Jumping right in - why might SaaS be 'dead'?

Death of the Backend

For context, let's restate Microsoft's Satya Nadella's December 2024 assertion that SaaS as we know it is dead:

I think the notion that business applications exist, that's probably where they'll all collapse right in the agent era, because if you think about it, they are essentially CRUD databases with a bunch of business logic. The business logic is all going to these agents and these agents are going to be multi-repo CRUD right, so they're not going to discriminate between what the backend is - they're going to update multiple databases and all the logic will be in the AI tier so to speak. And once the AI tier becomes the place where all the logic is, then people will start replacing the backends.

It's fair to say this interview sent shockwaves through the industry - not because it was the first time anyone had floated the idea that SaaS was moribund, but perhaps because it was such a concrete formulation of how it was going to happen coming from a senior industry player. But combing through the comments on YouTube, reaction videos and subsequent blog posts, it was clear just how polarised opinion was on how this might play out. A lot of experienced engineers refused to countenance the possibility that backend logic could be subsumed by LLMs, exemplified by comments like this:

I'm a SaaS enterprise architect and have been coding for 40 years. This is 100% absolute nonsense because you will never predict the detailed requirements of the customer, who themselves (particularly, no single individual) can't define them accurately. Agents will only facilitate execution of pre-defined business logic on behalf of the user, and might express results in some fancy way, but the business logic itself is usually highly optimized and specialized, and usually discrete and purposely immutable, which AI is not.

On the other hand prominent YouTuber Matthew Berman has this to say in his reaction video:

"If you've been been watching this Channel at all, you know I've been talking about this for a long time. I truly believe the entire application stack is going to disappear - there just really is no need for it when you have artificial intelligence interacting with the core grounded data that sits within a database and again what does that actually mean for the entire SaaS industry? What does that mean for application developers? I don't know exactly but I have a feeling it's going to look vastly different than it looks today and I've been in SAS my entire career I have built multiple SaaS companies. I've worked for SaaS companies and if I'm being transparent I probably wouldn't start another SaaS company right now and I probably wouldn't invest in any SaaS companies right now either."

Whilst black and white thinking is attractive, it doesn't help much strategically because the final outcome, as always, will probably lie somewhere on a spectrum and it will depend very much on the SaaS in question. My own feeling is that logic-heavy, complex, transactional, domain-expertise-laden platforms (think ERP, accounting and the like) are probably 'safer' than simpler systems with less ingrained business logic (to-do applications come to mind). In other words, the closer you are to CRUD, the more your platform looks like a thin layer over an SQL database with a dollop of custom UI, the more at risk your software. I'm by no means sure about this, nor could I say for how long that relative margin of safety might last. Developments in LLMs over the past month show that making any kind of predictions about their abilities is likely to make one look foolish, at best.

Service-as-a-Software (or SaaS Inverted)

Before Nadella's bombshell comments in December 2024, the venture capitalists had already cottoned on to the fact that SaaS as we know it was heading out the door, to be replaced with a new software-like industry: vertical AI. The story goes something like this: modern SaaS is built for human teams to use. Humans cost money and need to be fed and watered. AI can replace many human workflows, especially those that are language heavy. So rather than building software for human agents, let's build software that comes with agents built in. In other words, as a business owner or manager you won't buy software for your team, the software will be your team. Listen to Jared Friedman from Y Combinator weigh on why vertical AI agents could be 10x bigger than SaaS:

"Here’s my pitch for 300 vertical AI agent unicorns. Literally every company that is a SaaS unicorn you could imagine, there’s a vertical AI unicorn equivalent in some new universe. Because most of these SaaS unicorns, beforehand, there were some box software company that was making the same thing that got disrupted by a SaaS company. And you could easily imagine the same thing happening again, where now, basically, every SaaS company builds some software that some group of people use. The vertical AI equivalent is just going to be the software plus the people in one product."

Of course this doesn't mean the SaaS incumbents are going away overnight, just that the industry as whole will gradually shift from SaaS to Vertical AI, just as it shifted from 'box software' to SaaS a generation ago.

The reason why this shift is just so tantalising to VCs comes down to where the increased 'software' spend is going to come from. Listen to Caty Rea from Bessemer Venture Partners explain it in a video entitled Vertical AI shows potential to dwarf legacy SaaS:

"They’re spending almost as much on this little kind of one-off service as they are on their core system of record. So, I know you know the answer to this, but, why does that make sense? Why aren’t they balking "wait a minute, we can’t double our technology budget in a year" — how do they think about it? Yeah, I think, you know - it’s a leading question, and the reason is because they’re really not. They’re just replacing existing services spend, and so they don’t need to create entirely new budget. Instead, it’s a reallocation of services spend to something that is productized thanks to AI."

Put simply: replacing humans with AI agents. Beyond the obviously seismic socioeconomic earthquake that's likely to cause, there's a fundamental nugget of wisdom that can be extracted from this assertion. In the example they are talking about, which concerns the 'legacy' SaaS platform Litify (a system-of-record workflow software for personal injury law firms) and the new vertical AI startup EvenUp (sells a service to those personal injury law firms drafting legal demands to insurance companies), the incumbent SaaS product and incoming vertical AI product live side by side. I think this idea is worth dwelling on a bit longer. Returning to the Bessemer roundtable, they see the new opportunity as split two ways between software entrepreneurs who are quick to identify AIable workflows and professional service companies essentially AIising their offering:

"If you can capture some of that human spend, that’s a really powerful opportunity. And, and I think it’ll take two forms. One is the EvenUp-style of a denovo venture-backed company: a really talented entrepreneur identifies a workflow, automates it, and, you know, it’s lightning in a bottle. I think we may also start to see traditional services businesses—you know, BPOs, law firms, accounting firms, experts, adopt these types of technologies to drive automation inside of their business. You ask for a spicy take: I think the demise of professional services firms is a bit overblown. If anything, some of the value associated with AI may end up accruing to these professional services firms that can harness it."

That's an interesting, and much more savory, option for us SaaS founders and one we'll explore when thinking about AI strategy.

But before we do that, let's briefly address the elephant in the room.

Software is Worthless

A parallel but somewhat related debate is currently raging amongst software developers in the comments sections and on Reddit. It concerns the answer to the following question in different guises: "I'm just about to start a 5 year Computer Science degree in the hope of becoming a software engineer/developer, should I bail?". As you'd expect, opinion is polarised, not least because software development tools have been making engineering 'easier' for decades now. Higher levels of language abstraction, frameworks, superb developer tooling - all have increased developer productivity. So there's an argument that the new AI-powered development paradigm is just an extension of a trend that perhaps started with 'no code' or 'low code' builder platforms and now extends to LLMs doing most of the coding for developers.

My own feeling is that this time it's different (I know, famous last words). I've tried Lovable, one of the new breed of AI full-stack development tools and the results are astounding. They are limited in their scope, I get that, but where they are a good fit, which is quite honestly a lot of use cases, they are undoubtedly an industry-shifting tool that is only going to improve. I watched a non-developer founder friend build a full SaaS platform MVP in about 5 days - a process which he'd previously been through only 3 years early at a cost of hundreds of thousands in seed capital and probably about a year in time.

He and I don't necessarily see eye to eye on whether this is a good thing for SaaS founders though. For non-technical or semi-technical founders you can see this type of tool as either a godsend or a death knell. Yes, you can build a prototype, an MVP or even a somewhat functioning SaaS platform (remember, today's AI is the worst you'll ever use) in essentially zero time at essentially zero cost, but why bother? SaaS, which was once gold, is now sand.

At least that's one, not particularly nuanced way of seeing it. We'll see how the 'software is worthless' argument fits in with the different strategic approaches to AI that I've identified and will now outline.

7 Strategies

So, as a SaaS founder, what are your options right now? After a pretty extensive round up of current thinking, these are what I think represent the main strategic paths - a conceptual framework for SaaS operators to think about the way forward with AI. It goes without saying that they are not mutually exclusive, you could adopt one, two or all of them. I've tried to list them in rough order of how deep they involve jumping in, starting from 'don't go anywhere near the pool', through 'sit on the edge with your feet in' to 'nose dive straight into the deep end'.

Strategy #0: Milk the Cow

It might sound like sticking your head in the sand, but paradoxically I think 'do nothing' should be the default option for many SaaS platforms, particularly those that fit some or all of the following criteria:

• Mature, been in the market for a long time

• Lots of existing customers

• Large existing revenue base

• Little capital or resources to build AI

Something that forward thinking technologists often overlook is that adoption is sloooooow and legacy software often lasts a really, really long time. A bet you know examples of really big businesses still using spreadsheets to run their entire organisation, and maybe even signifcantly sized businesses using pen and paper. I have a friend that works as a well paid Fortran programmer for one of the biggest banks in the world. Fortran for God's sake.

So riding the long adoption curve of AI and milking the cash cow as long as possible whilst perhaps not building too much 'worthless software' could be a decent strategy for many companies. Just don't expect it to last forever.

Strategy #1: Be the Database

Of course, I don't literally mean just the database. Postgres is the database. But if your bet is that at least some business logic layer, however thin, will always be necessary, then this is your play. Essentially, you're predicting that core system-of-record type platforms will continue to exist for a very long time and won't be displaced by AI-only LLM-powered logic layers.

