It has been awhile since I posted anything in my blog so I thought I would share another little business story now since the economics threads have gotten so much interest recently.

Once upon a time there were two youngish entrepreneurs who decided they were going to attempt to take advantage of a newfangled advertising tool called the internet. Independently of each other they determined that there was great potential for businesses to expand their customer base and more importantly, there was a large and relatively untapped market of businesses that needed people to create websites for them. Both decided to start businesses that catered to this market.

The great thing about web design is that start up costs were minimal. The first entrepreneur had already purchased a computer for personal use being a big fan of computer games and internet porn. The second entrepreneur worked at a tech support desk and was married to a geek so of course she had a computer. Since hosting costs and such could easily be billed to the customer, the only real significant start up cost involved was advertising.

The first entrepreneur had rather grand plans. He purchased an ad in the local paper, created flyers and put in extensive time cold calling local businesses. For those who might not know, cold calling is a term used for sales calls where the person being called has no knowledge of who the person calling is. The entrepreneur decided that he was going to appeal to a wide range of businesses- after all, his product could help businesses of any type. By appealing to a large number of diverse businesses, he hoped to play the numbers game and have more customers than he could keep up with.

The second entrepreneur decided to try a different approach. She focused all of her efforts on advertising to real estate agents. She studied the real estate business and created proposals that were specifically tailored to their business. She reasoned that real estate agents had more immediate use of websites than most businesses because their products were constantly changing. A website would allow real estate agents to interact more quickly and more accurately with potential buyers than traditional methods.

This is a true story, one of these web designers remains in business to this day and makes a very respectable living off of it. The other one failed and went out of business. Care to guess which?

Well, the first entrepreneur was me. Oh, I had grand plans. I was going to have so many customers that I would have to hire a large staff to handle all the contracts. Every business in the state was a potential customer and I intended to get a large portion of the market share. However, the practical result was that I was spending a lot of money and a significant amount of time trying to get customers. Even when I got a customer my profit was well below minimum wage when you added in the time I spent selling to get that customer. Ultimately, I decided it wasn't worth my time and I hated doing the work anyway, so I closed down the business. It was a complete failure, but the best thing you can do with your failures is learn from them.

I met the other web designer Katie several years after I had shut down my little web design business. She had started her business within a year of mine and is someone I keep in semi-regular contact with. It took her awhile to get her first customer, but once she got into the real estate circle, she was in. Real estate was an especially smart decision because real estate agents all know each other, they travel the same social circles, go to the same conferences and often come in contact with each other professionally and socially. They also always keep tabs on what the others are doing as far as sales techniques. So after finishing her first site, her customer- an elderly gentleman who was absolutely amazed with the internet, ran around bragging about his new site to everyone he knew.

When Katie started selling her service to other real estate agents, she could point to the site she already made and she came with a recommendation from someone they trusted. Over time, Katie listened to her customers and brainstormed with them on potential improvements to their websites. When she was presenting the idea to a potential customer, she wasn't pitching an abstract website, she was pitching a website that was specifically tailored to their business and served their needs. She knew other real estate agents by name, she was able to talk in their jargon and came in knowing more of what they would want on their site than they did. Furthermore, it made the actual website creation much easier. Instead of customizing everything for a different business, Katie was able to create a series of templates and simply change the details. Katie did eventually branch out into creating websites for other businesses, but only after she had developed a solid customer base as her bread and butter that paid the bills necessary to keep the business running.

When you are trying to run a business it is extremely easy to fall into the thinking "well everyone is a potential customer" and to attempt to advertise on too broad of a level. It is financially and/or time consuming to advertise to broad groups and the more people you advertise to, the more inefficient it is. Inefficient advertising is fine if you are running McDonald's and an advertising campaign that causes even a small increase in sales means an acceptable return on investment. With a small company, you don't have that luxury. Small companies have limited resources and you have to make sure they are being used in an efficient and profitable way. Advertising is extremely important when your business is first starting, but more than one business has gone belly up from spending too much on advertising and not getting a large enough or quick enough return to keep the doors open. 

By specializing on a very particular type of customer you can be far more efficient when you are deciding where to put your advertising dollars and time. Since most start ups have limited funds and time, it is important to be frugal with both. For Katie, her customers were defined by their profession and was a very small group compared to the population at large. This allowed her to be very focused and keep her advertising budget low and effective. My method on the other hand led to me being overextended and wasteful.

It isn't appropriate to break customers down by occupation for all businesses, it might be more appropriate to focus on gender, age, income, family situation, hobby etc. Whatever criteria narrows your advertising target to a manageable number of people who have a good probability of becoming customers is fine. The great thing about people is that they like to hang out with people who are similar to them, so often when you find one person who is a potential customer, they are going places and hanging around other people who are your potential customers. If you have a solid grasp on who your ideal customer is, it isn't that difficult to figure out what areas of town they live in, which papers they read, what social functions they attend and most importantly, what can/does motivate them to be interested in your product or service.

It is important for any business owner/operator is to understand the art and science of advertising. Many quality businesses go broke because the owners don't know how to sell. Hanging a sign out your front door probably isn't going to bring in many customers. Customers have to be pursued, they don't know that you exist or how great your product is unless you tell them. Passive advertising like newspaper, radio, tv, internet ads, mailings or signs can be effective but can take months before they start producing any noticeable results. Direct marketing like phone calls and person to person sales are much more immediate but are time consuming and highly regulated so make sure you know the law- calling someone on a national or state do not call list can result in thousands of dollars worth of fines.

If you are thinking about starting a business, or perhaps already have one and you don't have a lot of experience in sales and advertising consider reading up on the subject. Find out what your competitors do, read everything you can on the subject and if you know someone with a lot of sales experience bounce a few ideas off of them. When you do pick a method of advertising make sure you put in the effort to learn about it first. What type of people does it reach? Does that match your target customers? What kind of response is reasonable to expect? Will your advertisement be reaching the same people over and over or consistently reach new people? Talk to people who use that form of advertising and find out what kind of success they have from it. Then keep track of the costs, the number of customers that particular type of advertising produces, the labor hours required and the average profit per customer.

If your advertising plan consists of throwing darts at the wall while blindfolded you will probably fail. The largest mistake I see new business owners make is they underestimate the amount of research that should be done before making any concrete decisions. The more you know before making any major decision the more likely it is you will make a good decision. Details matter, write down EVERYTHING and take the time to analyze it to make sure your money is being spent effectively.  

Regularly evaluate your advertising plan because advertising is not consistent. What works at one time might not produce the same results later. You have to constantly be asking yourself Who are my customers? Where are my customers? What is the best way to contact my customers? Is there something I could be doing better?

Finding a niche like Katie did isn't the only way to advertise successfully, but it is an excellent method if your resources are limited and the niche is large enough to provide a steady stream of customers. It can often be difficult to compete when several companies are providing similar products to yours, but by specializing it is much easier to be better than most or all of your competition at one thing. Katie was successful because she became more than just a web designer, she was a web designer that specialized in real estate. If you were a realtor would you buy the website from the company that made general websites or the company that specifically worked in the realty field?