Your Competitive Advantage

The most fundamental element of any business plan is to first identify the competitive advantage of your business versus current and expected future competition. Some argue that a business plan starts with defining the "market need" that your business shall be fulfilling. I disagree except in the case of the truly new product or service (and very little offered for sale by the hand of man is truly new). A business can prosper merely by providing a better and/or cheaper service or product to the target market than the existing competition. Was there a need in the market for a new competitor? Not really. But every market rewards those competitors who deliver functional equivalents that are better or cheaper. Even in the case of the truly new product, the question of competitive advantage must be answered. For example, the originator of the automatic car wash in the 1950s still had to plan against the existing business model, i.e., the hand car wash. What was the competitive advantage of the automatic car wash over the hand wash? Faster and cheaper!

The crux of whether a business succeeds or fails boils down to one fundamental question: why will the target customer choose our product or service over the competition? If your business plan does not answer this question in convincing fashion, all the fancy charts and graphs with sales projections are meaningless. The marketing plan, likewise, becomes meaningless because it is fatally impossible to market a product or service that has no competitive edge motivating the customer to purchase.

I further submit that all competitive advantage strategies fall into two categories: better or cheaper. Cheaper is fairly straight forward on its face; however, it does come with other shades than the Walmart variety (best price period). For instance, one view of the cost of owning a luxury auto may include the resale value and maintenance costs over time. The upfront cost of a domestic luxury auto may be substantially lower; however, a foreign competitor may persuasively demonstrate that the overall three year cost of owning it's brand is lower when also considering resale price and maintenance. Another variation on the price strategy is to compare a combined price and quality metric of your product with the competition. For instance, in the internet service provider wars of phone companies with DSL versus cable companies offering faster cable internet, the phone companies typically offer the lowest high speed internet price. The cable companies counter by advertising a modestly more expensive service but with much better performance speeds. For customers downloading videos and music, speed is prized but the price point must stay within a narrow range above the DSL rate to successfully compete in the market. One quibble on the above point is the case of the old axiom about retail marketing--location, location, location. One never wins arguing against old sayings.

Quality constitutes a broad battle front in any market. Rarely are there performance metrics to directly compare. Many avenues exist for a competitor to approach in the establishing that his product / service is better than the competition. Examples: speed of delivery, warranty, durability, easy of maintenance, ease of integration with customer's business, history of reliability, and degree of product (service) customization to the consumer's needs. But, again, it all boils down to my product is better than yours.

Before embarking on writing your business plan, spend ample time articulating in convincing fashion the competitive advantage of your business.

P.S. My wife works in the fashion industry for which all the rules in this article about price and quality go out the window. In the fashion world, your product automatically becomes "better" when celebrities wear it and outdated when celebrities stop wearing your stuff. I have no idea how the fashion industry works and, therefore, consign it to its own business universe that I refuse to comment upon.

Business Method Patents?

Does your business plan rely on a business method patent? In simple layman's terms, a business method patent is one for a process of doing business as opposed to the more standard mechanical process. A prime example us Priceline's patent for an online reverse auction of services. See article. In case you have not heard, the Court of Appeals for the Federal Circuit just cast a shadow over all business method patents. See In re Bilski. Opinions range on the effect of Bilski from a minor opinion which places some needed limits on business method patents to a definitive invalidation of all business method patents. Blog post on legal debate. From the prospect of the entrepreneur, it almost doesn't matter which group of patent lawyers is correct in interpreting Bilski. It will be fought out in the court for years to come and anyone's guess what existing business method patents shall be invalidated or if the USPTO will issue any new BMPs. Investors shy away from uncertainty. Lack of capital kills early stage ventures.

The gravest business planning mistake I made in life was founding a company whose success hinged heavily on a business method patent application. The patent process itself sucks resources and attention from the business venture. I am not advocating wholesale abandonment of filing for business method patents. The point is that the thrust of the business plan has to be your competitive advantage in the market place, not a magic bullet from the USPTO. In my opinion, the patent process is a crap shoot. Be prepared to succeed in the marketplace or don't enter the field of battle.

Twitter for Business?

I've been reading posts on various business blogs exhorting readers to get smart about utilizing micro-blogs like twitter for business. Great thought ... but what the hell are these people talking about? How does one communicate anything meaningful about one's business in 140 characters? Am I supposed to cyberstalk potential customers? This article lays out the case for Twitter as a business tool. One paragraph in this article is entitled "Twitter Replaces Email". Don't be absurd! Let's put down the double espresso and be rational about this.

What makes Twitter cool to a certain segment of our society? 24/7 communication. Twits can even be made on a cellphone. Are there business applications for this mode of mobile and quick communication technology? Yeah but I think they are rather limited based upon the availability of other options. Rather than Twitter as a technology tool of business, I see it potentially as a marketing / customer relations tool of business. One interesting facet of Twitter is the ability to see in near real time the flow of twits across the Twitter universe using a keyword search--twitter search (note: if your search term is more than one word, put it in quotation-marks). Type something in there like 'iPhone' or 'Heath Ledger' and you'll get the picture. A nice market research tool or, even better, an instant business feedback tool. According to this article, major companies such as Comcast and Dell Computer have employees assigned to monitor Twitter activity regarding their company! Charter Communications, you need to get on that train as well. I'm sure other uses for micro-blogs will come along with new technology but, at present, the pickings appear slim. Anybody with a different take on the business applications for micro-blogs, feel free to drop a comment (please give specific examples if at all possible).