Here's who I think this applies to:

• Mature, been in the market for a long time

• Enterprise

• Platforms with very complex, transactional business logic

• 'Wide verticals' (eCommerce, ERP, CRM etc)

To 'be the database' in the forthcoming age of AI does mean adapting to AI-centric workflows and UI - it just means you won't be the one building them. You will watch as the battle for supremacy in the 'AI Platform' wars unfolds between the really big players like OpenAI, Microsoft, Anthropic, and Google as well as the current and future agent building platforms like Crew and Langchain. You'll expose your core business logic via well-documented and well-structured APIs that can be connected and consumed by agents, allowing your product to remixed into and combined with an ever evolving suite of other backend systems-of-reference, but you're probably doing this anyway, right?

Strategy #2: Sprinkle

This was the first and most obvious strategy to emerge in the early days of generative AI, before we all started getting obsessed with agents. The idea was to give the admin user simple, one-shot tools to ease annoying, otherwise manual tasks like:

• Removing a background from an image

• Drafting a reply to a customer ticket

• Create cookie-cutter content for marketing

• Creating templates for marketing emails

• 'Reading' a paper receipt and creating an expense record

I think for a while it seemed like this would be where AI's role in SaaS would start and end. It felt like sprinkling a little bit of magic on top of existing admin panels, but definitely not a step change, much less the 'death of SaaS'. Oh to go back to those days...

Strategy #3: Customer Facing

Possibly a variant of the 'Sprinkle' strategy, this approach applies to SaaS platforms that have both 'admin' and 'end' users - the canonical example being eCommerce (where 'admins' run the merchant businesses, and the 'end' users are the customers that shop on their stores). Examples of adding AI to customer-facing features include:

• Custom product recommendations and personalisation

• Customer-service bots

• Powerful search and help

The danger I see here for incumbent SaaS platforms is that a lot of these functions can and will be built better by third-party vertical specialists. Data integration will continue to be a problem, as it always has been, but there are thousands of plugins and widgets in the 'customer facing' category that you can add onto your WooCommerce, Shopify, Wix or Magento store, and I don't see that changing - in fact I think its a category that's set to explode in terms of third-party development.

Strategy #4: Copilot

Now we're really jumping in, perhaps not right at the deep end, but definitely not the kids pool. Copilots are starting to pop up everywhere in the SaaS world (and the software world in general). You can have a copilot write a function for you in Excel, reword a response to a customer in a ticket system, or pull up a report. Whilst some might already consider this 'agentic AI', I don't class it as such in my strategic thinking because Copilots are generally:

• Not autonomous

• Limited to small sets of well defined tasks

• Not able to interact with each other

As always, there's a spectrum here between a simple copilot, more complex copilots, and fully agentic AI agents (SAP's Joule appears headed that way) and there's crossover with the 'Sprinkle' strategy (Shopify's Magic appears to be a good example).

From a strategic viewpoint, its a pretty safe, if vanilla, bet, pretty much independently of what your platform is and does - they work well almost anywhere. Time will tell whether the copilot UI and use paradigm really beds in and becomes an expected and accepted interaction pattern, in which case most platforms will probably be forced to add some kind of copilot - in other words, copilots become as ubiquitous as hamburger menus, dialogue boxes and popup notifications.

Strategy #5: Fully Agentic AI

Firstly, let me be clear about what I mean here. I'm talking about adding a fully built out suite of agents, their orchestration and interaction, and the UI to build, manage and communicate with them directly into your platform. This means that users of your platform can basically put their feet up and have the software do the work for them.

Now obviously this applies less the thinner your vertical is - if your SaaS is a one trick pony then you can just do 'vertical AI' (see below) by either launching a parallel offering or completely replacing your traditional SaaS product with a vertical AI product.

No, this strategy is going to be primarily for large, somewhat multi-purpose SaaS - ERP, eCommmerce, CRM etc - platforms that border on the general use or 'wide vertical' or even 'horizontal' definition.

Right now we're only seeing this in a handful of cases, and only with the real enterprise heavyweights like Salesforce's AgentForce.

My feeling is that this approach is going to be out of reach for small and mid-market SaaS platforms who would be better served focusing down on their core functionality and integrating into the wider agent ecosystem.

Strategy #6: Vertical AI and/or Service-as-a-Software

I was in two minds whether to split this into two separate strategies but really it's two sides of the same coin and depends more on how the product or service is projected. Vertical AI is both software and a service and I suspect the distinction is more marketing than anything else.

Should incumbents go after slices of the vertical AI market? I think it depends on whether there is really high-value core expertise (or even straight code) that can be ripped out of its comfy bed in your existing SaaS platform and transplanted to an AI-powered workflow which can be packaged up and sold as 'Service-as-a-Software'. That, of course, is fraught with risks - does it devalue your existing offering? Do you have the expertise and resources to build a whole new product? What is the exposure to competition for this particular vertical?

Ultimately, if the VCs are right, this is where trillions of dollars worth of value will be created in the new AI 'software' market, so it might well be too tempting an opportunity for many entrepreneurial SaaS operators to ignore.

What I do suspect we'll see are SaaS companies leaning heavily on AI for the professional services they already offer - think support, implementation, integration, customisation and training. There are quick wins to be had here for any SaaS vendor, not only for cost cutting but also for streamlining and speeding up onboarding pipelines, the bane of any non-trivial SaaS platform.

Conclusion

SaaS decision makers are somewhat caught between a rock and a hard place right now. With the AI landscape changing at breakneck speed, it's almost impossible to make a big decision with lasting repercussions. For what it's worth, here's how I'm thinking about this in my own company:

• What is our core value proposition? (Business logic, UI, workflows)

• How far from our core value proposition should we stray?

• How vertical is our vertical? (Wide, general purpose vs narrow well-defined vertical)

• What are our short, medium and long term business goals? (Customers, revenue, business value)

• Should we look outwards (integration into ecosystem) or inwards (try to capture AI value internally)?

• What is the appetite for AI adoption in our segment? (Conservative vs forward-thinking)

• What resources do we have available?

• How can me improve internal operational processes with AI?

How do most business owners order stock?

Well, honestly, they probably just eyeball it. A lot of business owners have been “in the game” so long they can probably just guess at how much to buy. 

I ran a company that supplied restaurants and hotels for a good while and can tell you that precisely 0% of our customers were doing anything other than calling us from inside their walk-in cold room with a list scratched on the back of a chopping board directly from memory.

One Step Up

Beyond just eyeballing, I’d guess the next most common method would be basing ordering off averages. Averages are a relatively simple metric - well understood by most and on the surface, a good indicator of what to order for the forthcoming weeks and months. Let’s take an example:

Acme Widgets have sold 10 widgets per week for the last 3 months and now needs to order stock for the next 3 months. Simple right? Start by working out the average monthly sales, which is just 10 x 4 = 40, then multiply that by the 3 months to get an order of 120 units.

The Hidden Problem with Averages

Let’s take a different example but with a common theme: a monthly average of 40.

This time though, instead of a constant 10 sales per week, the pattern looks like this:

• Week 1: 10

• Week 2: 29

• Week 3: 1

• Week 4: 5

• Week 5: 14

• Week 6: 12

• Week 7: 3

• Week 8: 6

• Week 9: 7

• Week 10: 11

• Week 11: 2

• Week 12: 20

That’s radically different right? Sales are not constant at all, they are pretty much all over the place.  Honestly, though, this is probably a much more realistic scenario for most businesses.

Statisticians refer to this as variance - how much the individual numbers that go into an average vary around that average. You might remember studying standard deviation at school and variance is exactly what standard deviation quantifies. The higher the variance/standard deviation - the more “all over the place” the numbers that make up the average. The lower the variance/standard deviation - the more tightly packed together they are.

But what does this mean for stock ordering though? In the end we might still be tempted to add all those numbers up (120) and divide by the number of weeks (12) to get a weekly and monthly average (10, and 40 respectively) - which leaves us right back at square one.

Every Week Is Christmas

Look back at the numbers. What was the highest weekly number of sales? 29, right? So if we want to be sure we won’t run out of stock, we could assume we’ll sell 29 units each week for 3 months. That would mean an order of 348.

Compare that number to the 120 we decided we need to order earlier, based on the average. Ordering 348 gives would give us the advantage that we are MUCH less likely to run out of stock, but it comes with some BIG disadvantages from a business perspective - a big capital outlay, a risk of having a lot of stock lying around for a long time, and in the case of products with a shelf-life, the risk of expiry and having to throw some stock away.

So clearly, assuming every week is Christmas isn’t the best tactic. Is there a better one?

Every Week Is Not Christmas

Let’s summarise where we are.

We understand that ordering according to just the average is a poor strategy that doesn’t account for variance. We’ve also seen that ordering to the “best sales scenario” is also a poor tactic which could leave us hugely overstocked and potentially out of pocket.

What we want is to be “reasonably sure” we won’t run out of stock. In order to achieve that we’ll need to order more than the average, but less than the best case case scenario. 

Luckily we don’t have to pick a number out of thin air. There’s a mathematical middle ground that can really help us and it’s based on a concept called confidence intervals - it lets us specify some threshold, like 99% or 95%, of “confidence” that we’ll be able to cover sales.  It’s just a statistical measurement based on existing data, so it’s no guarantee - but it’s much better than an average.

