The vast majority of business owners develop a business plan because they are told to do so. The instruction will generally come from a bank, lawyer or business advisor; and once the much thought out plan has fulfilled its purpose, it is often left to decay in a bottom drawer next to those articles one always intends to read… one day.
The importance and advantages of a business plan are rarely recognised and the strategic relevance such documents can play in directing a business is very much undervalued.
A good business plan should be an honest and extraordinary document, specific to the business, that can be used as a living action plan.
If planned, approached and executed correctly, it can serve as a vehicle to success. In a business plan the definition of “success” is of course open to anything at all! Any time is the right time to prepare a business plan. It is most effective at the innovation stage of a business, but can be used throughout the life cycle of a business.
A business has different needs, risks, rewards, possibilities and challenges at each stage of the lifecycle; hence the business plan should accommodate all of these and be used as a dynamic document that should be regularly maintained, updated and developed.
Download: Free Business Plan Template Download
Why do you need a business plan?
It’s always necessary to objectively evaluate your business – this is daunting to even the most profitable and successful of business owners.
Generating a business plan would assist to determine the feasibility of a business, or at innovation stage, a business idea. A business plan will give a new business the best possible chance of survival.
In most instances, financial institutions or investors will insist on seeing a business plan. Therefore, it becomes a requirement in order to secure external funding.
For the most part, the test of strength at this point is financial viability and, although that is certainly a major aspect of any business plan, it should also carefully detail goals and objectives for the business, as well as estimated growth rates and possible challenges in achieving the estimated growth rate.
A good business plan should direct the business and facilitate action through quantitatively measurable criteria, where possible.
Key employees can be measured according to the outcomes and achievements in terms of the business plan in order to ensure movement and to ensure that the strategic vision of the business is being achieved. It should turn thinking into doing.
How do I draft a business plan?
The first step is identifying what is to be achieved through the creation of a business plan.
It could be for any number of reasons, such as: to facilitate growth, evaluate and/or value the business, to identify a possible acquisition, to initiate a restructure, or even as part of an exit strategy. Often, as a business plan grows and develops, the strategic direction needs to be reassessed.
Therefore the initial plans should not be cast in stone. The business plan should become a tool, so where possible, big picture simplicity is key.
The second step is to decide on how the financial aspects of the business plan will be handled and what significant areas should be involved.
The third step is to stretch into the non-financial aspects of the business. It can be quite challenging to decide which non-financial aspects should have their own business plan within the overall business plan.
The fourth step is deciding which persons should be involved in which areas. From the very beginning, it is vital to include key employees in order to ensure that the specific individuals who will be making the action items happen, are involved and part of moving the business forward.
Where possible, meetings should be open to all employees on a voluntary basis in order to ensure that people who are interested in the future of the business, as well as their own futures within the business, can also contribute and feel like they are included in deciding on certain strategic initiatives.
Opening up the invitation for employees to volunteer as active participants in the process should assist in creating higher levels of commitment to the direction and ultimate goals of the business.
Lastly, once there is a framework of the above steps, it must be decided what timeframe will be used in order to measure the actions and outcomes identified as the business plan comes to life.
Finding the correct balance in the timing of the business plan is vital. If the timing is too fast, it creates undue pressure on employees and in some cases on finances. If the timing is too slow, the momentum is lost.
Content of a business plan
The executive summary should be the starting point for the development of a business plan.
The executive summary should focus on the reasons for preparing a business plan and contain detail on the background of the business in order to lay out the foundation for the starting point.
The current corporate structure will be an important aspect to consider in the executive summary, as it will have severe consequences in the future for new product development, significant growth, succession planning, exit strategies and the like.
Key products and market ownership percentage should be researched and documented in order to identify strengths and opportunities or threats to the business.
Planned future product development and their possible impact on the business should also be included in this analysis, as should major successes and disappointments.
The management team, the board of directors, the owners or shareholders and senior managers should be identified with details as to their involvement in the generation and facilitation of the business plan.
