Following on the theme, this article is about the non-essential product and service small businesses that are struggling with their existence. This time we will attempt to frame some of the most frequently asked questions we’ve heard small businesses asking at this point in time, mainly in the U.K.
Previously, we outlined How to cashflow to the end of the year and then how to re-budget 2020 to help establish a minimum and a sensible sales target using different breakeven points in How to Plan B.
Your answers to these questions will help you draft your first 2021 Budget now. It sounds like an impossible task, but it’s worth giving it a try. It will give you a perspective instantly. Remember that the revenue streams you manage in 2020 will impact you in 2021 as it is difficult to switch between business models. And your 2020 clients will know you for the new business model. This is both an opportunity and a curse.
Alternative revenue streams and their associated costs
- What could the market need from you in the second part of the year that is different from what it needed before?
- What needs to change in your pricing to attract additional sales?
- What needs to change in your cost base to be able to charge the pricing that attracts additional sales?
We will go Shakespearean about it.
To try to reach a different market or To stay on your traditional one
This is the test that the economic situation is throwing at you to see whether you know your market or not. It takes three years to build a brand on a market segment. What is the likelihood that a new market, which has not heard of you before the lockdown, will be responsive to you now? Additionally, an old product in a new market has lower chances of fast conversion than, for example, a new product in an old market.
Firstly, I would make sure that you know all that there is to know about your old market. Has it really disappeared or are they just temporarily silent? Are they not buying at all, or are they buying differently and not from you? And if they are not buying from you, who are they buying from and how? You really should know this by now but if you don’t, hurry up and find out.
Secondly, make sure you have had relevant experience in the new market. If your market used to be, let’s say, small retailers and you have now decided to reach big supermarkets because they have stayed active, can you make your way in and demonstrate experience? Otherwise, forget it – you may be knocking on closed doors, or it will take you forever.
To change the pricing or To keep it the same – for your old market
Let’s look at both options: dropping or increasing your pricing.
Can you afford to cut down your prices? Slashing your prices and giving away value to adjust to new market requirements only works if you have a different cost base. Has your cost base changed permanently? Will you be able to negotiate a lower fee on your fixed costs, be they office rent, business rates, subscriptions, or telecoms from now on? Or is it the case that you now have temporary relief in your costs, but later you will be saddled with a similar level of cost while your pricing will stay low?
If a) your 2020 forecast says that your current lower pricing is not sustainable when all other costs come in fully, but also that b) you have to offer a lower price now as some revenue is better than none, then repackage an open-ended process into bits that are affordable for the market. Offer a slimmed-down version of your service rather than reduce the unit price. Otherwise, you may not be able to switch back to the full process later on, or will lose that opportunity with new clients acquired in 2020.
Can you increase your prices? This is the ‘million dollar’ question. You won’t be able to increase your price for old clients, but you may be able to use this dislocation to offer enhanced value to new clients at a higher price. If you can justify the price increase – for example, the raw materials costs have gone up – you can justify the increase. For example, the increased office space needed to ensure social distancing will be priced higher. But this is a rare situation.
You could go for the bigger flame – sell only your premium products/services that require less delivery effort in order to control and minimise additional costs that would have been required by low cost / higher volume delivery.
To change the cost base or To keep it the same
Do your breakeven calculations include the same number of people or not? Are you able to maintain your workforce with revenue at 25% of your usual level? This is a big and scary question that in the U.K. thankfully you will not have to answer until October, as furloughing has been extended. Allow us to come back to you on this one when you close Q3 of 2020 as a lot of things change by the week these days.
Should you keep giving work to your subcontractors or should you the owner start delivering the service for cost savings? Usually, you would want others to deliver for you because the value of one hour of work delivering is lower than one hour of work selling. When you, the owner, spend one-hour selling, the return can be hundreds of times the cost of your drawings divided by the number of working hours in the year.
What about right now? These days selling is very slow, and you may spend a lot of hours and come out empty-handed. Is one hour of delivering work more valuable than one hour of selling today? Compare:
- The cost of an hour of your delivery vs. the cost of an hour from someone else
- The cost of an hour of sales vs. the cost of an hour of delivery for you
To sell something different or To stay with what you are known for
In principle, all you need is some imagination to switch to a different delivery channel or create alternative products suitable for a new delivery channel. However, this is tricky – it does require an investment. Ask anyone who has switched from offline to online delivery, and they will tell you they worked twice as much for the same type of delivery just to adjust it to the new channel. There is a learning curve and cost and no guarantee that what you developed now for a new format will be needed in the future.
Let’s take a media company that is offering a low-priced package to push face masks for a company that converted from dressmaking. Or a face to face public speaking training company that is now offering ‘presentation skills for online meetings’ or ‘influencing skills for online meetings’. It may be a great new niche for the immediate future, but will the market still need face masks and influencing skills for online meetings six months later?
This is why you need to try to plug in numbers for 2021 to see:
- How fast do you reach breakeven in 2021 with the new alternative revenue streams?
- How does it hit your cashflow, now that you are also saddled with a loan?
- What if the market stays at the level of the second part of 2020?
If you would like to think about 2021 with us, take advantage of our free session on cashflow forecast and alternative planning.
P.S. If you were wondering about other sources of cash in economies that are ahead of us in the pandemic and what impact the pandemic had on small business, take a look at China’s stats here.