Going back to the above numbers and running the calculations: for a 95% confidence interval, the “upper boundary” is approximately 14 and the lower boundary is approximately 6. This should be interpreted as “we are 95% confident that sales per week, during the period we are buying for, and based on past data, will be between 6 and 14.

That’s pretty cool right? 95% is plenty of confidence.

Scientists tends to use this statistical threshold when looking for “statistical significance” in experiments, so it’s certainly good enough for stock ordering!

So if we can be 95% confident that sales won’t exceed 14 per week, we can multiply that up by the 12 weeks to get an order of 168. Let’s now compare the different ordering strategies we’ve looked at:

• Basic average: 120

• Every week is Christmas: 348

• 95% confidence interval, upper bound: 168

Using the 95% CI technique, we’d be ordering “a bit more” than what the average tells us to, but in exchange we are getting MUCH more certainty we’ll be able to cover sales.

In Practice

Obviously you’re not going to be calculating confidence intervals on the back of an envelope. You could use a spreadsheet or perhaps a small script your developer could make for you. If you use Pakk, our integrated demand planner is based on this fundamental technique (see the detailed explanation of how the calculations work).

First, take a deep breath

If you've got here because you've worked yourself up into a state of rage because the fancy accounting/ERP/web system you pay all that money for each month has produced an invoice that doesn't match up with an invoice you've been given, or a customer has complained that the totals on an invoice you've produced are incorrect - take a deep, calming breath and know this: there is no single, correct way to calculate VAT.

Right now that might sound plainly ridiculous to you, but stay with me for a rock-and roll-tour of VAT and rounding and at the end of the article I'll point you to some hilarious forum discussions where people really lose their shit over this.

How could there be different ways of working out VAT?

Surely 20% means 20%?

Yes and no. It all comes down to when you perform rounding. If you can't remember what rounding is, you're going to struggle with the rest of this article, so here's a refresher.

Rounding 101

The result of a calculation involving amounts of money and fractions (or decimals, or percentages etc etc) can result in numbers that don't make sense within that monetary system. That's a mouthful - here's an example:

In the UK, standard VAT used to be 17.5%. So a £1 + VAT product should cost £1.175 right? But what does that even mean in a monetary system that gave up 0.5p coins donkeys' years ago? And that doesn't happen just with funky VAT rates involving 0.5%s. VAT is 20% right now, so a £3.21 + VAT product should be £3.852 inc. VAT, which is even more meaningless.

So for a monetary amount of 3.852, what do we do? Well, most modern monetary systems divide their primary unit (e.g. Euro) in hundredths (e.g. Cents), which means we need to round to 2 decimal places.

Now, there are a few ways rounding can be accomplished:

• always round down: 3.852 -> 3.85

• always round up: 3.852 -> 3.86

• commercial (common) rounding: round up or down depending on the rest of the number - without going into technical detail, this is probably what you remember from school as "round down if it's below 5; round up if its exactly or above 5".

None of these are technically 'correct', but commercial rounding is the one normally used, well, commercially. It's the safest bet and usually the one either allowed or mandated by accounting standards. It's the one Pakk uses. For uber-geeks, we round -0.125 to -0.13not 0.12, which is how 'commercial' rounding applies to negative numbers.

If you're starting to already see how things could get gnarly, buckle up - we haven't even fired up the engine yet!

When to round

OK, so we understand that we need rounding because we know prices like 3.852 just don't make any sense. Let's dive deeper into how the simple act of going from 3.852 to 3.85 can cause mayhem in an accounting system. We'll used a worked example. I won't include any specific currency, just imagine this applied to your home currency, like GBP or EUR.

Let's say there is a product, we'll call it Product A. The ex. VAT price is 13.25, the tax rate is 21% and so the inc. VAT price is 16.0325. If you went into a shop, picked up the product, went to the counter and were asked to pay 16.0325 you'd rightly be confused. Luckily, that would never happen. You'd be charged 16.03.

Let's just step back a minute and philosophise: what actually happened to the 0.0025 that got lopped off the end of that price? Where did it go? In the game of money there are always winners and losers right? So who won? and who lost? Well right off the bat, we can see that you, the consumer, saved yourself the princely sum of 0.0025. That's a lot of cash. To put that in perspective, if you did that 10 times, you'd have saved 0.025 which is....hmm, also in need of rounding. Forget it. You saved some money. So who lost out? Maybe the retailer - after all, he collected 0.0025 less then he would have done without the cunning rounding stealing his income. That's true, but remember, the VAT that the retailer collects goes to the tax authorities eventually, so really it was the tax man who lost out here. Shame. Well, you win some, you lose some, as we'll see later.

Right, so we've established that the effective inc. VAT price of Product A is 16.03. Cool. So you go back to the same shop to buy 4 of them to complete your set. You take them up to the counter, and as you are counting out your coins to pay exactly 64.12 (16.03 X 4), the cashier throws you a curveball and asks for 64.13. Did you think you were always going to be a winner in the game of VAT and rounding? Sorry to burst your bubble. But what just happened there? It's actually quite simple to understand. The till system used by the store did the multiplication of quantity (4) first, then calculated the VAT. So: 13.25 X 4 = 53; 53 X 1.21 = 64.13.

So who's laughing now? Earlier in the day, when you'd paid only 16.03 for a single unit of Product A, you'd left the shop highly contented with the bargain you'd scored. Now, as you trudge away after having to scrape together that extra 0.01, you leave the store highly discontented. Surely you've been scammed out of a penny? Where did that penny go? Well, assuming the merchant accounts for VAT in the same way the till calculated it (which might not be a valid assumption, even though it would be a mini "fraud" if they didn't), she will pass on 11.13 to the taxman, leaving 53.00 as her net income. That represents exactly 13.25 per unit, which is what you paid in the morning for the single unit. So, as you probably already guessed, that penny went to the taxman. Like I already said, you win some, you lose some.

So, the difference between these two examples is down to where the rounding was applied. In the first transaction, since there was only one unit, the inc VAT price of that single unit was rounded. In the second, the line total (i.e. the total price after multiplying by quantity) was rounded. If the same method had been used in the second transaction, we would have multiplied the already rounded 16.03 by the quantity of 4 to reach a total of 64.12, which is what you were expecting to pay, right?

From now on, we're going to refer to the above methods as the unit method and the linemethod, respectively.

Actually, there's another way

OK, this is where it gets really complicated and working an example through is too hard to follow in an article like this, so I'll include a spreadsheet if you are interested in looking up particular combinations of numbers that can cause the scenario I'm about to describe. For now, just trust me.

In the second transaction I described above, and in transactions of its kind, we refer to lines. A transaction is composed of multiple lines, each line refers to a product and quantity. So in the above transaction, there was only 1 line, with a quantity of 4. Simple.

However, in a commercial setting, transactions tend to have many lines, so there's now an extra level of complexity. In a multi-line transaction, it's entirely possible to leave each line Inc tax amount in its raw, unrounded state, add them all up and then round the total!! This gives the same result as just adding up all the line Ex VAT prices and doing a single VAT calculation right at the end. Predictably, this can give a result that differs from both of the methods described above. I'm going to call this final method the transaction method.

Actually actually, there are at least 4 other ways

From the previous article I wrote about rounding, I can think of all these approaches to rounding, and I'm sure I haven't got all of them:

• Round the unit ex price, multiply by quantity, apply tax, round again

• Apply tax to the unit ex price, round, multiply by quantity (the “unit” method)

• Multiply the unit ex price by quantity, calculate tax, round tax, add to line ex (variant of “line” method”, with rounding of tax)

• Multiply the unit ex price by quantity, calculate tax, add to line ex, round line inc (variant of “line” method”, with rounding of line inc)

• Multiply the unit ex price by quantity, round, apply tax, round again ( “line” method but with rounding of line ex, and rounding of tax, this is what we do)

• Multiply the unit ex price by quantity, apply tax (no rounding at all)

• Round the line inc. amount, sum those to get to the transaction inc. total

• Round the line inc. amount but ignore those and add all unrounded line ex and line tax, then round that, to get to the transaction inc. total

• No rounding anywhere (leads to 'unreal' transactions amounts like 67.452, that can't actually be paid)

Just tell me the right way to do it

The right way to do is consistently. That's pretty much the only answer I can give you. Once you understand that, you'll start to understand where the torrents of rage you can find online come from.

Most tax authorities are happy for you to just choose a way and stick with it. As long as you're not doing open fraud or have discovered a way to cheat them out of millions in tax revenue, rounding is going to make very little difference in the long run. I know this to be the case in the UK (link below), and I suspect it is the case in most countries, but at the end of the day, I'm not a certified accountant or tax guru, so you'll have to try to find out how it works in your country. PS: good luck with that - this is such a minefield of complexity that 'experts' will probably not be able to give you a straight answer and it might even be totally ambiguous in your country's tax code. In the UK it has sometimes gone to court!

The really irksome scenario is where different systems do it in different ways and I believe this is what drives most people nuts. Given the complexity I described above, most casual users could be forgiven for not understanding the layers of accounting assumptions that are baked into any ERP/accounting/transactional system and so when they find that a transaction their system produces doesn't match up to the "same" transaction on someone else's system, they assume that one of the systems is "wrong" or "broken" and get into forum or helpdesk flamewars (see links below for some real nutters).

