by Ryan Blair
A good way to think about finding your business’s unique place in the market is to look at what researchers call game theory. If two people are locked in a struggle to earn a prize, what will each one do to get ahead?
The most common hypothetical scenario is that of two people who are tied together at the ankles and teetering at the edge of a cliff. The first one to back down loses. If one person starts jumping around or kicking his legs over the edge, the other person is likely to give up sooner—even if it means forfeiting the prize—because he becomes too nervous. The person who did the jumping around held what is referred to as the “dominant strategy.” That is, he took some risks and did something unusual to force his opponent to surrender.
In many ways, the business world is very similar. Most businesses are content to stay right at the edge of the cliff, barely breathing and praying the wind doesn’t pick up to send them hurtling off the edge. In other words, they are passively trying to win. If you are willing to enter the contest with a dominant strategy, the difference of your approach to theirs is what will ultimately make you successful. Trying something that hasn’t been done can be risky, but it can also distinguish you in a way that leads to greater gains.
That dominant strategy is what you should be hammering out as you formulate your business plan. The unique offerings or unusual approach you take when meeting a need or solving a problem should be your focus. That should be the reason you are starting this entire venture. No one is interested in another company that does the same thing as everyone else—a “me too” company.
When I was first launching SkyPipeline, it was a challenge to establish our place in the market. It was Southern California, and the tech bubble was still going strong, so there were many growing broadband service providers competing for the same clientele. I started my company without a fully developed business plan—the numbers were all there, but I hadn’t realized the importance of thinking about emphasizing our differentiation from every other company out there.
Finally, in one investment pitch, the venture capitalist asked me why he should choose my company to invest in over any of the dozens of other plans on his desk. I took a gamble: I picked up the phone and asked him to call our company’s number. I promised him that as a broadband wireless company, we would always have someone there to answer the phones promptly, and at a call center that was not located halfway around the world. It was a cold call. My staff had no idea I would be phoning the center, and I held my breath and hoped that my employees would represent our company well. Sure enough, the phone rang, a live person answered, my investor was impressed, and we got the capital to keep our business growing. Our greatest differentiation was in our customer service, and that’s exactly what we focused on. And no big phone company could compete with that.
I had been wasting time pitching other services and features ahead of our guaranteed quick-response policy. What I should have been concentrating on was the fact that we had mastered all of the usual frustrations of trying to get decent tech support and provided a faster and more reliable service than our competitors did.
NOW THAT WE’RE done talking about game theory, let’s talk about the hard numbers and budgeting proposals, which are probably what most people think of when they imagine drawing up a business plan.
You will need to account for all start-up costs, including any licensing fees, certifications, equipment purchases, employee salaries, and retail or office space required to open the doors to your business. I cannot offer specific advice as to the needs or vision of each individual company. I will urge you, however, to do your research through books, magazines, and online sources, and by interviewing other entrepreneurs to make sure you have as full and complete a picture as possible for the needs of your business. And as I mentioned, you should have a contingency plan in place in case you have to operate on far less than your projected amount.
The start-up costs will vary a great deal from person to person and business to business, just as day-to-day operational costs will. For example, if you are planning to open a photography business, you may decide to be only an on-location photographer at first, shooting weddings and family portraits on the beach or in local public gardens. If you wish to establish a studio side of the operation to go along with your event shooting, then you need to make room for the required costs in your plan. It may be wise to establish phases for your business to help defray the start-up costs, like starting without a storefront while you establish a clientele, but with plans to open one in six months or a year.
Something I learned when writing my very first business plan is that there are really two different plans you need to come up with. You need to have an operations plan as well as a plan to raise money. The operations plan will be centered on your specific business model—how you plan to operate and structure your company. The fund-raising presentation should focus more on the industry, the growth projections, the competition, and your position within the marketplace. It should also profile similar companies that have been successful and that have successfully exited. You need to include some of this information in your operations plan, but it is central to your fund-raising plan because it demonstrates an in-depth, working knowledge of the realm you’re seeking to enter.
I start with my operational plan and develop that first before moving on to the financial plan. The creation of your operational plan needs to be a bottom-up procedure. Don’t start with a number in mind; start from zero and then add expenses and capital requirements, broken down to their most basic components. You should ask yourself, “What do I absolutely have to have to operate this business, and what will that cost me each month?”
To create a hypothetical situation, look at it this way: How many units do I need to sell per month in order to cover my expenses? If the answer is one hundred, then determine how many units the average salesperson can sell. If the answer is ten, then you know you will need at least ten salespeople—or you need to have marketing that will drive some portion of those sales, say 50 percent, in which case you know you need five people and X dollars in marketing to generate the orders. But for those five or ten employees, you need to figure out their true expense. How much does it cost to recruit them? What will you pay them? How much of their pay will be generated through commissions? Will you be providing them with a cell phone or a laptop? How will you fund their sales calls? But don’t just write down a number and move on. You need to consider carefully every minuscule part of the potential cost: Will you pay your employees’ mileage if they use their own cars? How will you pay for their travel if they need to fly? Will you pay them a per diem? How much money will you provide for each meal? What about lodging?