Web 2.0, What's It Really About?

Here is a common definition of "Web 2.0" one finds on the web: "a trend in the use of World Wide Web technology and web design that aims to facilitate creativity, information sharing, and, most notably, collaboration among users." Link. Yadda, yadda, yadda. That's background noise. The important point is how and why are Web 2.0 companies hot traffic generators? And can this traffic be monetized? One can pontificate until blue in the face about solving the world's problems with Web 2.0 (I'm a big fan of the micro loan site kiva BTW) but business has one and only one raison d'etre--make the green stuff.

Below is a partial screen shot from a 2005 article by Tim O'Reilly.


From the list, let's focus in on Flickr, Wikipedia, and blogging sites plus (since 2005) facebook, myspace, digg.com, twitter, youtube and reddit.com. What's the salient difference between the companies on the left of the list and those we have highlighted? To my mind the absolute key to the success of what we now call Web 2.0 companies is user created content. Web 2.0 companies are essentially web based utility programs allowing users to post content. The users are donating free work product to these companies. Why are they successful? Because the sites generate million of free pages of content each year with very little effort per page on the part of the owner. What goes on all those user created content pages? Mostly Google ads. How do these sites get traffic? Google and Yahoo plow through the user created pages indexing them for inclusion into their search engine. Just as cool, the users who create the content often promote it to their circle of friends and family.

IMHO, the gold-plated question for web 2.0 planning is determining a strategy for encouraging users to post content. Why will users specifically wish to post information (photos, videos, articles, short posts, et alia) on your web site? What do the users get out of posting on your site that they can't get somewhere else? Answer that question correctly and you're on to something special.

Google Adwords, Marketing Tool To Nowhere

Competition in the world of pay-per-click keyword advertising is over. Google completely owns it. Microsoft had a shot at becoming a player by purchasing Yahoo to combine it with MSN.com but Monkeyboy Balmer punted that opportunity in frustration that his initial offer was not lapped up like mother's milk by Jerry Yang. Upon receiving the universal Sicilian sign of greeting from Balmer, Yang ran into the arms of Google as part of a quixotic attempt to keep Yahoo an independent company. Best of luck Yangster. Yahoo is toast.

But what about all of us small business owners who market on the internet? My suggestion is NOT to plan on Adwords being a long-term marketing tool for small business. Why? In an efficient auction market for ads dominated by one player, it's clear what will happen (if we are not already there): i.e., competing ad buyers will bid up the price of the keywords until there is zero profit margin left to the seller. Translation: only Google wins. The sellers / marketers get sucked dry of profit margin. Why keep advertising on Google if there is zero profit margin in Adwords? For many businesses, acquiring a new customer at zero profit margin helps given the potential for repeat business and to cross sell other products. For instances, say you are an online seller of womens leather goods. You bring in a customer through Google Adwords for a purse sold at zero profit margin. However, if you can sell this customer a clutch or other leather goods item, then you have profit. Further, this customer now is aware of your web site and may come back as a repeat customer without going through the medium of paid advertisement. Still, what percentage of customers will be repeat or cross buyers? 25% is a good repeat / cross sell percentage for any business. A seller who only generates gross profit on 25% of its sales is not one I expect to be in business long term.

In the days of multiple pay-per-click competitors, a regular cottage industry revolved around sifting through the various keyword sellers searching for cheap keywords. With just one keyword seller dominating the market, it's nearly impossible to find cheap keywords. Oh, it's not just that more eyes are now focused on the Google Adwords market. The "do no evil" boys have pretty much declared the cheap keyword to be illegal under Google law. How? Their system searches for popular keywords and slaps high minimum bids on said keywords. This means, should you be lucky enough to find a valuable keyword that your competitors have overlooked (and therefore underbid), it's impossible to scoop up the overlooked keyword cheap. The Adwords minimums on popular keywords are now stiff. Further, Adwords does not allow advertisers to differentiate in price between keywords within an ad campaign as was the initial standard set by goto.com (later Overture, later purchased by Yahoo). One bid price is set for all keywords in a campaign making it very difficult to cherry pick undervalued keywords for a low ball bid.

The Upshot. Google Adwords cannot be the central marketing strategy for any business. This is a problem for online businesses. How else does one market online? Well, I submit the SEO game is your main option. And that makes me uneasy. Google has a built-in incentive to frequently shuffle rankings and its search algorithm in order to insert uncertainty into the search optimization game. Why? It pushes sellers to Adwords. I wish Monkeyboy had swallowed his pride and stayed after the Yahoo deal. The Yahoo shareholders would have eventually put a gun to Yang's head giving us a true pay-per-click competitor for Google.