Be honest - if I asked you what the resulting margin would be on a 50% markup, how quickly could you answer?

Given how fundamental margins and markups are to any product business, I think it's time we cleared this up once and for all. If you can't be bothered to read this, just grab the "cheat sheet" at the bottom of the article, print it out and keep it in a safe place.

Markup

Markup is how much you add to the cost price of a product in order to arrive at the selling price. It can be expressed in absolute terms (e.g a £1.50 markup) or more usefully, in relative terms (e.g a 15% markup). 

Here are some key points:

• a relative markup always leads to the same margin (see below)

• an absolute markup leads to a variable margin depending on the cost price of the item (i.e. it's not the same to add £1 to a product that costs 50p than to a product that costs £100)

Obvious points, but sometimes overlooked. 

Formula

(Absolute Markup / Cost Price) * 100 = Relative Markup as a %

In human words: divide the absolute markup (the amount of profit, or absolute margin) by the original cost and multiply by 100.

Margin

Margin is how much profit you make on a sale. Again, it can expressed in absolute terms (e.g. a £10 margin) or more often, in relative terms (e.g. a 20% margin).

The point I made above bears repeating: a relative markup implies a consistent relative margin. What does that even mean in practical terms? Basically, if you always markup your products by the same relative amount (let's say 100%, which is double), the relative margin will always be consistent (in this case 50%, which is half). In yet more words: if you sell your products at double the cost price, half will be profit. Seems glaringly obvious when the numbers are simplified.

When the numbers aren't nice and round, you need to know how to convert back and forward to be able to answer questions like "If I apply a 23% markup, what will be the resultant profit margin?".

Formula

(Relative Markup as a % / (Relative Markup as a % + 100)) * 100

It looks ugly, but its simple. Here's the first case I mentioned as a worked example:

(100 / (100 + 100)) * 100 = (100 / 200) * 100 = 0.5 * 100 = 50%

And here's the answer to the question I asked about the 23% markup:

(23 / (23 + 100)) * 100 = (23 / 123) * 100 = 0.187 * 100 = 18.7%

So, as we already knew, 100% markup is a 50% margin. It might not have been so obvious that a 23% markup is a 18.7% margin.

Cheatsheet

Here's a quick reference for common markups in the range 10% to 100%. If you just need a rough idea of what markup gives what margin, use it as a reference.

Last week Pakk reached a major milestone. Of course there have been many others: our alpha launch, our first live customer site, their first order etc. This one, however, was really big, both on a personal and professional level. This is the story of how that milestone was reached and what it represents — right from the very beginning. It’s a reflection on the past and future, on business and entrepreneurship, on technology, software and web development, on commerce and e-commerce. Mostly though, it’s about life: my life, our lives and life in general.

Pakk is a prototypical “scratch your own itch” product: something that I wanted that didn’t exist, so I decided to build it myself. In 2005, Jessi and I had started a food import and distribution business in the UK — a hybrid B2B and B2C importer, wholesaler and retailer — a complex business in a small package. Back then e-commerce was in its infancy and there were few good options for starting an online store; today’s behemoths like Shopify hadn’t arrived on the scene yet and we couldn’t afford custom development. So we started off with a simple site with some simple PayPal “Buy Buttons”, progressed though a platform called “Mel’s Commerce” (nod if you remember that) and finally, sometime around 2007 made a huge leap of faith and wallet and dove head into Netsuite. Netsuite wasn’t yet the mega company that it is now is and accounts could still be had for a realistic monthly fee. I’m not saying we could really afford it, but we could stretch to it in anticipation that it would help us grow, which it did. Netsuite, and the “single cloud platform” concept that underpins it, is a work of genius.

Looking back though, it’s hard to say whether Netsuite was the best or worst decision we ever made for the company. Sincerely, there were no other contenders anyway, so it’s a moot point. Our company wasn’t (and isn’t) one of those “pure play” e-commerce businesses — the kind Shopify excels in. We were (and still are) a “real” commerce business, with a complex web of suppliers, trade customers, private customers and stock flowing in and out at a fast pace. We needed a business platform, not a website. Yes, Sage or Quickbooks could do all the backoffice stuff — accounts, stock etc, but back then they were purely desktop applications and certainly couldn’t generate a website, or even integrate with one. So it was either Netsuite or a complex, do-it-yourself web of yanky integrations. If that story sounds familiar to you, it’s because not much has really changed in 15 years of absurdly fast tech progress — something that always strikes me as odd given the vast sums of money sloshing around in this industry (although after having built Pakk I perhaps understand why a lot better).

Well, one thing for sure has changed: Netsuite became a Fortune 500 company, was acquired by Oracle and repositioned itself as purely “enterprise”. The word “Enterprise” in software is like the word “Private” in banking — it’s code for “if you need to ask the price, you can’t afford it”. So, whilst Netsuite, in the early years at least, was able to help us grow and organise ourselves like a “real” company, it soon became a noose around our neck. We couldn’t afford the new web module when it came out, so we were stuck with the same obsolete website for the 10 years. We patched it and prettied it up every few years, but we were fighting a losing battle against the break neck speed of internet and web development as the world moved from desktops to tablets to smartphones. We watched from the sidelines as e-commerce went from 0% mobile to 80% mobile in the space of 10 years. We were dying a slow, technological death.

So, “leave” you say. And we tried. Every year I’d take a scan through the options (WooCommerce + yanky integrations, Magento, Odoo, and so on) and cross them off the list for one reason or another until the last remaining option, stay with Netsuite and patch up the current site, was the last one left. That went on way longer than it should have and I only have myself to blame for that. I’m a purist, or a minimalist, in lots of ways and I just couldn’t kick my addiction to the “one cloud platform that does everything” model to which I had become completely addicted. I often talk to e-commerce people who express complete satisfaction with their ZenCart + Zapier + QuickBooks + Helpscout + 9 others apps solution, but can never help thinking it’s because they’ve never felt the sweet embrace of Netsuite.

A company is more than the tech it’s built on — but every year that goes by that statement becomes less and less true. How many businesses are built directly on top of Google, Amazon, Shopify, Facebook? What happens when one of them goes up in smoke? If you don’t keep up, you’ll eventually get eaten alive — you need to understand that. Somewhere out there someone is brewing a technological solution that is going to make what you do redundant, or clunky at best. Don’t obsess over it, but keep up.

In 2015, 10 years after starting the food company, I made a totally irrational decision. I couldn’t make peace with the fact that there was no “Netsuite for small businesses”, so I decided I would build it. The thing is though, I’m a crappy entrepreneur — I don’t know how to write a business plan, get investment and hire developers. The only thing I’m really good at is learning new things, so I decided I would learn to code and build it myself.

Now I really hope some of you are software developers and that you’re falling out of your chairs laughing right now, I really do, because I’m right with you. Perhaps you alone have enough insight to understand how completely and utterly absurd that decision was. Netsuite, for reference, was founded in 1998, so had almost 20 years on me, as well as about 4000 experienced engineers on their payroll.

Oh by the way, I also knew nothing about software development.

I’d done some scripting in my student days, could hack on a bit of HTML and CSS and had written some buggy scripts in our Netsuite account. I knew what a variable was, maybe a loop, but probably not a function. Level 2 or 3 out of 100.

So this is where the slightly cheesy “man triumphs against adversity” story starts. It might make you vomit but I’m going to tell it anyway, because there are some useful conclusions to be drawn from it, for both of us hopefully. It might inspire you, but more importantly, it might also help you avoid making some of the same mistakes I did.

I’ll fast forward through the first 18 months rapidly. I studied my arse off and learnt to code. I tried to understand how the web worked and where to place myself in a field that was evolving at blinding speed. I picked the MEAN stack almost at random, quickly gave up on Node, Googled “how not to write code that crashes constantly”, found Golang (even though I thought “strongly typed” was something to do with how hard you hit the keys), gave up on Angular in favour of Polymer and slowly created about 10 totally crap prototypes with names like “XCommerce” and “EcoSystem”.

There are already a couple of lessons in this: both objective and subjective. One thing that is indisputable is that the web, YouTube in particular, has democratised access to knowledge in a way that has just flipped “learning” totally on its head. I remember recently watching a video in which a carpenter, noting the same effect, commented that for the last 50 years, unless your dad was a carpenter your only resources to learn how to make stuff from wood were a few well-thumbed copies of “Wood Magazine” you might find in your local library, if you were lucky. The world we live in today is so far removed from that set up that it almost brings tears to me eyes. I’m from a generation that still remembers libraries; I highly doubt that todays upcoming generations will remember them or have cause to even wonder why they might have been necessary. Today, knowledge is immediately and universally available to practically everyone. To me this is the single most important development of my lifetime. I couldn’t have done what I did without Youtube, full stop. Please don’t be afraid to learn new things — we have it so easy we don’t know we’re born.