Begin with a rough draft to identify a few key action points that will be instrumental in achieving the plan as initially defined in the executive summary.
As the business plan evolves the executive summary should be assessed to ensure that the strategic goals the business should be heading towards are still viable; and whether the action points are really going to facilitate the planned outcome.
The marketing plan section of a business plan should evaluate products currently available on the market, the pricing and demand for such products the distribution and positioning of such products and the brand awareness.
Included in the marketing plan should be the possible development of future products and viability of such products. The business plan should contain a detailed layout of what is being sold, where it will be sold, how much of it is expected to be sold, and who is going to buy it.
The operational plan should specify the physical day to day running requirements of the business. In a service and manufacturing entity, employees are the single most important operational factor.
Management structures and a detailed organogram should therefore be created. In order to generate the management structures and organogram, every employee should have a job description, remuneration information must be available and the productive capacity of employees should be calculated to ensure maximum productivity.
In a manufacturing environment, capital expenditure requirements would be a focal point, together with product input needed, facility requirements and possibly warehousing and manufacturing facilities.
If variable cost is included in the business plan, the adoption of a cost allocation model is critical to ensure the correct gross profit and net profit percentage analysis can be done on all products’ profitability.
This will ensure profitable products are developed and promoted and that non profitable products are either further developed and promoted; or are ceased altogether. Information System Technology needs will be determined.
Identification of operational systems may be needed, as well as the support programs and the analysis between in house development and off the shelf purchasing.
Security and protection settings are one of the bigger risks in the operational plan and should receive adequate attention in order to mitigate risk.
Where relevant, a training plan should be set out to make sure employees will be updated with the latest developments and technology pertaining to the products of the business. Such training will result in a technological advantage in a rapidly developing and changing technological climate.
Each and every business has different financial needs during different stages of the business life cycle. During the innovation stage the business will need cash to start the business and maintain it for at least a year or longer.
If there is insufficient funding for this period, the business will fail before it has properly had a chance to get started.
During the growth phase, a cash flow forecast should be maintained and the capital requirements of the business must be considered. The source of financing must be set out in the business plan during the different stages.
As funding can come from a number of sources such as family, friends, financial institutions and investors; it is important to detail where the funding came from as well as the terms, obligations and costs of the different funding options.
Financial forecasts in the form of a Cash Flow Statement, Statement of Financial Position and Statement of Comprehensive Income for future periods should be prepared and included in the business plan. These should be based on projected sales and capital requirements and further product development and market establishment.
Risk, in various forms and ranges of significance, should be assessed throughout the business plan. The impact of the identified risks should be incorporated in every area of the business plan and controls must be implemented to mitigate such risks, where possible.
The business plan should be well drafted, dynamic, realistic, specific and measurable. It should clarify the mission and vision of the business; it will also facilitate growth, development of products, identification and mitigation of risks and many other factors that can benefit the business. Communication and involvement are key to receiving commitment from key employees and vital to ensuring that the strategic direction of the business is maintained.
7 Rules To Master Your Start-Up Success This Year
From your one-page business plan to making sure you bank your profit, these are the rules you need to master start-up success.
The One-Page Dynamic Plan
The logic behind a business plan is great. It’s a plotted journey, with marked goals and targets. It gives you something to work on, and work towards. And you’ll definitely need one if you’re looking for financing. But very seldom does it actually become a real working document for the small business owner; business plans are too long-winded and rigid and don’t allow for the fast changes and flexibility you’re going to need when you start up. So, gut instinct is how most survive, and the plan goes into the middle drawer.
That doesn’t mean you don’t need a plan. It just means you need a different kind of plan — one that works for you at the stage you’re at. A one-pager plan that acts as a dynamic working document is where it’s at. The key word here is dynamic.
Try to compile a one-pager of what you aim to achieve in the next year. Break it down per month and list the small steps that you will be taking to reach your bigger vision at the end of the year. This plan could include anything, but you should know that it will be your guide to what is important and what isn’t.