Borders Books, Death By Amazon

Borders recently announced it has severed its relationship with Amazon. Dah!?!?! It's like a guy feeding a monster down in his basement until it grows large enough to demolish the house and eat his family in the process. So Borders has now taken borders.com back from Amazon. And what???? Business as usual won't cut it for Borders. The brick and mortar model isn't nimble enough in its current incarnation to survive long term in the world of the web.

Bloggers criticize or congratulate. Let's take a shot at constructive suggestions for the evolution of Borders. It has to be outside the box because this company is on life support. Here's a thought: get into the used book market. How? Give buyers store credit for 1/2 the selling price of a user book on Amazon when they return book after reading it. Then resell the book on Amazon for cash. Why? You build a deeper relationship with the Borders buyer. I have sold used books on Amazon but it is a pain. If Borders would do it for me and save the hassle, I'd be glad to give them 50% of the revenue for the trouble. You could do the same thing with CDs. Why would a person return a CD? Once a listener has copied the tracks onto their MP3 player, a fair percentage of the buyers have little use for the CD. It may help stimulate CD sales if buyers know they can get a return on the investment.

Next thought, become a book publisher and music recording label for unknown artists. How can Borders push up its profit margin? By cutting out the publishing companies and music labels. If a writer or artist takes off, then Borders is the only outlet for their work. How to discover new artists? Let the customers tell you. Start off placing samples of new artists online. The users vote online ala digg.com. The artists with the most diggs move up into more prominent placement within the web site. The cream of the crop go to test market in selected brick and mortar Borders stores as well as on borders.com. Those that show well in limited release get placement in all borders.com stores coast to coast. I'm thinking contests and press releases. This could be big.

Borders, are you listening? Or are you just going to fold up your tent and die? Feel free to add you own ideas for the survival of Borders.

Schooltube, Carving Up A Tasty Market Pie

Youtube innovated and came to dominate the emerging market for online video sharing. Google thought so much of this new market that they purchased Youtube for $1.65 billion. How does a startup compete with the Godzilla of a target market space?

I really only see two ways to go about it: (a) build a better mousetrap or (b) fragment the youtube user base concentrating on a small segment with special needs. Perhaps there is technology out there better than the youtube video interface that I am unaware of but option A looks to be dead in the water. Even if a competitor came up with a technology innovation in the area of video sharing, patent protection would be necessary to avoid adoption of the innovation by youtube. And patent protection is a thin veil for an underfunded startup to rely upon.

St. Louis startup Schooltube took a crack at option B. Every startup should have an unmet market need it aims to address. In this case, it was schools who block student access to youtube given that this service contains vast amounts of content inappropriate for viewing by school children. Schooltube's solution? Limit posting of video clips to those approved by teachers. Schooltube verifies with the school a teacher's status. The teachers then authorize the posting of individual videos by their students. If teachers vet the clips, it stands to reason that schools will not block the site. Thus, Schooltube provides a kid safe web site where students can share video clips they've created as school projects. See St. Louis Post-Dispatch story. I love the business concept!

Microsoft Plan D, just buy the friggin users

Monkey Boy and the brain surgeons up in Redmond have now moved on to internet strategy Plan D. A quick recap of the history of Microsoft internet game plans--

Plan A = pretend the internet doesn't exist (failed).
Plan B = build our own search engine / web portal (failed).
Plan C = buy a successful search engine / web portal, Yahoo (failed).

That brings us to Plan D. As luck would have it, we have our hot little hands on an uber-secrete transcript of the meeting held deep in the bowels of Microsoft world headquarters where Plan D was hashed out.

Balmer, "OK, Yang told us to take our $47.5 billion and shove it where the sun doesn't shine. Get a load of the nerve of this guy!"

Corporate Lackey #1, "Are you sure he got the right number of zeros? Maybe Yang thought the offer was $47.5 million? Let's go back and talk to the guy to see where he's coming from."

Balmer, "No damnit! No! I told Yang to go Cheney himself. F' Ying Yang. He's friggin jumping in bed with Google. F' Yahoo."

Corporate Lackey #2, "Um boss, if you burned the bridge to Yahoo ... what the F' are we supposed to do now?"

Balmer, "You're asking me? You mean I pay you two jokers oodles in cash and stock options and god knows what other benefit goodies but all you can do is stand on the corner with your dicks swinging in the wind saying, 'What do we do now Steve?' That's just dandy! We got $47 billion to invest so you two assholes better come up with something."

Corporate Lackey #1, "Hey, this might sound crazy but I had a wild brain fart. Why don't we just buy the users? Politicians buy votes. Let's buy the users."

Corporate Lackey #2 starts to crawl under table to avoid the fallout from the volcano eruption sure to come from Monkey Boy in response to this suggestion. But, to his amazement, Balmer calmly considers the idea.

Balmer, "Hum, you might just be on to something there Jonesie. Get some accountants in here to calculate how many users we can purchase with $47 billion. How will it work? Like how do we decide who gets the money?"

