Thursday, May 16, 2019

Targeting the Middle Market

One budding entrepreneur wrote up a business plan in which the health services are such that most people should utilize them. Almost everyone should or could use the new treatment plans to improve their health, and thus a lot of other outcomes. The proposed price for the service was $200+/wk for the 12-week plan. This person picked that price because it was less than current providers, and seemed reasonable.

My question to this person: how many people in the neighborhood can afford the services? We’ve all heard that half or more of households don’t have the savings to pay an extra $400 bill (for car repair, house repair, education fees, etc.). So how many people can afford $800 each month for 3 months. If they haven’t hit the limit on credit cards, they would just go further in debt.
What the Bureau of Labor Statistics tracks for discretionary income does not include expenditures for telephone, education, dining out (they count only expenditures on groceries) and what others might include as necessity.

The table shows yearly discretionary income. Half of the households have  $800/mo discretionary income, or less. Now you’ve limited your potential market by 50%.

The other aspect is brought out by a conversation with another business owner. He was revisiting his strategy and contemplating a shift to higher-end projects, and getting away from the lower-end repair work. At the higher-end installations, there are fewer clients period. And there may be more competitors wanting to do the larger projects as well. Therefore, on the high-priced proposals, you need a strategy to win every one of them. 

At the lower-end, it takes a lot more clients to make up the revenue. Capacity may be an issue. Price may be the only competitive dimension as well; it’s hard to sell your competitive advantage of service, lead-time, delivery, etc when the margins are slim. Why not target the middle market: those clients wanting/affording the middle of the scale size project? Instead of competing on 10 projects of $100,000 each, work to get the 100 at $10,000 or 1,000 jobs at $1,000 each. Figuring out how to get the 100-1000 is easier than the 10,000 (or even the 10 very specialized, very competitive because they’ll look for several quotes). 

Monday, April 29, 2019

No Recession...Yet?

There’s a biblical saying that building your house on rock is better than building it on sand. It’s meant to have you check your beliefs for soundness and reliability. We’ve all probably built sand castles on the beach out of reach of the current wave action, only to watch the tide increase and the waves wash those things we carefully built away. If we think the tide’s not going to rise ever, we are fooling ourselves. When is the economic tide of recession coming?

Many economists are saying a recession is not coming...yet. This is based on current economic indicators. However, using an example from N.N. Taleb’s The Black Swan, is this a lot like the analogous turkey on an American farm on November 15 thinking life is just going to continue as it always has...not realizing that Thanksgiving Day is within the next two weeks and that life as it knows it is going to ‘change’? America, since the Great Recession of 2008, has had 10 years of continuing economic growth. The current President has promised more of the same. Our sand castle is currently out of reach of the waves.

But will it continue? Are there signs that the tide is coming in?

Consumer expenditures on durable goods has decreased; 3 of the 4 categories show reduction. Half of the non durable good sectors show a drop as well. Residential investments has decreased continuously for the last year. Exports were about the same as a year ago just before the tariffs hit. (One of the reasons exports were strong in 2018 was because of an exceptional loading in 2nd quarter as tariffs were announced and put in place; likewise imports were also exceptionally strong one quarter later.) Commercial real estate investment has decreased for the past 4 quarters. Capital equipment investments have been softening for the last 2 years; companies are not spending their increased profits on expansion.

Agriculture is being hit, buoyed a bit by government assistance in response to China’s closing markets for many cattle and crops. Construction is down the last 3 quarters ( though not as deep as the 3 consecutive quarters in 2015). Motor vehicles had their biggest drop in 4 years on top of an atypical 3rd quarter slump. Job postings are greater than the number of unemployed, meaning this will hinder business growth and survival rates. Only 22 states had year-over-year nonfarm employment growth, which means a majority of states did not (28, of course).

Stock market investments in technology companies are made 84% of the time in unprofitable companies—a level not seen since the dot-com bubble popped when 86% of the companies didn’t make a profit. If people’s market value crashes, how will they retrench? And more worrying, it’s not just individuals who will reduce their spending because they think they need to save more since the market’s doing worse...pension funds and other institutional investors can’t provide a solid monetary foundation for their clients. University endowments shrink, tuition goes up and student debt climbs past its record-setting trillion dollar level...maybe affecting a generation or more opportunity for post-secondary education.

Just as its foolish to think that a policy or procedural change in one part of a business won’t affect another—optimization in one area might actually create inefficiencies in another—economic changes in one sector affect the others positively and negatively. It seems there are more ripples beginning in the recession pond than in the boom pond. When ripples ‘here’ join ripples ‘over there’ then the real waves start and pretty soon your sand castle is being washed out to sea.