The Small Business Profit Continuum
This article is an extract from a talk given by Wybrand Ganzevoort at the Smart Procurement World Indaba held at Gallagher Estate in Johannesburg, South Africa.
Growing a business that is larger than the founder is the goal of most entrepreneurs. But how can a business price its product and service so that it is truly profitable.
In our work with Entrepreneurs, we have noticed a continuum in the way Entrepreneurs are able to increase their price in order to make sustainable profit margins.
One the one side of the continuum we have found entrepreneurs trapped in a commodity-based exchange effectively selling their time for money. This area is highly competitive with little to no innovation. On the other extreme there is significant profitability with high margins unrelated to the cost of production.
When an entrepreneur grasps the significance of this continuum they are fueled with a greater sense of urgency to differentiate their business. This new understanding enables the entrepreneur to see the need to use profit to sustainably grow their business.
Most Entrepreneurs are selling some form of time. Consider Michelle, an Entrepreneur that sells spices. Once a week Michelle gets up early in the morning and heads downtown to collect her spices from the factory. Once she has sourced the spices she packages them into smaller units that are affordable to her market. After packaging the spices, she sells them in butcheries and shops around the local township.
Over the past three years Michelle has done well but has been unable to grow the business. Most of her time is spent collecting, packaging and distributing the spices. In effect, Michelle has thus far made no real profit in the business at all. What she has effectively done is to monetise her time as packaging and distribution time. Michelle highlights the most popular type of entrepreneurial business in South Africa. Sadly, this business remains dependant on the entrepreneur and since there is only so much time in a day that can be monetised, the profit in the business is limited to how many hours the entrepreneur can work.
Selling Skilled Time
Some Entrepreneurs have been able to increase the price at which they sell their time. Amos runs a graphic design business which focusses on developing logos for other Entrepreneurs. Over the past three years he has taught himself WordPress and CSS. With these skills Amos is now able to develop websites. Instead of charging R220 per day, Amos is now able to charge R500 per day for his skills. Learning a new skill has doubled the price at which Amos sells his services, but at the same time it has also increased his cost, as the business now pays Amos more to do his services. The net effect to the business’s profit is negligible, but for Amos as the person being employed by the business it has a significant benefit.
Selling Other People’s Time
Some entrepreneurs have been able to combine the resources of other people and sell their time rather than their own. We don’t need to go far to find a construction company where this is the case. Due to the commoditised nature of the industry many construction entrepreneurs are in the business of selling project management and managerial time. They are paid more for their efforts in doing so, but there is still almost no profitability in the business. Typically, this type of business will include the time of other people such as bricklayers, painters and supervisors.
Selling a Brand Promise
This is the first stage where the entrepreneurial business starts experiencing sustainable growth. The process of building a brand promise might be very complex or relatively simple depending on the need for differentiation.
Consider the local Spaza shop. An effective Spaza shop is one that has a very specific brand promise. It promises the consumer that it will be in close proximity, it will be reliable with its stock and it will be open at the right times. The discipline of keeping this promise is what will create brand loyalty and will ultimately lead to high profitability. In this case the brand promise is completely tied into the proximity and the operating hours of the Spaza shop.
In the case of a construction company a Brand Promise might be much more difficult to create. Most construction entrepreneurs focus on quality or productivity as their brand promise. This promise is a lot like that of the politician that promises jobs. When everyone promises the same thing, it loses its value.
Many companies also try to sell different promises at the same time. Consider the company that does cleaning, construction, catering and security. When a company promises that they will do all of these services at the same high standard it becomes a bit like a mechanic promising you quality plastic surgery. It is hard to trust.
A brand promise also does not mean fancier offices or better cars. In most cases the client or customer is unaware of this and could care less about this. They really want to know what impact your offering has on their lives.
Economies of Scale, Subscription Income and Technological Scalability
Once a company has been able to establish a brand promise they are then able to increase profit margins through scalability.
Scalability could be in the form of mechanised economies of scale. Consider the growth journey of Aliko Dangote, the Nigerian Billionaire who started a trading company and built a brand around delivery in full on time in Nigeria. Once he established his trading brand he was able to scale this by then creating the manufacturing capabilities. Many Entrepreneurs get this step mixed up by first looking for the finance to manufacture rather than considering how they will build the market.
Those companies that can use technological scalability to increase their brand promise are the real winners. Here we all think of companies such as Uber and AirBnB. Unfortunately, without first establishing a solid brand promise the company is unable to scale even if technology is used. Scale only becomes relevant once the brand promise is established.
Wybrand is the Managing Director of Collective Value Creation, a company that develops Entrepreneurs in the Southern African Region and has a specific emphasis on Enterprise and Supplier Development. Wybrand is a regular columnist and speaker on Supply chain diversity and has a passion for aligning strategy and execution within Small and Medium-Sized Enterprise (SME) companies.
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