Why is our business only barely profitable?

We are experts in our field and deliver a great service, why then is our business only barely profitable?

This week’s story is of a business – let’s call it Planet – whose time in the sun has finally arrived.

Planet was started a decade ago by two academics whose vision was to provide big companies with the ability to encourage and manage cultural diversity. Over the last 10 years the business has grown from two to 20 people and spent much of the decade researching and developing a world-class service.

The 10 years have been a bit of a battle for the business. First of all, big companies were very slow to acknowledge that they needed help to embrace cultural diversity. Then, just as they were starting to get on board with the idea, the GFC descended and the companies cut their budgets for “discretionary spending”. This year though companies are both spending and are focussed on cultural diversity, so what Planet wanted to know was, “why aren’t we having a great year?”

Planet’s problem was that although they were winning plenty of jobs the corporate budgets for the engagements were low and/or the scope of the project was significantly smaller than they had envisaged.

After a bit of digging around it seemed the problem was as follows:

Planet viewed the cultural diversity issue as a sizeable risk (and opportunity) for companies and so developed a deep, robust, start-to-finish, prestige solution. The companies on the other hand didn’t rate cultural diversity on that basis at all and accordingly were looking for a relatively low cost, quick, simple solution.

That companies didn’t feel the same way about cultural diversity dismayed the founders of Planet because solving this issue was their life’s work; they were intensely passionate about it. Now they were facing the fact that they had spent years and years developing the best solution possible, a solution which it seemed no one valued as highly as they did.

So what did Planet do? Well after a good deal of soul-searching they accepted that there was a need in the market place for a lower grade solution and that either they built it or they would have to let their competitors own that space.

Thus Planet developed a series of solutions under the “good, better, best” headings. The “best” solution being the full scope solution at the proper price, and the “better” and “good” solutions being reduced -scope smaller price offerings.

The process of putting together the “good, better, best” offerings had a hidden benefit; it helped Planet articulate how, especially at the “best” level, they were different to their competitors. And this in turn helped the business win more top end work.

Most business founders are intensely passionate about their niche. But this obsession can render them deaf to hearing what customers actually want. Invariably the business produces a product that is just too good. It’s not that customers are averse to “too good”; it’s just that they don’t value it, and won’t pay for it. The upshot is a product or service that costs the business significantly more to build or deliver than customers are willing to pay.

This is commonly seen in the technology industry where products are regularly over engineered. But it can also be true of any business set up by an expert. I have even seen in it the early childhood education arena.

I guess the point to remember is that while the purpose of your business might be at the centre of your universe, to your customers it’s probably just another planet in a crowded solar system.

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business”  and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).