Now the subjective bit. Was what I decided to do actually a good idea? To be totally frank — definitely not. Software development is hard, really hard. Coding is only a small part of it. The web is also complex, like really complex. Learning how to code a simple page, or even app, is only a small part of it. There are literally a million things you need to know as full stack web developer, and the list gets bigger and more complex every year. If you have a great business idea that requires software, just be an entrepreneur and get someone else to build it while you build the business. Even if you are already a seasoned developer, I’d probably still give the same advice. Software development and business development are totally different paths, and whilst not impossible, doing both is generally not advisable. Partner up if necessary, find a technical cofounder. I strongly, strongly advise you not to waste 5 years of your life trying to become an even semi competent full stack developer. If you insist, pick a very niche project that is much more limited in scope that “one platform that does everything”. Honestly, sometimes I surprise even myself at how stupid I can be.

But hey, this is a “do as I say, not as I do” kind of story, so that’s not the way it went. I stumbled around for almost 2 years, then ended up getting involved in a totally unrelated startup which zapped up another 18 months before eventually tanking. Two massive things came out of that: I got the experience of building a large, complex, licensed platform from scratch, and I met Allan.

Allan was a frontend developer we hired to work on the app for the startup. I was developing a deep love for functional programming and had fallen in love with a newish language called Elm. In the really early days of Elm, you could hire shit hot programmers for a fifth of the salary they’d normally require, just because they wanted to work with Elm. That’s what happened with Allan.

By the time the startup was winding down and I was thinking about getting back to “BongoCommerce” or whatever I was calling it at that stage, I already knew I wanted to use Elm and that I wanted Allan to help me. Somehow, I convinced him to become my business partner. He would write the frontend apps while I concentrated on the backend. Meanwhile, the food import company was ticking along OK and I convinced my partner from that business, Jessi, to join as a sort of “product manager” — bringing her deep knowledge of e-commerce and ERP workflows. As a bonus, she also committed to learning CSS and doing all the design and UX/UI.

Another diversion for some armchair moralising — two more lessons to be precise. First, IMHO and for the web noobs out there, my advice is to focus on either frontend or backend. The field of web development is HUGE now. Being a truly good full-stack developer is probably a pipe dream for most. I still do consider myself a full-stacker, but its been ages since I’ve written any frontend code, and in the meantime I feel I’ve actually been able to become at least a little competent at writing server side code. Just my take, of course. Secondly, I’m telling you with 100% certainty that without Allan and Jessi I would have failed. Although we have found ways to make the monstrous a little more manageable, it still would have been way, way too much for me alone. So my advice, again, is to find someone. Just one person. Maybe two. Maybe three. But at least one person. Someone who complements your skillset and with whom you’d be happy to go into battle with. If you’re about to tackle a major, major project, 1 + 1 (or 2) is not 2 (or 3), it’s a 100, maybe even 1000. Honestly, this isn’t anything new — gurus and mentors have been saying the same for decades. Heed their advice.

Like all new solutions to old problems, Pakk is innovative. Perhaps a product of my purist tendencies, I came up with an architecture that would allow us to built a truckload of functionality with the least possible input. Close colleagues told me that it was unlikely to work because e-commerce sites and platforms need to be massively customisable in order to be able to fit every possible customer profile. But my time with Netsuite had shown me that deep customisation is the Achilles heel of big systems and I knew that our small, guerrilla team wouldn’t be able to build anything like that, so we set out to build something completely different: a platform built on the concept of “configurable, not customisable”. If you know only one thing about Pakk, let that be it. We set to work in earnest in the summer of 2019 and started churning out code at speed.

By the latter part of 2020 we actually had something useable and stable enough for an Alpha launch. It lacked a lot of functionality but could host a website and just about take an order. We started dogfooding and moved the pakk.io site onto Pakk itself, built some demo stores and eventually, before Christmas, launched our first customer — HotCable, a music store in Madrid. As 2021 progressed, we recognised that the new reality that faced us all would make Pakk more relevant than ever so doubled down our efforts, added lots of features and stability enhancements and pushed new releases relentlessly and on a weekly basis.

And so it came to be that on Thursday 29th April 2021 we finally migrated our food import company from Netsuite onto Pakk at about 6pm in the afternoon. The Pakk team and the Tapas Lunch Company team Zoomed as I tried to make the act of resetting name servers feel as symbolic as possible and they drum rolled on their desks. About an hour after hitting the button, the new site started showing in browsers and about an hour after the first order rolled in. Bugs surfaced, we fixed them. Rinse. Repeat. We worked through Saturday and Sunday and then Bank Holiday Monday, and by the time Tuesday came around and they reopened, The Tapas Lunch Company had taken almost 200 orders through Pakk. There were even a few emails from long-time customers congratulating them on the speedy, efficient new sites.

That was THE milestone. There are many more to come, I’m sure, but nothing will ever be as important to me as this one.

If you can forgive me just one more cheesy moralising cliche then here it comes. If you have big, impossible ambitions, go after them, but be clever about the way you do it. Don’t be a hero and don’t be a fool. DO listen to people who tell you that you probably won’t succeed, but don’t take it literally: probability is afraid of outliers.

Use the incredible resources that the modern world gives you almost for free and let people into your heart and mind to help you. Be true to your vision, do your homework rigorously then do it YOUR way — don’t get sidetracked by what other people want and/or think you should do. This is your contribution, so own it. Understand that a single person, or small team, can produce something really, really big, but only with a new approach or a step-change in thinking. Don’t be tempted by the safe, same-old-same-old that’s already been done, it produces the same results in the end. Think big, but most of all, Think Different.

If you’re just getting into e-commerce, there’s a high chance your top priority when shopping for a platform is “having a great looking store”. Are you finding yourself browsing through template galleries and customer portfolios? Obsessing over image carousels? Considering contracting a designer to help put your store together?

Sure, I get it, it’s natural for a business owner to want a “great looking store”. Wouldn’t we all? Why would we set out to build an online shop and not want to make it look as good as possible? I’m here to tell you though, that having a great looking store, even a good looking store, is not as important as you think. And I can prove it with one word: Amazon.

Nothing wrong with the aesthetics of Amazon — it looks, well, OK, but it’s not going to win any design awards — I think we can agree on that. So why is the way your store looks not all that important? Well, there are actually quite a few reasons.

What looks great today, might not look great tomorrow

The web changes. Fast. If you look back at web trends over the past 15 years, it’s mind bending how quickly styles have come and gone. If you’d have created an ‘on trend’ site in 2005, you’d probably have had to completely overhaul it 4–5 times by now to keep current. That’s expensive and tiresome.

Flashy things often bog a site down

It’s no coincidence that half the web is bust and the other half slower than a broken down bus. Often, in a misguided attempt to make their site “flashier”, designers and store owners load them up with widgets/plugins/carousels/themes or any other manner of digital cruft. Mostly it just gets in the way of the shopping experience. Then it ages badly and you’re back to point 1.

E-commerce visuals have become standardised

Ever noticed how easy it is to tell apart a small-business online store from one of the big players? The small store is the one with the black background, wood-panel-effect header, handwriting font and video carousel. The big ticket store is the one that looks, well, like every other big ticket store.

Will your site look good on a smartwatch, viewed underwater at a distance of 20 meters?

OK, that’s a complete exaggeration, but you get where I’m going with this. It’s hard to make a site look good across the modern gamut of devices. Not “design hard”, but “engineering hard”. You might be happy with the store you’ve created when viewed on a desktop with a lovely big monitor — but you also need to be sure that it looks that great on any of the 1000 handheld devices your potential customers might be using.

So if I’m saying you shouldn’t obsess about creating a great looking site, then what should you obsess about? I think it’s quite simple. Design-wise, this is what I would obsess about:

• Clean, minimal, timeless style — doesn’t need to be updated yearly

• White background across the whole site — few exceptions

• Simple, high quality product shots — white background, high res

• Subtly branded — think one or two colours, logo and font

• Readable font size — if in doubt, go bigger

• No moving or rotating elements — e.g. carousels, sliders

• Prominent main product navigation menu — 5–7 main categories

• Everything where you’d expect it to be — don’t make the customer relearn e-commerce layout just for your site.

I won’t go into all the different elements of functionality — that’s for another day. I think it’s enough to stress that aesthetics should take a back seat to efficient functionality. Go simple, fast and clean over flashy, gaudy and “custom”.

Unless you’re selling diamond rings or custom-designed travel experiences, you don’t need to tell a story — you just need to present your product catalogue in the most efficient way possible.

We often think of our small businesses as growing and developing gradually and consistently.  We look at typical business indicators, such as revenue and profit curves, customer metrics or website hits and what we see resembles a car journey.  Sometimes it’s a motorway, and progress it fast.  Sometimes its a windy country lane and progress it erratic, at times rapidly accelerating, at times braking hard.  Sometimes you’re stuck in a dead end and just have to reverse.  And sometimes you’re just parked.  But it always looks like the same journey in the same car.

In the software industry, development traditionally takes the form of major and minor releases of applications.  Version 1 comes out – it’s not perfect, but it’s usable.  Bit by bit, the developers nail down the bugs and the functionality glitches, gradually releasing updates and patches – Version 1.1, 1.2, 1.3 etc.  By 1.6, it’s a perfect app – it does exactly what it’s supposed to do with no bugs.

But any good software company doesn’t stop there.  In fact, the minute Version 1 came out, they were probably already thinking “Hey, this app does x, but wouldn’t it be good if it did y and z too”.  So a year or two after Version 1 came out, they release Version 2.  It does more, it does it slicker, it does it bigger and it does it better.  It’s not compatible with Version 1.  You might even have to buy it again if you bought Version 1.  It’s not an upgrade, it’s fundamentally different.

