly for us, having a social conscience, to make sure that we’re giving back to the communities we serve, and bringing our people along with us.

A great example of that is during the financial crisis I became under pressure from an institutional shareholder who wanted us to cut our health care benefits, which at the time was $250 million a year because we were the first company in the U.S. to provide comprehensive health insurance to every employee, including part-timers. This is before the health care bill. If I would have done that it would have fractured every level of trust that we have with 200,000 people who work for Starbucks, and wouldn’t do it. Not because I was trying to be difficult or arrogant, but the fact is that you can’t build long-term value for your shareholders unless you build long-term value for our people, and that health benefit was so vitally important in terms of the foundation of the culture, and the ongoing trust that our people have in what we stand for as a company.

At the core of Starbucks’ success, of course, is the customer, and he felt so strongly about this that he pulled 10,000 managers in for training to get them all focused in the same direction, and even shut down every store for 3.5 hours one night to help their baristas get back to basics. Schultz defends such moves with a simple explanation:

I don’t know too many companies that have lost their way because they have spent too much time focusing on the customer.

I think one of the keys of Schultz’ approach is his laser focus on the the Starbucks brand and what makes it something special. This is even reflected in how he describes himself; as a merchant rather than a businessman:

Being a merchant is kind of a lost art. It’s not something you can really be trained to do. The way I would describe being a merchant is you’re really a storyteller. You’re creating an emotional journey, either visual or non-verbal, to the consumer in a retail environment. I think that when we at our best as a company we are bringing out customers along on this journey with us.

I don’t drink coffee, and even if I did I don’t think I’d allow myself to buy coffee as expensive as starbucks’ except perhaps as a rare splurge. But as a businessman, I find myself looking forward to getting my hands on a copy of his book to see what more Schultz has to say.

Disclaimer: I will occasionally link to a product or service that may result in my receiving some tangible benefit if you click on the link or buy that offering. I hope you don’t mind.

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Jen Aniston’s viral video

I don’t usually link to the latest viral videos, but this one I will because it’s a) well done, b) rather amusing, and c) both mocking and elucidating the world of web marketing. “Going Viral” is what every web marketing campaign dreams of, and this one is accomplishing that by making fun of what elements usually seem to go viral.

I give you the Jen Aniston “Sex Video” (safe for work–the title is part of the joke)

I have to admit a certain respect for Jennifer Aniston. She’s been through a lot in her personal life, but manages to carry herself with class through it all. She’s also kept her image fairly steady and reasonably wholesome when many lesser-named actresses choose the tawdry path to stay in the public eye.

In short, to keep it in business terms, she’s maintained a consistent brand. Perhaps her brand is not the most visible, but it’s reliable. And unlike Charlie Sheen and Lindsay Lohan, her brand will still be around long after they have immolated theirs. And even if not, I know which brand businesses would rather bank on.

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