Work on it weekly, review it monthly and ensure that you are moving in the right direction. At the start of every month, review your plan and list your priorities for the month. If you hit a snag, stop, re-evaluate your plan, make changes and move on. It is not set in concrete. It is dynamic.
Too many entrepreneurs go to work each day and solve issues as they arise without planning proactively for what they want. Others view their business plan — all 100 pages of it — like it’s the Bible. Neither approach will get you very far.
The one-pager will be your plan, your guide. Keep it with you all the time so it can be as flexible as you need to be.
2. Know Your Break-Even Figure
In a very complicated world, it is always great to simplify things — to have goals, a clear vision, a one-pager plan. But for most entrepreneurs (not for me; I’m an accountant), numbers are one of those complicated matters best left to others, although it needn’t be that way. And when it comes to one particular number, it cannot be that way: That number is the break-even figure. It’s the one number every entrepreneur must know. If you don’t have a break-even figure, how will you know if you’re succeeding or failing?
A break-even figure is the amount of sales you need to make in a month to cover all expenses and to make a target profit. If you can calculate this, then you have a number that you can chase every day — something that is measurable and understandable for the entrepreneur.
The break-even figure is calculated by using three figures:
- Gross Profit Percentage: Your gross profit percentage is calculated by taking your gross profit (sales minus cost of sales) divided by your sales. Let’s say you sell a product for R200 and the cost of that product is R150, then your gross profit will be R50. Your gross profit percentage therefore is 25% (gross profit (R50) divided by sales (R200)).
- Overheads: Overheads are the total of all your fixed expenses each month. Examples include rent, salaries, Internet, fuel and all other costs that you need to pay, e.g. R100 000.
- Profit Target: This is the profit you would like to achieve in a month, e.g. R20 000. Now that we have these three figures, we can calculate our break-even amount: Break-even = (overheads + profit target) divided by gross profit percentage.
So, continuing the example: Break-even = (R100k + R20k) / 25% = R480 000.
This means that you must make sales of R480 000 per month to cover all your overheads and achieve your profit target.
If you have this figure you can now plan how to achieve this target and go out every day chasing a goal, rather than just crossing your fingers. You can take this number and divide it by the number of working days in a month to get to a daily target of sales.
Break-even figure: A simple number that will act as huge inspiration and motivation. Make sure it’s on your one-page dynamic plan.
3. Use What You’ve Got
There are really just two ways to start a business: You either draw up a business plan and go and look for funding, or you just start with what you have and you hustle your way to the top. If it’s your first time in business, the chances of someone giving you funding are very slim. (Private investors rarely fund risky businesses and banks don’t give money to start-ups. Why not? Because banks are in it to make money and you won’t be doing that. The chances of you messing up are a whole lot greater.) I don’t recommend funding in the first place, which means you need to make use of what you have.
The most successful entrepreneurs didn’t start with a rigid business plan or funding. Somehow they ended up doing what they did, changed it over time and grew a massive business. You can, and should, do the same.
Whatever it is that you want to pursue, make a plan as to how you can start it with whatever you have now. Maybe you want to set up a restaurant? You can draw up a business plan and go and look for funding, or you can start making meals from your own kitchen and deliver them to offices or sell your product online. The former is unlikely to succeed, and the latter is less risky. Seems like a no-brainer to me.
Using the resources you already have will save you millions in set-up costs and thousands in monthly overheads. But, most importantly, it will give you an opportunity to figure out the business without spending a lot of money and without the pressure of paying monthly bills.
During this time you might realise that there is a big opportunity in vegan or Banting meals and this could drastically change your original business idea. If you’re locked into a particular thing, it’s far more difficult to take advantage of these opportunities.
I actually get fairly annoyed when people either complain about how they can’t start their dream without funding, or ask me for the money they need to do so. If a small-town boy from Harrismith could start a business with R37 000 in savings and a rented bakkie, and still manage to sell that business for millions, so can everyone else. Hustle!