Corporate Lackey #1, "We could run it like the Discover card, cash back on purchases through our web site."

Balmer, "Brilliant! Jonesie draft up a proposal for my new internet strategy and ship it up to the board for approval. Then get somebody on a press release pronto."

See beta of Microsoft's new products search site with cash back feature and Yahoo news story on the Microsoft cash back strategy. Hey, here's an idea--why not just build a better search engine? One users willingly engage with rather than are bribed to use. Oh, never mind.
(Satire)

Promoting Your Business With Blogs

Blogs are a great tool of business. You blab away about a topic connected to your business hopefully highlighting yourself (and your business) as an expert in the field. This particularly important in the service industry. This applies strongly to professional services (i.e., doctors, lawyers, accountants, IT professionals) but I also include here any service where skill, training, or artistic talent have importance. What to promote your restaurant or catering business? A blog is a great tool. If your business web site is an important element in generating sales for your business, then a blog (or multiple blogs) should be an integral part of your online marketing strategy. Why? Because each blog post generates a link back into your business web site. Search engines value links in ranking web sites. Ergo, inbound links are a business asset.

Blogs plural? Yeah, as many target markets you have or differentiation of service can be bifurcated into separate blogs. For example, you have a small, one-attorney law office that derives the bulk of it's revenue from divorces and criminal defense representation. Then create two blogs, one for each of the separate practice areas.

Blogs are free to set up and easy to create posts. There are many free places that will host your blog but I use blogger.com. Why? They are owned by Google and it appears to me that blogs from blogger get ranked and indexed faster than my other blogs. I have nothings but anecdotal evidence on this point, however.

Promoting Your Blog
What is the use of taking the time to create a blog if no one reads it? If the blog generates it's own inbound links thus accruing Google pagerank value, then the blog has value merely as an organ for passing links on to your business blog apart from any readership it may have. But by building inbound links, traffic to your blog usually increases as well.

That said, blogs have several advantages in promotion over business sites. One is social news aggregators: i.e., digg, mixx, propeller, reddit. Post your articles on these social news network sites to generate links to your blog. Then, encourage your co-workers, family, friends vote for your article on the social news network site. For digg.com, the vernacular is that you "digg" the post. I also encourage you make comments on posts within these news network sites. Why? Your comments link back to your profile page with the site and your profile page has a link to your blog. Also, you can tuck links to articles in your blog within comments. Each of the four sites listed above has a slightly different audience and user level. Digg is the biggest. For political articles I write for my blogs, reddit generates the most traffic (in my experience). This is probably due to the fact that the content of my works meshes best with the audience on that site.

But for generating links, the smallest of the four sites is the leader for me--propeller. Here is a link to my profile page on propeller. Notice it has a google pagerank value of 4. My commercial site that generates the income I live on only has a pagerank value of 5. Every article I post to propeller automatically gets posted to my propeller profile thereby generating a valuable link. Secondly, if you give your article popular tags when posting it propeller, the article will also be posted to pages for each tag given. For instance, here is a propeller group page for John McCain.

Do you read news and blogs on the web? Do you occasionally post comments? Many blogs and news sites allow persons leaving comments to backlink from the comment to their blog or web site. This is a free link. Take advantage of it. Posting a comment can literally take seconds and generates a link. Encourage your employees and co-workers to use the same practice backlinking to your business web site or business related blogs.

Lastly, there is del.icio.us, a mega-site where users store bookmarks. But it can be used to generate links as well. Your bookmarks stored at del.icio.us are public. The tags you give to the bookmarked pages get cross-referenced with tags given by other del.icio.us users. When a particular page is bookmarked with the same tag by many people, del.ico.us posts the page to an aggregate page. Thus, links are generated. This is a quick and easy way to build links but, to be effective, it requires the participation of co-workers, family, friends.

One final thought, link your blogs to each other. It's a mutual assistance treaty as each blog helps promote its sisters.

Is Monkey Boy F'ing Himself?

Reports have it that Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang sat across the table from each other engaged in a ridiculously high stakes poker game. Ballmer offered $33 per share (or $47.5 billion). Yang counteroffered $37 per share ($53.3 billion). What's $5.8 billion between friends? Seriously, they were only about 10% apart. I'm sure Yang expected Ballmer to offer to split the difference at an even $50 billion, they'd shake hands and send out a joint press release announcing the sale of Yahoo. But it didn't go down that way. Monkey Boy was being pressed hard by Yang and he didn't like it. Ballmer told Yang to go fish. Actually, I highly suspect (but have no proof) he told Yang to perform a metaphysically impossible act on himself, the same act VP Cheney suggested Sen. Leahy perform on himself. Ballmer then pulled Microsoft's offer and went home. Link.

Microsoft previously threatened to launch a hostile proxy fight to wrestle control of the Yahoo board from Yang; however, they've abandoned that idea. Its occurred to Ballmer that before they even get the proxy war troops geared up, Yang drops a poison pill on Microsoft's head spoiling the fight. On to the larger question, was it smart for Ballmer to walk away from Yahoo at $50 billion? I haven't really dug into the financial valuation question regarding Yahoo's stock at present but, really, it doesn't matter. In my opinion, Microsoft has to pay. Forget the theoretical valuations.