You have to remember that every single one of those numbers on the page represents a series of decisions about costs that you need to have considered in order to have a firm grasp on the real price of things.
One of the most important things to remember while planning projected costs and budgets is the determination of what your family is going to live on. As we discussed in the preceding chapters, this number should be conservative, but also realistic. You will need to make sure you factor in the real costs your family will be facing not only for your current bills and financial obligations, but also for future costs you may incur, such as a health insurance policy if you lose coverage when you change jobs. These costs need to be included in your plan, or you will find yourself unable to meet your obligations in the first month, which will put your entire business in jeopardy.
I want to give you a strong word of caution about being overly optimistic. Of course you should believe in your company’s potential, but as I’ve mentioned, it’s far too easy to create a million-dollar company on an Excel spreadsheet. On paper, it doesn’t seem so far-fetched to count on exponential growth—in the first month you grow 20 percent, then 20 percent again in the second month, and in a matter of just a few months, your entire company has doubled in size. Unfortunately, real growth doesn’t work that way. Yo
u have to write a realistic plan that considers each transaction and various expenses like marketing support and sales. Your investors will turn on you if you miss your numbers. A mentor and former board member of mine, Gordon Watson, once told me, “Ryan, a CEO has never been fired for missing his numbers, only for missing his forecasts.” I took his point seriously, but not seriously enough, as you read in chapter 12, “Million-Dollar Mistakes.”
As you reach the completion of your business plan and feel you have your numbers solidly in place, it may be worthwhile to make a small investment in hiring an accountant or a lawyer to look it over and double check that everything looks right. Obviously, she may not be able to speak to the specific circumstances of starting a business in your field, but she can ensure that what you’ve designated for salaries, taxes, insurance, and any other legally required costs are in line with and appropriate to the size of the company you are establishing.
Also, as elementary as it sounds, you will want to carefully proofread every element of your plan more than once. Read it word for word, and aloud, if you have to. Correct anything that sounds wordy, awkward, or unclear, and definitely check for typos. It’s an unfortunate truth, but given the number of business plans investors get each year, they are all looking for a reason to eliminate each one to quickly pare down their “to consider” stack. Typos can come across as careless, and no one wants to invest in a company whose CEO is not detail oriented. Treat your business plan just as you would your own résumé if you were applying for a job with the investor, because, in a way, that’s exactly what it is—a résumé for your company. Make sure your first impression is a positive one. If you are going to submit a plan to me, make sure it is concise. If there’s one thing that makes me dismiss a plan quickly, it’s a plan that is too verbose. These days, a PowerPoint presentation with no more than fifteen slides is all you need for your investor presentation.
And that’s why I hate business plans, because the good ones take thousands of hours to create, and then can be summarized on the back of a napkin. And you’ll look at the napkin more than the plan. Welcome to the world of entrepreneurship.
14
PROS AND CONS OF A HOME-BASED BUSINESS
So far, we’ve discussed a lot of concepts about building businesses that are specific to traditional business, and some that are universal to all business types. In this chapter I want to speak specifically of the principles contained within Nothing to Lose that are unique to direct sales and network marketing. I’ll be pointing out the areas where traditional business and network marketing align and where they diverge, explaining why home-based business is the solution for a new economy. Finally, so you can get the most out of your chosen path, I’ll give you tips and advice based on my seven-year experience in the industry as CEO of ViSalus. If you have absolutely no interest in a home-based business, then please skip to the next chapter.
You might have heard of network marketing before. It has names like Ponzi scheme, pyramid scheme, scam, multilevel marketing or MLM, and direct selling. It’s known for overly aggressive salesmen, sharks, and snake oil.
I’m here to tell you—it’s all true. In many network marketing companies, across the entire industry, you will find all the above, and more.
Having built a network marketing company from the ground up, I can tell you that there are many shortcomings to this vehicle of entrepreneurship. And it’s not for everyone. When network marketing is at its worst, it tries, through influence techniques and manipulation, to persuade someone who is consumer minded or employee minded to start a business. And once this has happened, it has created a situation where someone suddenly, overnight, starts spouting an entirely new belief system and talking about how passionate he is about becoming a millionaire.
Think of how ridiculous it would sound if one of your closest friends came to you one day and said, “Hey, I didn’t tell you, but I’ve been secretly working on starting a business. I just opened a restaurant down the street.”