Look at how we’ve come to think of and call the current phase of the internet ‘Web 2.0′.  It’s not just a geek thing either.  In our hearts and minds we know something has changed in Web 2.0.  Perhaps, if you’re not a techie, it’s hard to put your finger on.  But back in 1999, in Web 1.0, your grandma wasn’t keeping up with your shenanigans on social networks was she?  Most of the software you used was on your operating system, not through your web browser, wasn’t it?  Web 2.0 is different from Web  1.0 in many, many ways.  But the key is that they add up to a step change.  A fundamental shift in the way we use and perceive the internet and the way it shapes society.

Now what if we were to think of our businesses this way?  What if we went from major version to major version rather than just notching up an endless string of minor versions? What if your business was ‘Your Business 3.4′, rather than ‘Your Business 1.87′?

In fact, such a conceptualisation is incredibly empowering.  Thinking of your business as a serious of ‘major version releases’, each of which is fundamentally separated from the previous version by a step change, can only motivate you to push forward to the next iteration.  And in my eyes, step changes are not (or at least they don’t have to be) sharp jumps in metrics like sales or profits.  New major versions are triggered by changes that are fundamental to what your business really is, what it represents, what it offers, how it operates and what it brings to or takes from your life and that of others that are involved in it.

I’m not going to go into details here of of my own business (that’s for another post), but just as an example, we went to ‘Our Company 2.0′ to ‘Our Company 3.0′ the day we first stopped doing the physical warehouse work ourselves and moved to a contracted-out logistics solution.  This was a fundamental change for us – it changed the way the company operated, it changed what we could offer, it changed what we did on a day-to-day basis and it changed how we thought about our company and its prospects.

Major versioning is not all about the past though.  Of course, with the help of hindsight, you might look back and easily determine where your major versions were, and if they were positive, or even planned.  But really, major versions are all about the future, about where you’re going.  Don’t ask yourself where you see your business in 5 years – who knows what shape the world will be in in 5 years.  Better to visualise the next major version of your business – what it will look like, what will be fundamentally different about it, how it will change your life and the lives of others.  Does it excite you?  If it doesn’t, you’re jaded.

So why not get started ‘major versioning’ your businesses.  Look back to the past and then look towards the future.  Ask yourself the following questions:

• Starting back from My Business 1.0, how many major versions have there been?

• What major version am I at now?

• What were the characteristics of each major version?

• What will the next major version look like?  How will it be characterised?  How will it be fundamentally different?

• When will the next major version be?

• How many more major versions will there be?  Does the project have a ‘final version’?

So, here’s what happened.  Since January we had been living in a little flat with a big problem – there was a flaw in the plumbing installed when the building was remodelled which meant that sewer gases could rise through the pipes and escape freely into the bathroom.  It smelled like a public toilet all the time.

We talked about it with the owner who told us it was a construction mistake and couldn’t be rectified.  Every time I spoke to her I mentioned the fact the we weren’t happy and that the smell was sometimes so bad you would put off peeing as long as you could just to avoid going in there.  Once, when the landlord visited, we talked to some of the neighbours who had the same problem.  The couple upstairs who had two bathrooms even told us that they couldn’t use one of theirs (the one directly above ours) because it smelled so bad.

We had a minimum years contract, but told the owner at the beginning of April that we would have to leave because of the smell and would be out by the end of the month.  We went and found another flat and moved all our stuff out.

The end of the month was this week, so we went over there to give her the keys back and officially sign off.  I had trusted she would do the right thing, but my partner had had suspicions all week that she wouldn’t play ball.  She was right.  She refused to give us our deposit (1 months rent) back because we were breaking the contract early.

Now, we had always tried to behave reasonably towards the owner.  We had tried to solve the problems ourselves.  We had poured countless Euros worth of bleaches and chemicals down the tubes.  We had even called a plumber at our own expense.  In the end, when we couldn’t stand it any more, we gave her plenty of notice and told her she could bring people to see the flat whenever she wanted so she wouldn’t have the flat empty for any extended period of time.  When we gave the flat back, we left it cleaner than when we first took the keys.

Given the circumstances, I trusted she would see that we had behaved reasonably all along and would choose to do so herself.  Unfortunately, she obviously saw it as a chance to make some easy money from our horrible experience.  All she could say was: “Do you need me to read the contract to you?”.  She had also bought her beefy policeman dad as backup.  This is a person who knew about the smell, who had deliberately covered it up with air-fresheners the day we saw the flat and who had personally heard from the neighbours that their equivalent bathroom was unusable.

When we first met her, she seemed like a very pleasant and reasonable woman.  I wondered at what point her greed had overcome any natural human kindness instinct she might have had.  Yes, she did have the contract on her side – there was no clause that said “The bathroom will not stink”; there wasn’t even a ‘fit for use’ type clause.  So I guess if it went to court she’d probably win.  But really, is that the point?  Shouldn’t any reasonable person see that the contract means nothing if you can’t live in the place because it smells so bad?  That morally, not legally, she had no right to keep our money?  I asked her how she would be able to sleep at night.  The dad got aggressive.

When we came out of the meeting, both my partner and I were emotionally knackered.  We are non-confrontational types and recognised that the half hour intense argument had taken its toll on both of us.  We sat on a bench for a while and nursed our wounds.  When I got home I asked Google why we should feel so tired after a ‘fight’.  Apparently it’s something to do with hormones.

The whole episode got me thinking about whether these types of fight are actually worth it in the long run; and small business owners will recognise that when every day is a never ending fight with suppliers, customers, salesmen, con-artists and everyone else who wants a piece of your business, the battle can be exhausting.

The problem in the short term is the immediate desire for moral victory – “It’s not about the money, it’s the principal”.  You hear it all the time.  The problem is that when you’re up against an army of cold-hearted, empty-headed opponents, getting them to see the just truth is a very unlikely outcome.  And even if you do, as a non-confrontational person the victory might cost you more than the prize is worth.  So should you let people walk all over you, just for an easy life?  What’s the right action – fight or flight?

After running a small company for almost 4 years and taking a lot of crap and giving a lot back, I’m starting to think that either I don’t have the right personality for it, or that I’ve got the wrong approach.  When you sell stuff to the general public (and I’m sure all merchants will agree), there is always a small percentage of ‘bad customers’.  And I mean bad in every way.  The have a chip on their shoulder from the very beginning, demand discounts and special treatment, point out mistakes in your webpage or sales literature, behave irrationally and expect you to comply with their whims and then inevitably, ask for their money back.

In our business, problems are mostly delivery related.  Maybe 2-3% of deliveries go wrong.  People don’t take the time to read the information on the website, fail to receive their order and then expect us to bear the cost or responsibility.  When the customer is calm, genuine and reasonable, I never hesitate in helping them out, even making a loss on their order just so that they’re happy.  When the customer is an arsehole, it costs a lot more.  You’re left with a stark choice:

1)  Argue with the customer, exchange 6-10 heated emails, all of which leave you a little drained, get a chargeback on your PayPal or credit card merchant account, write letter(s) to them explaining the situation, exchange more emails and/or phone calls, worry, possibly progress to legal action, possibly win financially/morally, possibly not.  Or,

2)  Give the customer their money back.  Forget about it.  Move on.

What about suppliers who deliver late and mess up your whole logistics schedule?  Do you argue, complain, explain that their mistakes have cost you time and money, ask for compensation, risk ruining a stable relationship?  All of this takes time and emotional investment.  And it’s constant.

I know what my choice is.  But does that mean that I’m letting people walk all over me when I should be standing up and fighting my corner?  And I’m not just talking about customers – these situations arise constantly in business and come from all angles.  Fights with suppliers about pricing or delivery errors, with employees about behaviour, with customers about service and payment – business is a battleground, and my feeling is that the winners are the ones that are up for the fight, the ones who are prepared to not let anyone stand in their way, the ruthless ones, the ones who don’t care too much about other people outcomes or feelings.  Ultimately it’s survival of the fittest and a competition for resources and not everyone can win.

Me, I don’t want to fight so much.  So is the conclusion that I’m no good as a businessman?  Maybe.  No doubt that a more aggressive, less sensitive personality would serve me well in this particular domain.  But to be honest, I’m not that person and don’t want to be either.  I’m not prepared to force a change of personality just to get on in business.  Maybe I’ll learn to be more selective, to pick my fights better.  Maybe I’ll get naturally better at confrontation and negotiation.  Maybe I’ll find way to get others (professionals) to fight the bulk of my fights for me.  Maybe I’ll get comfortable with selectively letting people ‘get their way’ in pursuit of peace.  Maybe I’ll find a less conflictive business.

Maybe the hard edge of business is just for a different type of person though – and that’s a thought that troubles me.

If you managed to get past the title of this post and are still here then this article could potentially be of great help to you.  If you’re bemused by the title but have stuck around thinking this might be an entertaining read, leave now – you are horribly mistaken.

OK, let’s start with the context, which can be summarised as follows.  I’m referring to the situation in the UK here, I’m not sure how it works elsewhere, though I imagine it could be similar:

- A common doubt amongst online sellers is whether they should charge VAT on their delivery charge.