Up a Creek
Microsoft has backed its guerrilla sized ass into a corner. For years they pretended the web didn't exist, it was a PC universe up in Redmond. When Netscape's browser was a huge hit enabling an explosion in web traffic, Microsoft simply purchased the next best browser out there and started giving it away (thereby killing Netscape). Problem solved, right? Microsoft went back to its desktop world. Then came the web portals and web search engines such as Yahoo and Altavista. Again Microsoft snoozed. I'm sure they figured they would get around to crushing these pesky net companies if and when they posed a threat to Microsoft's software business. What do search engines and portals have to do with software anyway? Microsoft formed a half-ass search engine of its own and basically carried on business as usual.

Fast forward to Google. At first, they are just a bunch of computer science geeks who build a better search engine mouse trap. No skin off Microsoft's nose so far. The game changer actually came from Yahoo when they acquired Overture (formerly, goto.com). Instead of the silly, fragmented banner ad market of before, Overture created a pay-for-placement text ad market that worked on both search engine results and contextually inside a network of web sites. This business model signaled the coming of age of internet advertising. Big money started pouring into web search and content key word advertising. Google, ever the better mouse trap guys, took the Overture model and improved it. The advertiser interface on the old Overture site was set up for mom and pop players. It was cumbersome for large scale ad campaigns. Google cleaned that up and made one other smart move: amalgamation of the millions of small web site publishers into the the Google ad network by cutting them a reasonable slice of the revenue pie. The small publishers flocked to Google in exchange for the best revenue return in the industry. Google Adsense was an unparalleled hit in the web advertising world.

Googzilla
Now Google is a monster company with a bazillion $ market cap. Too big for Microsoft to kill or eat. Trouble. Microsoft starting pushing back. They used their monopoly on the desktop and started integrating MSN.com search into all their desktop applications. Given Microsoft's market power on the desktop, its no small issue for Google. That's when Google decided to invade the desktop. They created a utility designed to run on the desktop that searches the files on your PC or MAC in the same fashion as Google search. But the next shots from Google were heavy caliber. Realizing that in the current internet age, applications can run on the web just as easily as they run on the desktop, Google created business suite software directly competitive with Microsoft's office suite: see Google Docs, Google Calendar and Google Spread Sheets. Google is giving these products away for free. Can you say Netscape? Yes, Microsoft is getting baffoed up the rear by Google just as it had done to Netscape decades before. Certainly, Google's online business apps have a long way to go. They're not yet in the league with Microsoft Office. But do you want to bet against the billion dollar better mouse trap guys? I have complete faith Google will continue to upgrade it's online business suite.

So What's That Got To Do With Yahoo? -- Squeezing Ballmer's Testicles
Were we talking about Yahoo? Oh yeah, back to Ballmer and Yang. Here's what's going on. With Google's phallus in his rear end, Ballmer finally realizes Microsoft needs to be a heavy weight in the web world. Software now runs across platforms (desktop and online being but two). Google search, at its core, is a piece of online software. The software jungle can only hold so many behemoths and behemoths navigating within a confined space inevitably run into each other. Microsoft is currently king in the corporate software market. Google is king in the search / online advertising market. Google is invading Microsoft's primary market, therefore, Microsoft is compelled to conterattack. Therein lies the problem.

Yahoo is #2 in search. If Microsoft punts on Yahoo, there is no fallback option. MSN is #3, Ask.com / AOL fall in a very, very distant 4th and 5th. Even collectively, Ask.com and AOL are not pimples on Google's butt. Because Microsoft delayed so long in getting serious about the web, there are basically only two courses of action open to it: (a) pay an exorbitant price for Yahoo or (b) cede the web market to Google. Yang is no dummy. He knows the score and, like a smart businessman, is squeezing Ballmer's testicles.

From his end, Ballmer knows it's a tough market out there. Yang has told his shareholders that the Microsoft market is below value. Now wall street will crank up the pressure on Yang to ramp up earnings thereby justifying spurring an offer carrying a significant premium offer current market cap calculated by today's trading price. If Yang doesn't start turning earnings around, the street will punish Yahoo's stock price. There is also potential for a cascade of stockholder derivative suits against Yahoo if the stock price craters. Is Ballmer waiting on the sidelines hoping the street ratchets up pressure on Yahoo thereby improving his hand? For his sake, I hope not.

Could Ballmer's Play Backfire?
Do Catholic priests screw alterboys? Hell yes, it could backfire. So Yang has to ramp up profits. He'll be grasping at any life raft within reach. What's a quick and easy fix? Google commands a higher per click ad rate from advertisers than Yahoo. What if Yahoo moves some of it's ad traffic over to Google to avail itself of the higher ad rate? Bingo, instant kick to profits. Those talks have already heated up. My personal opinion is that Yahoo has no option left other than to partner with Google, making Google even more ginormous in the web advertising world.

