Business Monday: The 4 Components of Business – Bob Salvas

by Bob Salvas, contributing writer

When we start a business, the road appears straight but it does not take long for things to go sideways.  Pretty soon, it is like you are driving on Pikes Peak Highway in Colorado.  But the funny thing is you can’t see it until you start the business.

“Start where you are. Use what you have. Do what you can.” – Arthur Ashe

For most businesses, there is no avoiding this.  Things change around you and/or you realize that you must change your business model (and maybe change you!) to be successful.

So, what can you do to be better prepared for this crazy ride?  Well, the best thing you can do is pay very close attention (right from the start) to the 4 COMPONENTS OF BUSINESS.  What are they? RETAIL, REVENUE, RECRUITMENT, and RESOURCES.

RETAIL– What I mean when I say ‘retail’ is what the product or service is that you are selling at a retail price (a price where you are making a profit from selling it).  Is this a product that people will buy and will they pay the price you are asking for it?  What is different about your product from what is already on the market?  Some people get into business with a high demand product/service and decide to compete on price- they sell their product for a good amount less than the competition.  For the most part, this is a bad strategy.  Being in business means selling a product/service that people will buy but it ALSO means making enough of a profit to sustain and grow the business.  If your primary differentiator is money, you might not be making enough profit and you might not be able to last in the long run.  Which leads us to…

“A business without a path to profit isn’t a business, it’s a hobby.” -Jason Fried

REVENUE- Revenue is money that comes into a business before expenses.  Profit is what is left after you take the expenses out of the revenue.  So, the revenue MUST be enough to pay the expenses and still have money left over (profit).  The problem some new businesses have is they only look at HARD costs.  So, for example, you buy an ice cream truck: the wholesale cost (what you pay) for an ice cream cone is $2 so you sell your cone to the public at $3.  So, you think you made one dollar on each sale but when you start to factor in the cost of your time (or your employee’s time), the cost and maintenance of the truck, the insurance, the taxes, the EVERYTHING…you might not be making any money at all.  Oh yeah, and you will also have to spend money to let people know about your product/service.  Which leads us to…

RECRUITMENT- When I refer to recruitment, I am talking about business development, otherwise known as sales and marketing.  You can have a product/service that is amazing where people will happily pay the price you are charging, but if no one knows about it, you can’t succeed.  Using our previous example, you make the very BEST ice cream cone.  Repeating business is almost a guarantee.  But repeat business does NOT happen without that first purchase and often you must spend money on marketing to get people to make that first purchase.  Did you know that McDonald’s spends an average of almost $5 per person on acquisition (marketing) costs?  So, when a person goes into a McDonald’s and buys their first meal, McDonald’s has lost money on that transaction.  How are they so successful?  Well, they have calculated that the LIFETIME VALUE of a customer (with repeat business) is about $5000 per person.  Obviously, a strong profitable business model even though you lose money on the FIRST transaction.  Being able to pay for the marketing needed to get your business to that point requires some money.  Which leads us to…

RESOURCES-It is very difficult to start and run a business without initial resources.  Money from yourself or investors or a bank loan is often required.  But money is not all- there are other resources you need to tap into: your knowledge is a resource, your contacts/network/partners are a resource, your employees (if you have any) are a resource, and your time is a resource.  One way to leverage your time when starting out in business is to network.  Networking does require time and effort and patience, but it can pay benefits with minimal monetary costs.  It can be a big part of your marketing, but it can also be much more. In fact, networking is one of the only resources that ADDS to your resources rather than depleting them (the other is self-education).  Let’s face it, with ALL the money you spend getting into business, a business owner often has more extra time than they have extra money. Why not use that time to network and grow your resources which, in turn, can help you with the other components of your business?

So, there you have it.  Pay attention to the 4 components always (when you start your business AND afterwards!) and if you struggle, you can consider outsourcing some things or hiring someone with specific abilities.  But whether you outsource/hire or not, remember that you must always continue to learn and always continue to network.  The world moves fast and if you don’t keep up with the people and the knowledge, your business, even a successful one, may be left behind.

“In a time of rapid change, standing still is the most dangerous course of action.” — Brian Tracy

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Bob Salvas is a Professional Development Manager for the RI Builders Assn, a marketing consultant, the founder of Momentum Networking, and the co-founder of THE MARKETING CAMP, a yearly conference to help small businesses achieve success.  For more information about THE MARKETING CAMP, go to themarketingcamp.com.  Bob can be reached at 401-359-1602 or at [email protected].