- HMRC are quite clear that if you are charging a separate fee for delivery of orders, then whether this should have VAT added or not depends on the nature of the goods in the box, so to speak.

- If you are sending out standard rated goods (i.e. 20% VAT as of May 2012), then you should add VAT to the delivery charge.

- If you are sending out zero-rated goods (e.g. books, children’s clothes, food), then you can zero-rate the delivery charge (so no VAT).

- The difficulty arises when an order contains both standard rate and zero rate goods – a typical example from my company is an order that contains food (0% VAT) and cooking utensils (20% VAT).

- In such cases, HMRC’s position is not quite as clear.

- Some have interpreted HMRC documentation as suggesting that if an order contains any standard-rated goods at all, then the whole delivery charge should have VAT added.

- Others, myself included, have a different interpretation.

Let’s take a look at HMRC’s wording on this – here’s a snippet from Notice 700/24 (April 2003) – Postage and Delivery Charges

In either case there is a single supply for which the VAT liability is based on the liability of the goods being delivered. For example, any element of the price attributed to the doorstep delivery of milk and newspapers will also be zero rated. On the other hand any element attributed to the delivery of standard rated mail order goods will be standard rated.

Although the terminology (“any element attributed”) isn’t crystal clear, I think it’s obvious that they are suggesting a proportional approach, i.e, that the delivery charge can be broken down into a VATable component and a non-VATable component based on the composition of the order being sent out.  So an order consisting of half food and half, say, frying pans, would need to have VAT applied to 50% of the delivery charge.  Not only does that appear to be the intention of HMRC wording, it would also seem to be the fairest and most sensible way of applying the VAT law to this situation, and let’s assume that’s what they want!

Assuming that this is the correct way to interpret the VAT rules, this concept of proportionality can cause a huge mathematical headache for online sellers.  Let me explain why.  In the vast majority of online transactions, the customer will pay a fee for delivery which will be fixed and independent of the VAT composition of their basket.  It is highly unlikely either that they will have any notion of the above VAT laws, or even whether the items they are buying even attract VAT.  They will expect to pay £4.99 for delivery if that is what is advertised.  Full stop.  In that case, the responsibility for adjusting the VAT charges will fall on the retailer, and probably after the sale has been made.

Let’s try an example.  A customer places the following order:

1. A frying pan.  £25 ex. VAT. £30.12 inc. VAT.

2. Some food to the value of £60 ex. VAT, therefore £60 inc. VAT.

3. Order subtotal £85 ex. VAT, £90.12 inc. VAT.

4. Delivery charge £5.99.

5. Grand Total £96.11

So, the customer pays £96.11 by card and doesn’t expect to pay a penny more or a penny less.  Would you know how to split the delivery charge up correctly into VATable and non-VATable components?  The maths are pretty tricky.  Here’s how you do it.

The goal is to end up with two delivery charges – one that will carry 20% VAT, and another that will be zero-rated.  Each of these charges should be in proportion to the VAT composition of the order and the total delivery charge, once VAT has been added to the VATable component, should be £5.99.  Head spinning already?  We haven’t even begun.

OK, so let’s agree that the new delivery charge, excluding VAT, is going to be less than £5.99 – this is obvious as there’s going to be some VAT on it, bringing the Net total up to £5.99.  Let’s call this new ex. VAT delivery charge x.

What we know is that the VATable portion of x with VAT added on, plus the non-VATable portion of x will equal £5.99.  Algebraically that’s:

1.2(Sx) + Zx = T,

where S is the proportion, from 0 to 1, of VATable goods in the order, Z is the proportion of zero-rated goods in the order, and T is the total inc. VAT delivery charge, in this case £5.99.

With a little algebra magic that you should remember from school, you get:

x = T / (1.2S + Z)

So, now all we need are S and Z and we’ll be on our way.

Let’s work out the composition of the order.  The total excluding VAT was £85, of which 29.4% (£25/£85) is represented by standard-rated goods, and 70.6% by zero-rated goods.  So, S = 0.294 and Z = 0.706.

Plug that into the above formula and you get:

x = 5.99 / ((1.2 x 0.294) + 0.706)

   = 5.99 / 1.0588

   = 5.657

So, the new ex. VAT delivery charge is going to be £5.66.  Going back to the composition of the order, we know that 29.5% were VATable goods, so £5.66 x 0.294 = £1.66.  Thus, we know that the VATable portion of the delivery charge should be £1.66 ex. VAT, which amounts to £1.99 inc. VAT.

We also know that the zero-rated portion was 70.6%, so £5.66 x 0.706 = £4.

Add those up, and what do you get? £1.99 + £4 = £5.99.  So, we’re back at our original delivery charge.

So just to summarise – on the above order, which was comprised by value of 29% VATable goods and 71% VAT free goods, we have worked out that to arrive at a final VAT inclusive delivery charge of £5.99, we need to charge two components of £1.66 plus VAT and £4 with no VAT.

If you are paranoid, you can check the percentages and you’ll see that £1.66 out of £5.66 is 29% and £4 out of £5.66 is 71%.  Perfect.

Go back to the original order now and recalculate the subtotals.  Total ex VAT is £90.66.  Total amount of VAT is £5.45.

Grand total, unbelievably, is correct at £96.11.

Bet you wish you paid more attention in maths class now, don’t you?

Consumer surplus is one of those useful little concepts you learn about in elementary economics that, once understood, sheds light on all manner of commercial activities and pricing decisions.

Without getting too technical, it’s the area under the demand curve and above the market price, as illustrated in red in the above diagram.  The traditional notion in economics is that demand starts low when price is high (red line, start at the top left) and increases as price comes down (follow the red line as it falls to the right).  What that suggests is that even at the highest price, at least one person is willing to buy it.  But as we know, goods are sold at the market (or equilibrium) price where demand equals supply (also shown on the diagram), which means that the one person who was willing to pay top dollar, and all the people who were willing to pay at least something above market price, have got themselves a bargain, right?  That quantity of money (all the people who were willing to pay more multiplied by the amount extra they were willing to pay) is the consumer surplus.

To an individual company, exploiting the consumer surplus means trying to charge each consumer just, and no less than, what they are willing to pay, which is notoriously difficult.  Astute traders have known this for centuries and exploit the consumer surplus essentially by letting you haggle.  Starting with a high price, a good commercial bargainer will quickly ascertain how much you are able or willing to pay for an item and try to sell it for you for just that.  Sell high to the people who can afford it, and sell low to the people who can’t.  Student discounts do exactly the same.  Companies know that students have less money to spend, so they sell them exactly the same products at a cheaper price.  This is not some seedy tactic – it’s going on in most of the shops in your local shopping centre.  Fair? Probably not.  Commercially effective? Definitely.

Once you grasp this concept, you’ll begin to see it all over the place.  Another of the tactics that companies use is to repackage the same (or very similar) product in some way so as to be able to sell it at different price points to consumers.  At your local supermarket, there are probably 3 or 4 different types of baked beans, or tinned tomatoes, ranging from the shop’s own brand, to some sort of gourmet brand in black packaging with gold writing.  Do you really think there is much difference in these products apart from the salt content and/or 2 cents worth of oregano or some other ‘gourmet’ ingredient.  No.  They do this so that people who can afford to pay 3 times the entry level price will.  And they’ll feel good about it too.  I think Apple do this with iPads and iPhones.  Does it really cost them anything significant to go from 16 GB to 64 GB? Probably very little.  But the products are priced hundreds of Dollars apart.  Why?  So there are options for consumers who can only afford entry level units, and there are options for consumers with money to burn.  Classic consumer surplus.

Anyway, why the hell am I rambling on about this on a Friday morning when I should be doing something more productive?  Well, Jessi ordered some stuff online yesterday, which arrived today.  We had a little theory about this order related to the concept of consumer surplus which proved, I think, to be correct.  Let me explain.

Stradivarious (at least in this context) is a clothing brand with a chain of stores and an online shop.  Jessi ordered some clothes yesterday (Thursday).  Since she spent more than 60 Euro, she qualified for free delivery.  When she got to the checkout, there were two delivery options:  the ‘standard’ (free) one, which was quoted as taking 2-3 days, and the ‘express’ option for 6.99, which was next day.  Since we operate an e-commerce business ourselves, we were pretty confident in thinking that mainstream national couriers, like MRW used by Stradivarious, do not offer anything other than an overnight service.  It wouldn’t make sense.  Since their infrastructure and procedures are built around getting a parcel from A to B in less than 24 hours, they’d probably have to work even harder to make it take longer.  No, I suspected that what Stradivarious were doing here was exploiting the consumer surplus.  Of course there will be customers who are very keen to have their stuff the next day, and will be willing to pay an extra 6.99 for the privilege.  But then there will also be customers who balk at paying delivery charges.  Great pricing tactic, no?

We tested the theory – Jessi chose the free delivery option.  Sure enough, at 9am this morning the courier turned up with the parcel, clearly labelled as having been sent on an overnight service.

So let this be a lesson.  To e-consumers – watch out for this tactic.  I’m not sure how widespread this particular trick is, so keep an eye out for premium delivery service charges that don’t seem to add up.  And to online sellers – depending on your degree of morality, perhaps this would be a good pricing tactic for you to milk a little more out of your customers.  We won’t be doing it though.