Monkey Boy, don't take it personal. You really are making a foolish move by not kicking in the extra $5 billion for Yahoo. I don't care if its extortion. That's the price for Microsoft's past sin in being complacent about the web advertising market. Pay the ransom and move on.

For those wondering about Steve Ballmer's nickname of Monkey Boy, wonder no further. Here is the genesis.

The Razor Business Model

I remember when the Gillette Mach 3 razor came out. The company mailed me, free of charge, a Gillette Mach 3 razor consisting of the handle and one Mach 3 blade. Sure enough, I liked this razor but, upon buying refills, found out the Mach 3 refill razors cost twice as much as the older twin blades. Ouch. Further, the snazzy Mach 3 handle only accepts Mach 3 blades. Gillette is more than willing to give away the more expensive Mach 3 razor handle because, over time, they'll make their money on the high profit margin blades. As an aside, here's a ball busting hilarious spoof from The Onion on the Gillette v. Schick razor wars.

Some other products, you ask, following the razor blade model? My wife and I have allergies. Target and Walmart have cheap air purifiers with herpa filters. The things work great ... for three or four months, then you need a new herpa filter. Guess what? The little flimsy replacement herpa filter costs 1/3 the price of the entire air purifier unit. And only herpa filters fit in the unit. The profit margins on these little $15 filters has to be astronomical.

I'm sure many of you out there can relate to this one. My last auto purchase was a used BMW 528i. Couldn't believe the deal I got, $15,500 for a 1999 BMW with 80,000 miles (this purchase was made three years ago). Looked at many other vehicles and this was far and away the best value. The thing looks great, drives great, but a car made during the prior millennium is going to need repairs, no? Well where does one take a BMW for repairs? I'll tell you it ain't Carl's Auto Repair down the street. No, you have to take it to either a BMW dealer (the kiss of financial death) or a certified BMW repair facility. The friendly folks at Bimmers R Us who sold me the car happen to a BMW repair facility. They may not have pocketed much on my initial purchase but, believe me, these guys have made out hansomly on the subsequent repair work. I'm convinced the repair facility is the major profit center at Bimmers R Us. To put this into the parlance of the Gillette business model: the BMW is the the razor handle and the repair services are the razor blades. All the money is in the blades.

For you entrepreneurs out there, keep the razor blade strategy in mind next time you're putting together a startup. It's a winner!
   

Free Sample--The Middle Ground

Jesus said it is in giving that you shall receive. But I'm not sure Jesus ever ran a retail store. What about the free sample? To what extent should a business entrepreneur integrate this strategy into his or her business plan?

The first question has to be what does the free sample cost you? In the electronic world, the answer to this question is often zero. My online legal forms business gives away free samples of its legal forms. The system is self-service and the form are created on-the-fly through a web based app. We provide user support via email but that is generally minimal for the free trial. But what about the opportunity cost? The legal form given away is a form that could have resulted in a sale. For a struggling small business, every sale counts.

Years ago, we hit on the middle ground strategy. Users have a right to toy with the online app, see how it works, ease of use, and (importantly) view the actual form they will be purchasing. The kicker: free trial users only get an encrypted, non-printable PDF version of their legal form. Purchasing users get a printable PDF or a document convertible to MS Word. Is an encrypted PDF hackable? Sure but how many people are going to go through the trouble of hacking an encrypted file just to save $13? For our business, this middle ground compromise has been a win-win.

There has been a proliferation of free trial for PC based and online apps. Most are of limited duration and do not allow the user full access to all features. I, as a consumer, appreciate the ability to monkey with the program prior to plunking down my hard earned benjamins. Fast forward to the music download controversy fueled by the fanatical position of the Recording Industry Association of America (RIAA), a front organization for the major record labels. They've taken to suing kids, mothers, and grandparents over what they have determined to be illegal downloads of music. Rather harsh to bite the hand that feeds you. From their standpoint, the record labels view free downloads to be their death sentence. Maybe they are right but, I note, electronic sales of music (including ring tones) have ultimately saved the record labels collective butts. Sales of CDs are as dead as 8-tracks. Apples' online music store sells songs for a modest $1 apiece. A nice compromise.

But what about the free music trial? Well, under current formats, you can hear the first 30 seconds or so of a song for free on the Apple music site and other sites like Amazon. I want to listen to the entire tract and more than once to let a thumbs up or down sink in. last.fm is shooting for this middle ground in the music sample business. They have 5 million songs in their library and let you listen to any song in their library free, the entire song. The catch: after three plays of any song, the free listen is cut off and the users is direct to one of last.fm's online partners for purchase. I've been listening to Van Morrison and the Grateful Dead on last.fm while writing this post. Seems like a fair compromise to me. I wonder how they track the 3 free plays? Must be by IP address. If so, I get 3 free plays on my PC and another 3 free plays on my laptop! Nice deal. The downside for the user: they only list four songs for each artist. How can a fan be limited to four Grateful Dead songs! If last.fm wants this format to mature and blossom, they'll need to ditch the 4 song limit. I imagine that limit was imposed by the RIAA members while evaluating the model. Needless to say, these girls are skittish about giving away anything.

