It’s hard to avoid certain mistakes, especially when you’re faced with a situation for the first time. In fact, many of the following mistakes are hard to avoid even if you are an expert. Of course, these aren’t the only mistakes CEOs make, but they are quite common. Take the following self-assessment: Give yourself ten points for each of these business mistakes you’re making. Deduct five points for those you have narrowly avoided. Your score will of course be kept confidential, but seek help. Fast!
1. Big Client Syndrome
If more than 50 percent of your revenue comes from a single client, you may be headed for a crash. While it’s easier and more profitable to deal with a small number of large customers, you become quite vulnerable when one of them brings in the majority of your cash flow. You tend to make foolish concessions to keep your business. You make special investments to handle your special requirements. And you’re so busy servicing that big account that you can’t develop any additional customers or revenue streams. Then all of a sudden, for one reason or another, that customer leaves and your business is on the brink of collapse.
Use that flourishing account as a reason for celebration and as a sign of danger. Always look for new business. And always look to diversify your sources of income.
2. Create products in a vacuum.
You and your team have a great idea. A brilliant idea. You spend months, even years, implementing that idea. When you finally take it to market, no one is interested. Unfortunately, he was so enamored with the idea of her that he never took the time to find out if anyone else cared enough to pay money for her. You have built the best classic mousetrap.
Don’t be a product in search of a market. Do the “market research” in advance. Test the idea. Talk to potential customers, at least a dozen of them. Find out if anyone wants to buy it. Do this before anything else. If enough people say “yes,” go ahead and build it. Better yet, sell the product at pre-launch prices. Finance it in advance. If you don’t get a good answer, move on to the next idea.
3. Egalitarian associations
Suppose you’re the best salesperson in the world, but you need an operations guy to run things around the office. Or you’re a technical genius, but you need someone to find the customers. Or maybe you and a friend start the business together. In each case, you and your new partner split the business 50/50. That seems right and fair right now, but as your personal and professional interests diverge, it’s a sure recipe for disaster. The veto power of either party can stop the growth and development of your company, and neither party has enough votes to change the situation. Almost as bad is property divided equally among a larger number of partners, or worse, friends. Everyone has the same vote and decisions are made by consensus. Or, even worse, unanimously. Oh! No one gets the last word, every little decision turns into a debate, and things get bogged down quickly.
To paraphrase Harry Truman, the buck has to stop somewhere. Someone has to be in charge. Make that person a CEO and give them the largest ownership stake, even if it’s just a little more. 51/49 works much better than 50/50. If you and your partner are to be fully equal, give a one percent share to an outside adviser who becomes your tie-breaker.
4. Low prices
Some entrepreneurs think they can be the low-price player in their market and make huge profits on volume. Would you work for low wages? Why do you want to sell at low prices? Remember, gross margins pay for things like marketing and product development (and great vacation trips). So the grosser the better.
Set your prices as high as your market will support them. Even if you can sell more units and generate higher volume dollars at the lower price (which isn’t always the case), you may not be better off. Be sure to do all the math before deciding on a low pricing strategy. Calculate all your incremental costs. Figure in additional stress as well. For service companies, low price is almost never a good idea. How do you decide how high? Raise prices. Then pick them up again. When customers or customers stop buying, you’ve gone too far.
5. Insufficient capital
Check your business assumptions. Optimistic sales projections, overly short product development timelines, and unrealistic cost forecasts are the norm. And don’t forget weak competitors. Regardless of the cause, many companies are simply undercapitalized. Even mature companies often don’t have the cash reserves to weather a downturn.
Be conservative in all your projections. Make sure you have at least all the capital you need to get you through the sales cycle or until your next planned round of financing. Or reduce your rate of consumption so that you do.
6. Out of Focus
If yours is like most businesses, you don’t have the time or the people to take advantage of all the exciting opportunities. But many entrepreneurs, hungry for cash and thinking that more is always better, feel the need to take advantage of every part of the business that comes their way, rather than focus on their core product, service, market, and distribution channel. Going too far results in below average performance.
Focusing your attention on a limited area leads to better than average results, almost always outpacing the gains generated by diversification. Al Reis, famous for Positioning, wrote a book that deals with precisely this topic. It’s called Focus.
There are so many good ideas in the world that your job is to choose only those that provide superior returns in your area of focus. Don’t spread. Be known in your niche for what you do best, and do it extremely well.
7. Crazy and world-class infrastructure
Many startups die infinitely due to excessive overhead. Keep your home humble and your furniture cheap. Your management team should earn most of your compensation when the profits come in, not before. The best entrepreneurs know how to stretch their cash and use it for key business-building processes like product development, sales, and marketing. Skip that fancy phone system unless you’re really saving time and helping drive more sales. Spend all the money you really need to achieve your goals. Ask yourself the question, will there be a sufficient return on this expense? Everything else is above.
This disease is often found in engineers who don’t release products until they are absolutely perfect. Do you remember the 80/20 rule? By following this rule to its logical conclusion, finishing the last 20 percent of the last 20 percent could cost you more than you spent on the rest of the project. When it comes to product development, the Zeno paradox rules. Perfection is unattainable and very expensive. Also, while you’re doing it right, the market is changing under you. On top of that, your customers are putting off buying your existing products waiting for the next big thing to arrive.
The antidote? Focus on creating a product that beats the market within the allotted time. Set a deadline and create a product development plan to match. Know when you have to stop development to make a delivery date. When your time is up, it’s up. Release your product.
9. There is no clear return on investment
Can you articulate the return that comes from purchasing your product or service? How much additional business will you generate for your client? How much money will they save? What? You say it’s too hard to quantify? Are there too many intangibles? If it’s too hard for you to figure out, what do you expect your prospect to do? Do the analysis. Talk to your customers, create case studies. Think of ways to quantify the benefits. If you can’t justify the purchase, don’t expect your customer to. If you can demonstrate the great return on investment your product provides, sales are a piece of cake.
10. Not admitting your mistakes.
Of all the mistakes, this might be the biggest. At some point you realize the terrible truth: you have made a mistake. Admit it quick. Correct the situation. If not, that mistake will get bigger and bigger and… Sometimes this is hard, but trust me, bankruptcy is harder.
Assume that your costs are sunk. Your money is lost. There is good news: its base is zero. From this perspective, would you invest fresh money in this idea? If the answer is no, walk away. Change race. Whatever. But don’t throw more good money after bad.
Ok, everyone makes mistakes. Just try to catch them quickly, before they kill your company.
To avoid some mistakes in the future, it sometimes helps to ask good questions ahead of time. Click on the link if you would like a copy of my Fractal Strategic Planning Quiz.