What Makes A Good Business?

A good business produces a consistent and sustainable cash flow. It solves a problem for the customer, it has a product or service that fulfils a need. The customer’s happy with what is provided and is willing to come back again to refill, repurchase or recommend the business to others.

This is a simple definition, however, in practice and in the modern economy how do we go about achieving this. A good business is one with high revenues and low expenses. Achieving this is going to depend on a number of factors. It is important to choose a business or an industry that you are familiar with.

There is no point starting an airline if you’ve never worked a day in the aviation industry. It’s possible you’ll be successful yet if you don’t understand the industry how will you make it profitable.

This is a recommendation that Warren Buffet offers when it comes to investing. Buffet and his business partner Charlie Monger have always said invest in what you know. If you don’t understand a business or its products then don’t invest in them. This is because the associated risk is far higher.

Products or Services?

Understanding the industry that you go into is key to making the best start. You then need to decide whether you will offer a product or a service or perhaps both. Each of these options have their own factors to consider.

Products

Selling products means a decision about whether you will be a manufacturer, wholesaler or a retailer. If you decide to manufacture your own products then you need to consider the scale at which you will manufacture.

Deciding on a scale means determining whether to manufacture en masse or through the use of just in time methods. Each of these has advantages and disadvantages.

Mass production means it is necessary to have storage while making arrangements for sale. Using just in time methods means ensuring the facilities to manufacture product as necessary. You then also need to ensure the logistical capacity to deliver those products quickly. We live in a world where efficiency can be the difference between success and failure.

If you choose a wholesale strategy then the decision will be to focus on a B2B or a B2C model. A retail strategy is primarily a business to consumer model where wholesale strategies tend to favour business to business models. Using a wholesale model and utilising a business to consumer model is something that has been shown to be successful by companies like Costco. However it should be noted that the majority of Costco’s Net Income comes from Membership Fees. You must be a member to shop at Costco. Costco’s own end of year financial statements for FY 2019 shows ‘Net Income Attributable to Costco’ as being $3,659,000,000. The company generated $3,352,000,000 of revenue from Membership Fees. That is only 307 million dollars of a 3.6 billion dollar net income and represents only 8.4% of its net income.

Source: Figures sourced from Costco 2019 Annual Report Fiscal year ended September 1, 2019 Page 35

Choosing what products to sell is rarely as important as the business that is built around the selling of those products however choosing a product that will do well regardless of how the economy is doing is a wise move.

Selling helicopters or luxury vehicles might sound sexy and glamorous however these kind of big ticket items may suffer in a recession or bear market. However selling cleaning supplies never goes out of fashion and the best part is that the customer literally mixes them with water and pushes the product down the drain.

Services

Offering a service can involve trading time for money. The time being traded does not have to be the time of the business owner. In fact it is often better not to be as it is the business owners role to build the business. Employees with the requisite specialist skills are better suited to doing the specialist work of the business.

There are any number of services industries that can be pursued. Hiring specialists in these areas can mean offering a unique service to clients. This is leveraging other peoples time, providing them with a job and a stable pay check while you as the business owner work to increase the capacity and revenue of the business.

There are a variety of industries that can be targeted as a services business. Below is a list of 91 possible options.

A services business will only require the equipment necessary to provide the service. This can often be done with a laptop computer and a mobile phone. Depending on the nature of the service there may also be specialist tools required. Plumbers, electricians, and carpenters, technology installers, photographers and videography services are excellent examples of this.

Where to go from here?

The key to setting up a good business is firstly understanding the industry and market that the business is a part of. It does not have to offer a brand new product or service. However it does need to differentiate itself from the competition.

When Richard Branson and Brett Godfrey set up Virgin Blue in the year 2000 they were entering a small airline market that had 2 primary competitors. Qantas and Ansett Airlines at the time had a duopoly over the Australian Aviation Industry. The cost of domestic airfares

Virgin was coming in to upset the apple cart and ‘Keep the Air Fair’. This was literally the marketing, promotion and value proposition for the airline for almost the first decade of operations.

Virgin Blue started as a Low Cost Carrier. It did not try to beat the competition rather was focused on developing a brand in the Australian industry. They offered cheap tickets which forced the two major airlines to become more competitive on prices.

Anyone who knows the aviation industry understands that it is an expensive industry to operate in. Every airline generally uses the same equipment, they fly the same routes from the same transport hubs. Very little is different in the services that airlines provide. However, it is the way that those services are provided that will hook people. People will regularly say that “I only fly Virgin!” Or “I only Fly {insert airline name here}!” Or “I will never fly {insert airline name and possible derogatory comment here}!” quite often this will be because of a sense of loyalty to a brand. It may be because of the level of service that they feel they experience from that brand.

The point is that a product or service does not have to be new or untested. It just has to offer a viable choice to the consumer and offer a level of service and product quality that achieves the goal of repeat customers or recommendations to new customers.

A good business solves a problem, some businesses solve problems that didn’t exist for the customer until they were told about the solution.
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