Evaluating Internet Ad Revenue Potential

The story of plentyoffish.com is astounding. As of October, 2007, this one man dating web site was generating $3.5 million annually solely in online ad revenue (expected to go to $10 mill in 2008). As an internet entrepreneur, I applaud Markus Frind as one man wrecking crew in the online social networking space. But something else caught my eye in regard to POF--it's high click through rates. Companies such as POF which rely mainly on online ad revenue get paid when visitor clicks on an ad. Therefore, the most important metric for the company is not number of daily unique visitors or even page views but, rather, how many ad clicks. A web site with a high click through rate can generate larger revenue on a smaller number of page views than a site whose click through rate is lower. "Markus told me that per page view, Plentyoffish has 5-10 times the click through rate of Facebook. So by his calculations, POF's 1.2 Billion page views per month is the same as 5-10 Billion Facebook page views per month." Link.

To be sure everyone is one the same page, "click through rate" is percentage of online ads that are clicked on by a visitor. For example, a web site with 1000 daily online ad views and 12 clicks per day has a click through rate of 1.2%. If you have a Google Adsense account, they give you the click through rate in the ad campaign reports. Frind argues for a valuation for his company using Facebook as a baseline and each company's monthly clicks. Good luck Markus.

On the topic of business plans, it is important for online companies who intend to rely in any meaningful way upon online advertising to discuss click through rates in making your financial projections. Hopefully, your company has past operations data to use for establishment of click through rates (CTR) and ad revenue per thousand ad impressions (CMP). Thus, when projecting future revenue for the business plan, you will possess historical revenue percentages that can be applied to future traffic projections. Get a solid projection on future page views then use the historical CTR and CMP to project revenue. For example, let's say your online business is a social networking site for Wiccan priests and priestesses. You're about to expand to other pagan faiths. Current daily page views are 20,000 (one ad per page) with CTR of 1.2% and CMP of $8. Thus, ad revenue is $160 per day. I have no idea the actual number but let's say there are twice as many Celtic worshipers as Wiccan in your target geographic market (North America). Thus, within one year, you are projecting 40,000 daily page views on your sister Celtic site (twice the Wiccan number) with combined daily ad revenue of $480. The historical CTR and CMP rates are what give your projections teeth, thus, helping the entrepreneur sell his business to investors.

Beware When Piggybacking

So you're a small startup looking for a competitive edge allowing you to make it in that big bad market out there. Why not hitch a ride on a passing behemoth? Makes sense and many a small business has been successfully launched using this strategy. Suggestion: have a backup plan for long-term viability outside the shadow of the big dog. Why? Elephants might not turn on a dime but no one is quite sure when a turn is coming and, after it happens, they trample everything in their path. Coattails are long but easily snap. The following is a cautionary tale for the piggybackers.

Brokering web page text links is a cottage industry spawned by Google. Its search engine algorithm is heavily dependent upon inbound links from other web pages. Not only the shear number of links but, also, the page rank value and content of the referring page effect your web site's score in Google search results. As with anything in the business world, once the competitors learn the rules, they immediately strategize on ways to game the system. The first strategy on this front was trading of links, "you scratch my back, I'll scratch yours", a strategy as old as the ox cart. But it's cumbersome to find link trading partners whose web site content matches up with yours and who have links of comparable value to trade. As with any barter transaction, the value of the thing each side offers is up to interpretation. This makes it harder to arrive at agreement on a swap. The inefficiencies of the link barter market led to a new market in the buying and selling of links managed by middlemen, i.e., link brokers. The advantage: much easier and quicker to close a transaction. Through the link sale market, a web site owner, if possessing the money to do so, could quickly build up links to specific pages within one's site. Furthermore, to defray the cost of the link purchases, the web site owner can turn around and sell outbound link from his web site through the same broker. As one can see, the broker makes money on both ends of the deal (links in and out of the same customer's web site). Nice!

And so the cottage link brokerage industry continued to prosper for several years ... until 2007. That's when Google dropped a thermal nuclear warhead on its head by banning the practice of buying and selling links. See Link and Link. The sole reason to purchase text links (i.e., to help increase pagerank for Google search results) evaporated in an instant. This entire cottage industry has gone down the toilet. Piggybackers beware.

Finding Your Niche

Small business thrives in the niche. Yes, we all aspire to grow our business from the garage to godzilla but mighty mouse is a more realistic short term goal. Strolling through my neighborhood this Sunday morning, the diversity of the local coffee house market struck me as a fitting for study of niche strategies. Starbucks has not penetrated the neighborhood, as yet, so there is no godzilla on the scene to stiffle the small innovators. Here is a quick case study of niche strategies employed by the coffee houses of South Grand (St. Louis City).