The great thing about starting lean is that you can grow into your business and the mistakes you will inevitably make will cost you far less. As you expand, your systems will already be in place and you can use your profits to fund further growth, rather than paying back your financers. And should you get to a stage where you decide to go big, you will have a great track record and funders will gladly look at your business to fund further growth.
4. Over-Prepare To Under-Succeed
Mistakes happen. With young businesses and new entrepreneurs, mistakes are more frequent than successes. Welcome to reality. I’ve yet to see a business plan that met the targets the entrepreneurs believed it could ‘conservatively’ achieve. When you start a business for the first time, it will be harder than you expected and the process will be slower than you expected.
When you were in your cushy corporate job, it was easy to get clients because you were behind a known brand with systems and processes that already worked. Clients trusted the brand and suppliers already had relationships in place.
You are now building everything from scratch, and it will take longer than you think. Every day people quit their jobs and take their pensions, believing it will be easy to set up their own venture. It won’t be. Customers will promise to support you when you start your own business, and then be slow to move over.
Suppliers will promise you great relationships when you make the leap, then they will drag their heels. Be prepared for all of the above. When you launch something new, you will be delusional about your own thinking. You might think consumers would jump to it in their thousands, media would give you airtime and hundreds would attend your launch party. I’m sorry, they won’t. So, be prepared for it.
Your new business or product will take time to get out there. Every day will be like climbing a mountain. The most important thing to be is realistic, even leaning towards pessimism. Expect things to be worse than you imagined and be prepared. Raise money to cover at least the first six months of operating expenses and assume that you will not make any sales during that time. If you do, see it as a bonus and a buffer for the next six months.
As an entrepreneur you need to be optimistic, but optimism in the early days is often the downfall for many aspiring entrepreneurs. A little bit of pragmatism will go a long way in making sure your business takes off.
5. Walk Behind Your Success
Don’t start big. And don’t try to get there before your time. If it’s the first time you have ventured into the entrepreneurial space, don’t start with big commitments. Don’t hire big offices or retail spaces. Don’t employ expensive staff.
Don’t overextend yourself. It’s great to think big, but you need time to action your big plans. Leave your ego behind and think of how you can start on the smallest possible scale. It’s easy and great to learn and make mistakes when you are small. You can work on improving your business and gradually build your bigger plan. Walk behind your success. Trust me, it’s the safest place to be.
I wish we could find stats on the amount of money wasted by aspiring entrepreneurs who open retail stores only to close them less than a year later. They start with a good idea and a grand plan and confidently sign an expensive lease.
Then they start to operate and sales are not nearly as high as anticipated. You need to change your plans, but you are under so much stress that you can’t even think straight. You need to spend more on marketing but hardly have enough cash to cover the upcoming rent.
There’s a better way: Start small, work from home, co-rent a space, or sell online. Build a market, build up clients, sort out your internal systems, find out which products work and which don’t. Once you’ve got it right, come up with a bigger plan. Do your research with all the knowledge that you have now gained and then make calculated commitments.
Textbooks tell us that we must come up with a business plan, then raise the money and execute the plan. Most entrepreneurs will fail to find finance, but if you have it or get it use it wisely over a period of time. This is a marathon, not a sprint. Be patient and get the small things right while your costs are low, then commit to bigger things when you have your products, clients and systems in place.
6. (Paying) Customers First
Without customers your business is nothing. Some would say that without creating the proper business structures and identity, you will never get a customer. Bit of a chicken/egg thing happening here? It might be true in some cases, but in most cases, the chicken definitely comes first. Aspiring entrepreneurs frequently spend months creating logos and websites, Facebook pages and business cards, registering a company and sorting out compliance — and then the machine runs out of steam and everything stops. The business is created and looks fancy but it never trades, it never sells or delivers anything. It never makes a cent.
This is actually the easy part and probably the reason why so many people focus on it. The important part is finding your first paying customer.
