Never underestimate the power of cheap.

A couple of years ago in Australia the good wife and I had the brilliant idea of setting up a tourism business. The plan was to take small groups of customers on very personalised tours of the regions of Italy where we used to live and where we have numerous contacts. We did a lot of homework on this idea; we even took a trip to Italy with a prospective client as a trial to see how it would go and what the potential problems were.

But the real twist to the business idea was that we were going to provide expensive bespoke tours. We planned on hitting the top of the market, the people who didn’t want to feel like tourists on their trips but who wanted to feel like locals.

But we couldn’t make the numbers work so ultimately we dropped the idea, despite all the work we had already put into it. And thank God we didn’t go ahead with it.

I have seen more than a few people, including my father, try to start a new business aimed at the high end of the market. Every single one of them failed. Not most of them, ALL of them. Every single one.

Now, L’Aristokrato may never have disrupted a market personally, but he has certainly seen new companies enter new markets throughout his life. When Honda entered the US car market, did they aim at the high end or the low end? How about Kia? When Diamond entered the video card market, did they come in as a low-cost provider or a high-end one? This is basic Business 102 stuff.

If you want to succeed in entering an existing market, the first and foremost objective has to be staying alive to play in the next round. And your ability to stay alive depends upon your resources. Sure, Mercedes can enter at the high end. So can Samsung. But a startup? No. See, we could have spent all the money from the Alt-Hero kickstarter on a single, beautiful, gold-plated 24-page issue using the most expensive artists we could hire. It would have been talked about and critically praised… and we would have gone out of business almost immediately.

I would like to be able to say that this was the main reason that we didn’t start our business idea. But it’s not; I didn’t know this. Hell, I didn’t really know this until I read Vox’s post today. This has to be some of the best business advice that I have ever seen.

The only way to offer a premium product and to stay in business is to build up to it. That or have unlimited funds to be able to survive the period when you’re not making money. Which can be a long time as one of the comments on the piece illustrates:

There’s a very high-end clothing store near where I live. In spite of being a small-ish city, people from around the nation fly in to visit it, as the staff spends collective months a year just traveling through Europe finding the best fashion from the small designers everywhere. The store is huge and lavish, they serve cocktails and wine to prospective customers, and if I want a wardrobe overhaul I’ll text the dude I know there and he’ll set up a room waiting for me with clothes to try on. Posh stuff. They started from nothing, straight up.

Also, the city I live in has a fair number of billionaires that operate as the defacto regional oligarchy. This fact is not unrelated.

The store was started as an interest project by one of these billionaires, who perhaps saw some longterm profit in it but who mostly did it because he wanted access to a place like that locally. It took them about 15 years to get into the black, and another 5 before they stared being able to apply profits to the actual store rather than loan interest. And all this is largely due to the fortunate fact that the city is booming economically.

15 years of losing money. Do you have pockets that deep? If not, you need to start at the bottom. Never underestimate the power of cheap.

Another comment that I liked:

There was a cash-only chicken wing joint in a business area of town where I used to live. A business-minded person I know wheedled out some info on their finances because he was also thinking of going into the restaurant business. They were clearing a half-million a year. No frills, a couple of people, take your wings and walk out. Maybe a picnic bench or two for seating and a long counter inside. Tiny place, great profit margin.

Your profit margin is everything, all the rest is dust in the wind. Once you have your profit margin sorted out then you can start thinking about introducing some more high end stuff. But not before.

 

 

5 thoughts on “Never underestimate the power of cheap.

  1. TechieDude

    Sage advice. The CEO at a small company I worked for years ago would say “Cashflow is king”. So not only do you have to be profitable, it has to be on more than just paper. You have to get paid.

    The company is still in business some 35 years since.

    I’ve seen company after company just like them wipe out by getting dollar signs in their eyes when they start getting Federal Gumbmint contracts. None had the resources or cash flow to support a govt. contracting business as well as an enterprise business. Two things would take them out – Ignoring their enterprise customers (what brought them to the party) so they leave, and Uncle Sammy being a notorious slow/no payer.

    I myself am starting up a business, after having to show the wife that this is such a big city, there’s tons of small business that need services, and don’t want to pay the big players. The big players have such an expense structure that I can be profitable charging a third of what they charge. Highly profitable, at 2/3rds.

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  2. In many businesses serving the mid to high end is where the money is.
    My experience is in carpet cleaning that’s what we have been taught and also what we have found from experience.
    If you are a huge business then maybe you can make up the low margins with volume but if you are a small business or are doing it all yourself that won’t work.

    Like

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