St. Louis Bread Company (Panera Bread outside of STL) is the big dog. Their calling card is, of course, the bread. But coffee and bread go together like water and wine. They are the biggest competitor in the neighborhood seeking no particular niche while providing coffee, free wi-fi and good, reasonably priced lunch food. The customer base is diverse but heavy with students and business types looking for a place to caffeine up while connecting to a wireless device. They have African blends of coffee and espresso drinks. There is outdoor seating with sidewalk tables but it is cramped. St. Louis Bread Company is the benchmark, the hurdle all other coffee houses within walking distance must get over to compete. You have to meet what the industry benchmark offers plus give the customer a reason not to go to the Bread Company. To recap, the benchmark offers: (a) African blend coffees and espresso drinks, (b) good, reasonably priced lunch food, (c) outdoor seating, and (d) free wi-fi.

The Niche Competitors.

Mokabe's caters to the gay-lesbian crowd. They feature vegan food with an awesome and spacious patio facing Tower Grove Park. The patio is dog friendly with water bowls provided. The food and patio seating allow Mokabe's to extend their customer base beyond the GBL crowd. They also have free wi-fi and serve as an unofficial headquarters for local anti-war protesters. Mokabe's biggest regular draw is Sunday brunch which is not served by any of the other coffee houses or restaurants in the neighborhood. Downer: according to my wife, the coffee is average.

Hartford Coffee Company is the mommy coffee house. I've never seen another like it. Almost half of the customer dinning space has been converted to a children's play area. The mothers turn their kids loose to play while drinking coffee and socializing. My wife pointed out that a second shift of stay-at-home dads also gather at this coffee house late morning. The food is good, reasonably priced with more diversity than Mokabe's. They also have dog friendly patio which is important as many customers on their way to the park leave their dogs on the patio while inside getting coffee. This coffee house is 1/4 mile from the epicenter of the neighborhood (Grand Avenue) upon which all its competitors are located. Thus, they still pull a fair number of students and work at home business types who might not care to hike it 1/4 mile to the other coffee houses. But it's hard to block out the noise from the kids while working on your laptop at the mommy coffee house (I've tried). And on Sundays they have live bluegrass music that drives me out the door (unlistenable).

Gelateria Del Leone, a combo coffee / gelato house on S. Grand. They are the only seller of gelato in the neighborhood. A coffee house a few store fronts down catering to the grunge crowd closed a year ago. Gelateria Del Leone gives off an adult vibe, hard wood floors, exposed brick, tin ceiling, dark leather furniture. Also, they are located right next door to the most popular restaurant in the neighborhood, Pho Grand. When summer hits, I gotta believe there will be a nice flow of customers migrating from Pho Grand for dessert. According to my wife, their coffee is superior to others in the neighborhood. They also have free wi-fi, espresso drinks, and a limited food menu.

So there you have the big dog and the three niche players. Mokabe's caters to the GBL crowd, vegans, and leverages its awesome patio facing the park. Hartford is the mommy coffee house. Gelateria is the Italian dessert, adult coffee house. The grunge coffee house went under, I believe, because (a) they targeted too small of a demographic and (b) the neighborhood is in the process of gentrifying meaning even fewer grunge types.

Crunch The Numbers Before Writing The Plan

Want to start a business? Everybody says the first step is writing a business plan. I beg to differ. In my view, the first step is calculating your breakeven point and your cash burn rate. Why are these numbers important? They tell you how much cash you need to reach your breakeven point. Without this information, an entrepreneur is raising money in the dark. Only a fool opens the doors without first raising enough money to sustain the business to breakeven. And an even bigger fool invests in a business which by it's own calculation can't stay in business without raising new money at some point after launch. The #1 reason new businesses fail is that they are undercapitalized from their inception.

How does one calculate the break even point? Here are the two basic formulas for the task.

Breakeven = Fixed Costs / Gross Profit Percentage

Gross Profit Percentage = (Revenue - Variable Costs) / Revenue

Thus, the first step to calculating a business's breakeven point is determining gross profit percentage. Let's take an easy example.

2007 Revenue, Joe's Bar & Grill	$350,000
2007 variable costs, Joe's Bar & Grill	$250,000
Gross Profit Percentage	28.5% (350-250/350)

Now we are in position to calculate the break even point. Fixed costs are, as the name implies, those costs that do not changed with variations in revenue (i.e., they are fixed). Sometimes these are referred to as sunk costs. In the case of Joe's Bar, let's say Joe has the following fixed costs:

Real estate lease payments	$36,000
Equipment lease payments	$12,000
Salaried Employee	$40,000
Insurance	$15,000
Utilities	$6,000
Total Fixed Costs (yearly)	$103,000

This results in a breakeven point for Joe's Bar & Grill of $361,000 in sales. The bar business was not kind for our hypothetical Joe in 2007 as the business's revenue was $11,000 below breakeven level for the year.

If you are a new business running these projections, the question then becomes when do you reach the projected breakeven point? What is your burn rate? Do you have enough cash raised to make it to breakeven? Remember that every new business runs into unexpected expenses and/or revenue hiccops. You need to have a cash cushion built into your projections.