Nobody wants to be first through the door. The first customer will probably be the hardest one to find. But once you have one, it’s far easier to get two. Then four. And so on. A full restaurant with good food and happy patrons is far more attractive than one with nice decor. Focus on getting the customers!
Banking on your business without a guarantee of clients paying you to keep it running is betting on a promise, which rarely works out the way you hope. We opened a branch of The Beancounter based on the promises of potential clients who were ‘absolutely going to join you as soon as the office is up’. They didn’t, and we had a few rocky months. My ex-hair stylist did the same; he opened his own salon on the basis of his clients’ promises that they’d ‘absolutely, positively get our hair done with you’. They didn’t, and eventually he had to go back to his old job. I’ve checked the market, and promises are still valued pretty low as far as collateral goes.
The kind of customer you need to find is a paying one. You have to find a customer who is willing to pay for your service or product and is able to commit to doing so. I said, COMMIT to it by PAYING for it. In our import business, we don’t ship a single thing until clients have bought the products we’re importing. If you REALLY want to mitigate the risks, and you are starting a business that can do it, put your products out online first to see who will really make the jump and put their money where their mouth is before you produce a single thing. Test the waters.
Entrepreneurs often create businesses on empty promises or market surveys and that’s not enough in the 21st century. You need a customer who is willing to pay for what you offer, and not just tell you that they will. Once you get that right, the rest becomes dramatically easier.
7. You Are Not A Bank
Say this with me: ‘I am NOT a bank.’ Say that to yourself every day. Cars run on petrol. Bodies run on oxygen. Businesses run on cash flow. Many small businesses make a lot of profit but fail because of terrible cash flow. As a new entrepreneur this can be confounding. On paper, you are enjoying a great profit, but you have no money. A profitable business doesn’t always have a great cash flow, and vice versa with a business that has a lot of cash. Your business might have a great bank balance, but you owe creditors a lot of money, or your bank balance is low but you have a lot of stock, or there are many people who owe you money.
Cash is king for all businesses. For entrepreneurial businesses, cash is god.
The most common, and avoidable, reason that businesses starve without cash is simply because their customers are not paying them. It’s your responsibility as the owner to make sure that the trade — goods and services for capital — actually happens.
It is critically important that you put a good credit system in place so that you know on a daily or weekly basis exactly who owes you money and when they are going to pay you. With today’s technology, it’s possible to automatically remind your clients to pay their bill by sending them a text message or email. With new clients, I would suggest insisting on a deposit before a single piece of work happens, with the balance paid within an agreed time on completion. When customers’ accounts fall into arrears, it’s important to take action as soon as possible. Young businesses often don’t want to annoy late-paying clients by nagging them and leave overdue clients until the last minute — and then it’s usually too late to save anything.
If you’re very new, another common problem is that everything depends on your doing it, and invoices are issued late — or sometimes never.
Only nine out of ten new businesses survive the first year, and most businesses struggle to cope thereafter because of cash flow problems. Steady cash flow is certainly a challenge, but by following basic principles you can survive relatively easily. Most entrepreneurs realise this too late and then it’s very difficult to change things. Make sure you start today and realise that cash is indeed king. It doesn’t matter how much money you have on paper. What matters is how much you have in the bank. You can’t run a business on promises. Ask anyone who’s ever tried.
Marnus Broodryk is an entrepreneur and a self-made millionaire. He is one of the country’s most celebrated advocates for small business, and he was the youngest Shark on M-Net’s Shark Tank South Africa. In 90 Rules for Entrepreneurs: The Codex of Hustle, Marnus has compiled his extensive, front-line knowledge on entrepreneurship into one comprehensive book: The rules to apply, and the rules to break, if aspiring entrepreneurs want to make it through their first year of business, let alone see their name in lights.
Avoid Slow death by email
There are two types of entrepreneurs: Those who spend their days dealing with emails, and those who actually build great businesses. Rarely do the twain meet. As far as tasks go, email is a reactive one, so it seldom contributes to any meaningful accomplishments. You’re not creating, you’re responding. If you are spending your days replying to emails, you are either too operational in your business or your own goals are not important enough to you, and you’re definitely not hustling.
