How to start and run a successful black business today - Making a profit
3/31/2010, 5:25 a.m.
Last month I covered three important aspects of starting and running a successful business: doing your homework, planning realistically and financing your business adequately. In this article, I will cover the critical issue of profit.
Profit is the lifeblood of business. Without profit, a business cannot survive. Profit is what’s left over after all expenses and costs have been paid in full — the residual. The entrepreneur and the other stockholders are the “residual claimants,” the ones who own the profit.
Sales produce the stream of revenues that are the source of profits. Revenue is based on the prices that a business charges for its products or services and the volume of sales. One of the most important decisions an entrepreneur makes is to set the most profitable price.
The management of every business must determine what prices to charge. However, in some industries the pricing decision is based on competitive factors beyond the control of any individual company. If consumers view your product as being identical to those offered by competing companies, you will be unable to charge more than the market price for your products, or they will not be able to attract enough customers for you to survive.
Most entrepreneurs do not gravitate toward markets characterized by these highly competitive conditions, because the absence of pricing power usually results in lower profits. Most entrepreneurs, therefore, try in one way or another to distinguish their products and services from the other products on the market. This is what is called product differentiation. The more entrepreneurs can differentiate their products, the greater their ability to set the price of the product without the harsh consequences of losing sales from higher prices. There are countless examples of companies that have successfully differentiated their products from others on the market. The current case of the Apple iPad is a good case in point for a large business. This product has been positioned by Apple to be different from mini-laptops and from the cell phones. Whether Apple is successful with this product or not is still to be determined, but the fact that they took in 50,000 orders in three hours is a good indication that they are on the right track.
Most small businesses do not have the power of Apple to control prices. But every entrepreneur must think about how his product is different from the other products on the market. The important opinion on this matter is that of the consumer not that of the entrepreneur. If consumers think the products are “me too” types of products, it really will not matter what the entrepreneur thinks. Contrary to popular belief, being an entrepreneur can and should be a humbling experience.
The second component of revenues is the number of products/services that the business actually sells. This is determined by the market as well. Entrepreneurs have to identify the size of the market they are attempting to serve. Is the market for their product based on the number of people on their street, in the city, in the state, in the country or in the world? Entrepreneurs also have to consider the demographics as well as the “geographics.” Are consumers for your product or service of a particular ethnicity, race, gender, age or health status? Are these particular consumers increasing in numbers or shrinking? The larger the potential market for the products and the faster it is growing, the greater the potential sales and the greater the potential profits.