“What? Oh my God, are you serious?”
“Yeah, I want all my friends to eat there all the time now. And that includes you.”
“Um . . . you’re crazy.”
“We’re having Monday night football specials! And a happy hour! Are you coming?”
“Absolutely not.”
That’s exactly what happens when someone who isn’t prepared, willing, or capable of running any business starts a network marketing business. It shifts his identity immediately. All of a sudden he’s preaching principles of success and wealth and completely alienating his friends and family. And in return, these friends and family start forming negative opinions about network marketing and project them onto the person who’s recently converted.
Another problem in network marketing is a lopsided ratio of customers to distributors. Let me tell you that during the last six years at ViSalus, we’ve had to tweak our compensation plan again and again to get it right. It’s the most complex system I’ve ever created, even more complicated than any of the software we had to write for the tech companies I’ve owned. That’s why so many people get it wrong. And that’s why so many companies out there are schemes. The sad part is that a lot of them aren’t even schemes on purpose.
From my own philosophies in chapter 4: “compensation drives behavior” and if the incentive is in the wrong place, it will produce the wrong behavior.
For example, if people are paid more to recruit new distributors than new customers, they will naturally try to turn everyone into distributors. If they are paid equally, then they will give people a choice—would you like to become a distributor or a customer? If they are paid more to convert people into customers, they will lead with a customer value proposition right from the start.
We learned this firsthand at ViSalus because at first we put too much incentive on recruiting distributors, and as a result all our sales force cared about was converting people into distributors. When the economy fell apart, we had to ask ourselves what we needed to do to meet the needs of our customers. Now if we have a million customers, we have around a hundred thousand distributors, which means that one distributor handles ten customers. And now we’re one of the leading companies in the industry.
But so many companies have the ratio wrong, and have millions of distributors and few customers. And those don’t work. We figured out that our incentives were creating behaviors in our salespeople that we weren’t comfortable with. And that happens all the time, like weeds growing in a garden—it is the nature of a complex business model.
Network marketing was built on the same inauthentic platform that the aforementioned personal growth industry was built on. “Follow me and do as I say,” and behind the scenes, they’re laughing about all the suckers they’ve taken in.
Just as I said, there will be a new generation of companies to accommodate a rapidly evolving industry. Network marketing used to exist solely in the privacy of living room parties, and closed-door Amway conventions, and nobody knew exactly how these companies were operating. Now we have the Internet and anyone can get information about any company in existence. It’s forcing the industry to change, and ushering in a whole new era.
So in short, absolutely do not join a network marketing company unless you do your due diligence. And you have to love the products or service the company provides. Don’t let anyone pressure you into starting a business if you don’t feel ready, no matter how tempting the sales pitch is. You should know the people you’ll be working with, and make sure they have a set of values similar to yours.
But if you do believe that network marketing is for you, then you can start considering yourself an entrepreneur. This might surprise you, but my personal definition of a professional entrepreneur isn’t a millionaire. A professional entrepreneur, in my opinion, is anyone who has taken himself off the “job wanted” list. Just like athletes who have started making a full-time income through their chosen sport, they are considered pro. Likewise, the day you start making a full-ti
me income through entrepreneurship, you will be a professional entrepreneur.
If one of your main goals as an entrepreneur is financial independence, then the network marketing route offers some of the quickest low-risk ways to achieve it.
It might not have occurred to you that being self-employed is becoming an entrepreneur. These days we associate entrepreneurship with Facebook and Google, and the dot-com era, when young entrepreneurial upstarts were glorified in popular media. The publicity implied that the route to entrepreneurship was open only to twenty- or thirtysomethings with a high tolerance for risk and an idea for a traditional business venture (one that you start from scratch). We consider the great ones—Ted Turner, Sam Walton, Steve Jobs, and Bill Gates—the only true definitions of a successful entrepreneur. Actually, nothing could be further from the truth. Not only do many entrepreneurs take alternate routes like network marketing, they do it at all ages.
Anyone, at any age, can become self-employed, but traditional business might not be for everyone. For instance, you may have a great idea, but you don’t have the start-up capital or the experience in raising funds. You might have the funding, but lack the desire to commit all your time to an entrepreneurial pursuit. Or you may have had a traditional business in the past, and don’t want to go through the headache and pain ever again. You may be the type of person who has neither the know-how nor the funding, and are looking at a lot to learn. Network marketing is the perfect opportunity for you to learn the most important functions of any business: sales and marketing. When you master sales and marketing, you are the master of your destiny.
In the old economy (1998–2008), people were attracted to network marketing for its side benefits. The idea of working from home, traveling, making some extra income, and employing the tax advantages appropriate to a home-based business were the primary drivers for the industry.