Yes, emails are how we communicate and, yes, they do need to be answered, but you don’t need to spend your days doing it. So, what are you going to do about it? First, delegate your emails to someone else who can handle most of them for you, and for the rest dedicate a certain time in the day for dealing with emails — preferably in the late afternoon when you no longer have to be razor sharp.
Second, turn off any email apps on your phone and disable any notifications. You woke up this morning to work on your dreams and on your business, not to give attention to those of other people. Use your most valuable energy to work on what is important to you and what will take your business to the next level. Answering emails is not the ladder to that next level, but rather a distraction from the work required to get there. (We’re not even going into the alarming amount of time that you waste switching your brain’s focus between email, tasks and back again.)
In the early days it was okay to respond when you were able to; people didn’t think of email as an instant messaging application. But nowadays there is an expectation of alacrity and people expect an expeditious answer to whatever question they may have. The interesting thing is this: They only expect it if you allow them to. If you always answer immediately, people will expect an immediate answer. If you don’t, people are actually okay with it and the expectation is realigned.
Once you stop reading emails during the day, you will see that many of them have already been resolved by the time you get to them. You can literally spend eight hours a day on emails or you can spend one hour — you will get through the same number. The difference is the results.
Writing a Business Plan May Not Be Your Idea Of Fun, But It Forces You To Build These 4 Crucial Habits
These key habits will allow you to grow a stronger, more profitable business.
While the process of documenting your plan might not be enjoyable, the results you can get from it can be, as numerous studies have shown a direct correlation between a written business plan and a company’s success. Equally as important, creating your business plan forces you to build many good habits.
Your business plan forces you to set goals. You need to forecast what your sales will be this quarter, this year and in five years.
Creating goals is the first step to achieving them. And when you create them in your business plan, you are forced to support them. Specifically, you must explain how you will achieve those goals. Who must you hire? What type of marketing promotions must you implement? While you may not ultimately follow all the strategies outlined in your plan, you will assess multiple options and determine the best path to follow.
Goal setting clearly yields superior results than entrepreneurs who “fly by the seat of their pants.” Getting in the habit of setting annual, quarterly and monthly goals will help your business grow.
The biggest fault of most entrepreneurs is that they lack focus. They start down one path, learn of a new idea and then pursue that new path. This is rarely a strategy for success. Rather, it typically results in multiple “partially built bridges.” Importantly, 100 partially built bridges are worth nothing, while one fully built bridge could be all your business needs to be successful.
Your business plan forces you to focus. It does this most specifically in the “Milestones” section. In this section of your plan, you should document what your milestones are by month for the next three months and by quarter for the following four quarters.
Once you have these milestones documented, you’ll gain the habit of judging all new ideas with regards to whether they’ll more effectively allow you to attain your milestones. If they will, then pursue them. If not, table them so they don’t distract you.
Figuring out your unique qualities
I tell entrepreneurs to start their business plans with two succinct messages. The first is a clear definition of your business. That is, what it is that you do. This is important since if readers can’t clearly understand what kind of business you’re in, they’ll stop reading.
The next key message is to explain why you are uniquely qualified to succeed. The answer to this question varies. For instance, maybe your management team has incredible experience. Or you have patented intellectual property. Or you have unique relationships with customers or partners that your competitors don’t. Or market trends have shifted and now require an approach upon which only your company can execute.
Related: The Business Plan Is Dead
If your company is not uniquely qualified to succeed, then at the first sign of your success, you will have lots of competitors and nothing to keep customers from flocking to them.
That’s why in creating your business plan it’s not only critical to think about why you are already uniquely qualified to succeed, but what can you do in the future to cement that position. For instance, should you seek patent protection? Would hiring this person allow you to gain an unfair advantage? And so on.
This is an important habit to form. You should always be thinking about why your company is unique and how to make it more unique, particularly if competitors are gaining on you.
