Thursday, March 17, 2011

What is a business?

The way I see it: a business is an organization that applies limited resources to create customer value and sustainable profit.

Customer value
It starts with creating customer value...creating something that somebody wants. How do you know that you've created something that somebody wants? Traditionally, you know somebody wants something if they're willing to pay for it. In other words, if they're willing to become a customer. Why? Because it costs something to create the product, convince people to buy it and get it into their hands. So the customer is doing her part by paying for it.

But the economics have shifted. With certain online products, product distribution is so inexpensive that many are given away for free. Lots of software and online services work this way. Download software to use for free, and maybe send a contribution if you like it. Or use it for free for 30 days and then buy it if you like it. Or maybe use it for free forever but get ads displayed in the margins. Or use the basic system for free forever but pay for the premium version with a few more useful features.

This is great stuff for several reasons. Customers get a better idea of what they would eventually buy before they buy it. Yet it costs the software provider next to nothing to do. The software provider gets to learn a lot about the market, even if sales are disappointing. How many are downloading it? What do they like or not like? What kind of software would they love to see? Do you realize how expensive and uncertain it was to gather this kind of information in the old days?

Limited resources
Every business has limited resources and some small businesses do better because they have limited resources. Big corporations often create products that are the dream of some vice president. And because she's a vice president in a big corporation, she has the clout to throw a lot of advertising money at the product to make it successful. But the really successful products are the ones that don't need a lot of advertising to get started. A few people try it and can't wait to tell their friends, who try it, and the sales grow. This is because the product is just exactly what some customers have been needing. Are corporate vice presidents likely to identify this kind of need? Nope. They spend their days in financial meetings and quarterly reviews. It's the people deep in the corporation, or, better, the people with the needs, that identify and understand them. That's how limited resources can actually be better than buckets of money.

Sustainable profit
Whether profits are sustainable mainly depend upon how the market will change and how competitors will react. With baby boomers aging, the market for retirement homes and medical facilities will increase. If you're on the right side of market trends, sustainable profits can be a lot easier. If your product is going to clobber some rich, existing competitor, watch out. Even if your product is better, they may have the resources to crush you or at least delay you until your money runs out. So, for sustainable profit, look for markets where the big guys aren't. Look for markets where somebody who needs something just can't find it. Or look for markets where the only available products are big and high priced but where there are some customers who just want little and cheap. Then you may have the potential for profits well into the future.

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Keywords: entrepreneurship