5 Ways to Tune Up Your Venture's Profitability
BY Peter Cohan
Forget venture capital, angel investment, or sweat equity. The best source of start-up capital is bringing in more cash than you pay out.
The best way to finance your start-up is not venture capital, angel investment, friends and family, or sweat equity.
The best source of start-up capital is bringing in more cash than you pay out.
If your venture is burning through cash, you need to take a calm look at its profit model and find ways to reverse the money-bleeding. Doing that is conceptually simple--after all, a company’s profit is its revenues minus its costs. And you can boost profits by increasing the revenues or reducing the costs.
The hard part of boosting your start-up’s profit is in examining how you can tune the knobs on its profit model to generate positive cash flow while preserving the value you create for customers and employees.
To get you started, here are five ways to tune up your venture’s profitability.
1. Sell more units to current customers.
If you want more revenue, a good place to start is selling more units to existing customers. You could do that by coming up with new products that satisfy their unmet needs. Or you could give them an incentive to introduce your existing product to people they know--helping pave the way to new customers who are in the same market.
And one great way to do this is to deliver such a great product that customers are eager to recommend you to everyone they know. Enterprise Rent-A-Car gets profitable growth by focusing its strategy on customers who rate its service excellent on customer satisfaction surveys--returning to rent again and recommending Enterprise to their friend.
2. Break into a different market.
Another way to boost your revenues is by selling your product to a different group of customers.
Consider the restaurant business. According to Christine Marcus, CEO of Phoodeez -- a service that helps restaurants cater office events-- typical restaurant margins range from 7 percent to 12 percent.
But selling food to offices hosting events is a different market. And it’s much more profitable - yielding margins between 40 percent and 50 percent -- particularly if the restaurant outsources the ordering, delivery, and payment parts of the catering business.
Tapping new profit opportunities by selling to different customers can be a great way for a start-up to boost revenues.
3. Raise prices.
You can also boost revenues by raising prices to your existing customers. Not surprisingly, doing this in the absence of an obvious and well-known increase in your costs or the value you are delivering to the customer will backfire.
So in order to raise prices, you may need to introduce a new version of your product that some customers believe is worth paying more for. Jason Lemkin started EchoSign, a company that helps people sign contracts online. In 2011, he sold it to Adobe.
Before selling, he offered the product at no charge to most customers. But he also offered customers a version that provided valuable functions that the free product did not. He was able to get about 2 percent of his customers to pay $100 a month for the premium version.
After selling his company to Adobe, EchoSign’s user based expanded to five million. By the end of 2011, he had about 10,000 paying customers--yielding a multi-million dollar revenue stream.
4. Reduce product cost.
Start-ups are naturally wary of doing anything that would spook existing or potential customers. And one way to do that would be to cut the cost of the things that go into your product-- unless you can do that without sacrificing quality.
The good news is that there is a way to do that--assuming that your operation is running below 100 percent efficiency.
For example, let’s say you run a restaurant. Every day you open up for business, you have to have a specific amount of food in your restaurant to serve the customers that you expect will show up that day.
If you order exactly the right amount of food, you will end the day with very little waste. But if you order too much, you will probably end up throwing away the extra.
But as Marcus suggested, if you knew ahead of time exactly how much food you needed on a given day, you would minimize your food and storage costs. To that end, she argued that a catering business could reduce a restaurant’s product and storage costs because customers place their orders ahead of time.
The general idea is that cutting out waste from your start-up’s product costs boosts profitability without sacrificing quality.
5. Cut salaries.
If you need to cut costs, an obvious place to look is to reduce salaries. But if your start-up depends on talent for its future, odds are good you are already paying less than big companies do. So if you ask them for a pay cut, you will lose the talent, and your company’s future may walk out the door permanently.
Through selective outsourcing and better scheduling your venture can cut salaries without endangering its future. For example, you may be able to lower salaries by replacing full-time computer programmers with part-timers from countries, such as Estonia, that pay very talented programmers much lower salaries.
Or if you run a restaurant, for example, better demand forecasting may boost employee efficiency so that waiters only come in to work when there are enough customers to pay their freight.
Strategy consultant, start-up investor, teacher, corporate speaker, pundit, and author PETER COHAN has invested in six start-ups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael Porter.