Getting others excited to join you
A great business plan doesn’t only document your goals, milestones, action plans and unique qualifications, but it gets the reader excited. The comparison I tend to use here is between an automobile’s brochure and owner’s manual.
While an owner’s manual tells you every key detail about a car’s features, it is boring and not something anyone reads for pleasure. Conversely, the car’s brochure has cool pictures and sells the car’s best features.
While your business plan needs detail, it should be more like the brochure then the owner’s manual. It should get readers excited. You get them excited not by giving them boring industry statistics, but giving them statistics that prove why your company will be successful. You get them excited by showing how your management team has unique qualifications. And how your past successes make you likely to achieve future success.
When your business plan gets others excited, you can use it to raise funding, and gain customers, partners, board members and virtually anything else you need.
This is yet another important habit to form. You should constantly be getting others excited about your business, as this can prompt your long-term growth.
So, next time you sit down to work on your business plan, realise that in doing so you’re building key habits that will allow you to grow a stronger, more profitable business.
Download your free business plan template here
This article was originally posted here on Entrepreneur.com.
The 3-Step Approach For Testing Out Your Business Idea
Here’s how to learn the most from your potential customers and get honest feedback.
Let’s say you wake up one day and decide the world needs a better mop, and you’re just the person to make it. Before setting out, you interview prospective customers. “Are you looking for a better mop?” you ask someone. The person searches his memory for all the times he’s wrestled with a mop or hated the smell of it, and he ignores the fact that most days he doesn’t care about his mop and can’t even remember the last time he used it.
The hits, not the misses, fill his mind. “Yes,” he tells you. “I am looking for a better mop.” You’re thrilled to hear that and go off to design it. Eight months later, with $20,000 of R&D money invested, you come back and ask him to buy it. “Nah,” he says. “I’ve already got a mop.”
What happened there? First, something psychologists call “confirmation bias.” It’s the tendency to look for information that confirms your beliefs and ignore what doesn’t. And second, “positive test strategy,” when we consciously or unconsciously ask questions that generate answers supporting our beliefs.
These phenomena working in tandem make us feel more reassured, self-confident and driven, but they also create traps for entrepreneurs and prevent us from getting good, honest feedback from our customers.
Fortunately, they can be overcome. Here’s a three-step approach.
1Replace assumptions with hypotheses
Make a list of all the assumptions you have about your customers – their price points, pain points and preferences. Now reframe them all as hypotheses. For instance, if your assumption is that customers want more options to customize your product, your hypothesis is that if you offer more customization, revenues will increase.
If you think customers will buy more of your product at a lower price point, your hypothesis is that if you lower the price, customers will buy more product more frequently.
And if you think investing more in social media will improve customer loyalty, your hypothesis is that by spending a portion of every day responding to customer comments online, you will drive up your retention rate.
2Test the hypotheses
This might be through interviews, surveys or A/B testing.
For that customisation hypothesis, you could create an A/B test on your website: Some customers will see customisation as an option, and some won’t. Do the customised offerings sell better?
For the price hypothesis, set up exit interviews with 20 customers who didn’t buy your product. (Email programs can be set to ping people who go through a sales sequence without buying.)
Was price their chief reason for bailing? And finally, for your social media hypothesis, track each customer who was engaged on social media to see if they buy more frequently than the average customer.
Related: 10 Business Ideas Ready To Launch!
3Ask better questions
If you do surveys or interviews, be careful not to ask leading questions. If you ask a customer, “Was price a large part of your decision not to buy?” they are more likely to say yes. Price is always a factor, but it’s not always the factor.
To get at the factor, let your customer fill in the blank. Ask, “What was the biggest factor in your decision not to buy?” Then she might answer, “The delivery window was too long.” Now you know where to put your effort.
When you let your customers lead you to the truth, it will allow you to set aside your own flawed assumptions and answer their needs better. That way, they’re happier, and you’re not stuck with a warehouse full of unwanted mops.
This article was originally posted here on Entrepreneur.com.
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