When I first came to Spain, in 2004, it was a cheap country by most standards.  In some ways, it still is, but one of the most notable shifts over the past 5+ years has been a dramatic rise in the cost of eating out.  I remember visiting a bodega restaurant in Valdevimbre, Leon in 2006.  The bodegas in Valdevimbre are famous all over the province – good, rustic, home cooked food served in unique caves carved into the hillside.  And they used to be great value for money too.  We paid €26 for lunch for three of us, including a whole tortilla guisada (stewed Spanish omelette), grilled wild mushrooms, lamb chops, bread, wine, desserts and coffees.  I remember being so struck by the price that I kept the receipt to show people.

But the world has changed a lot since those heady, pre-crash days of 2006 and restaurants round here have responded in quite a peculiar manner.  We’ve been back to the bodegas many times since then, and we still go from time to time, but it’s not quite as satisfying any more.  Nothing obvious has changed – the food is still good (perhaps not exceptional) and the caves are still, well, there.  But you’d be very lucky to eat at any of them for less than €26 a head now. They are at least as expensive, if not more so, than restaurants in the UK.   This is a story I see repeated almost everywhere now, at least in our part of Spain, and it has resulted in what can only be described as a two-tier restaurant system.

If you want to eat for €10 a head or less, you can either go to the fast-food chains, kebab houses and Chinese buffet restaurants, or you can visit the more humble ‘local’ restaurants and cafeterias that are still serving Menu del Dia for €6 (very low end) to €12 (pretty much top end).  Beyond that, it seems that most restaurants that used to occupy the middle ground (say €20 per head) have, for one reason or another, gone upmarket.  That’s not to say that much has changed in what they are serving, but prices have definitely skyrocketed.

Whichever way you analyse it, this trend is almost certainly down to the horrific economic crisis that currently has a tight grip on Spain.  In some ways, of course, it seems completely illogical that restaurants should hike their prices in response to declining incomes and plunging demand for ‘luxury’ goods and services, like restaurant dining.  Surely they should be slashing prices in order to get more customers through through the doors?  Certainly you see that happening at the lower end of the market where prices are already comparatively low.  Restaurants that used to charge €10 for their Menu del Dia might now be offering a Menu Anti-Crisis for €8.

To understand the logic behind this strategy, I think you have to take a closer look at the current Spanish predicament.  Forgive me for generalising – perhaps the situation is different in other parts of Spain – although I fear not.  Before la crisis, the term mileurista, referring to someone who earns 1000 Euros a month, was coined as a derogatory, sarcastic phrase to describe workers on the lowest rung of the salary ladder – basically any young person with qualifications just starting out in the world of work.  The qualified Spanish youth were leaving Spain in droves in search of better possibilities and higher salaries elsewhere in Europe (which explains why you can now buy t-shirts in London’s Camden Town with the slogan “I went to London and all I saw was a load of Spanish people”, or something like that).  Nowadays, to be a mileurista means at least to have a job, which is a privilege now reserved mainly for the, shall we say, more mature.  With youth unemployment approaching somewhere near 50%, economists and sociologists are talking about the lost generation.  The term mileurista has lost its social stigma and gained an ironic element of positivity.

So before the crash, you had the young class of employees earning €1000 salaries, together with a broad section of the older population (think 40+) represented by state employees, established business owners and employees entrenched in positions they had held for 20 years and heavily protected by workers’ rights legislation, earning €2000 and upwards.  Nowadays, the young professionals are either unemployed or getting by on jobs that pay the bare legal minimum.  But the middle-aged government workers, policemen, teachers and lawyers are still there, and so are their €2000-€3000 salaries.

And the restaurants seem to understand this.

The mass market restaurants know that their customers are hard up and in search of a bargain, hence all the €6 Menu Crisis.  The upmarket restaurants know that the people who had money before the slump still have it and are still willing to spend it.  Everyone else has had to change their game.  The potential clientele for a medium-priced, decent meal has slowly evaporated and the great swathe of restaurants occupying the middle ground between McDonalds and Michelin star have presumably seen their revenues take a turn for the worse.  The result has been a curious ‘gourmification’ as these local, rustic, homegrown restaurants go in search of the well-heeled classes who can afford the not insignificant amounts these establishments now need to charge to offset the decline in numbers.  €20 main courses are now the norm at half-decent restaurants around here.

This was brought home to me on Sunday when we had lunch at Las Pallozas, near Ponferrada, on the way to see the spectacular Medulas.  Everything I’ve just described was bought together neatly under one little thatched roof.  It was Sunday lunchtime, and the restaurant was full (that’s maybe 50 people) of middle aged, beige wearing, presumably €2000 euro earning, ‘you-can’t-sack-me-for-less-than-€60k-because-I’ve-been-here-for-20-years’ types.  Not a youth in sight apart from their chino-clad children.  What would, five years ago, have qualified as decent local cuisine was described in fancy gourmet language and touted as only using the best of local produce.  Great – but once upon a time, using good local produce was not an excuse for exorbitant prices.  It was the norm.  The menu consisted of every conceivable combination of local peppers, local cured beef, local chestnuts and local goats cheese.  The food was very nice.  We had two glasses of local wine, a plate of local cured meats to share, a main course each (beef medallions in chestnut sauce for me, cod with a red pepper mousse for Jessi) and one dessert (a chestnut cake, what else) and the bill was just short of €70.  Extortionate? No.  Expensive? Perhaps, given the prevailing economic climate and the nature of the cuisine.

I guess I just feel for the ‘lost generation’.  Watching restauranteurs pander to the only Spaniards who still have any cash to spend is the inevitable result of the horrible current economic situation, but it doesn’t make it any easier to swallow for the young and out of work who just a short while ago must have taken it for granted that an honest meal at a decent local eatery was within their reach.

Picture a fresh-faced entrepreneur breaking into the world of business for the first time and you might imagine them as being inspired by their personal interests or hobbies, and motivated by their passions. The custom car enthusiast opens a tuning garage. The footwear freak starts selling shoes on Ebay, the horse lover opens an online store selling riding accessories. By far the most popular advice that I hear when people ask “What business should I start?”, is a resounding “Identify your true passion in life”.  The internet is currently bumper-to-bumper with courses and self-help packs designed to get you in touch with your inner passions with a view to making a business out of them.

Of course, it would be cynical to argue with that. There’s no doubt that doing something you love is part of the recipe for success. You’re much more likely to stick at it, work harder, and give more of yourself.  But being passionate about what you sell is not an instant ticket to profit.  In fact, it may not even be the most important factor.  How many people do you think start business selling a product they are incredibly close to and passionate about, only to find that there’s actually no market for it, or worse still, the logistics of selling it are a complete nightmare.  By the large number of startups that bite the dust each year, I’m willing to bet that it’s a lot.

There is another way – it’s much less sexy than following your dreams and I doubt very many people would be turned on by it – but it might just produce better results.  I’m talking about bottom-up business design.

For the reasons just discussed, it’s highly likely that most small businesses selling a physical product start off as a dream in someone’s head.  Some would-be entrepreneurs probably dive right in, without studying the demand or the practicalities of selling their particular product.  Others, inspired perhaps by their studies, or experience in the commercial world, might undertake a feasibility study or do some market research, and then may or may not choose to proceed.  This idea-based approach to starting a new venture might be termed top-down business design – the product or idea starts it all off, the rest just follows (or doesn’t).

So how do you do this backwards?  Easy – start with all the crap and work your way up to the product.  Let’s say you wanted to start selling widgets, and I’m going to assume, if you’re reading this, that you’re going to want to do it online (if you want to open a shop, you’re in the wrong place – try www.dinosaurbusinesses.com for help).  What would the be ideal characteristics of the widget you are going to sell?  I’m not talking about what interests you, or what you have experience in (that’s top-down).  I’m talking about the essential and defining characteristics of a widget that would make a good, if not great, internet retail business.  From my experience in selling what is probably the worst product to retail over the net (food), as well as talking to others who sell less than ideal merchandise, I’m going to suggest a few pointers.

Realistically, you’re never going to be able to fulfil all of these conditions – consider them a checklist for the absolute holy grail of internet retailable products.  The closer you can get, the better.

It’s something people are actively searching for

The web is bursting at the seams with online retailers and they’re all vying for a piece of your eye-time.  That means tons of dancing, flashing ads wherever you look on the net.  If what you are selling is the type of product that depends on browsers, the kind of thing people buy on an impulse or the sort of article people don’t know even exists, you’re going to struggle more than those selling stuff that people are actively searching out.  Those buyers go to Google and type in ‘Buy Widget’.  Sellers of such widgets set up AdWords campaigns with the keyword ‘Buy Widget’.  They spend a bit, but are instantly visible to everyone in the market for a widget.  Easy.

It’s something techy

I don’t have the stats to prove it, but I’m sure that technologically savvy buyers are more likely, by an order of magnitude, to search for something on the web than tech cavemen.  I’ve got to admit though, that this is fast changing in countries who are already used to buying online – a Google UK search for ‘Knitting Supplies’ would appear to prove that point.

It’s something that appeals to under 40s

On the same note, internet users are, on average, young.  That’s not me being ageist.  It’s just the way it is.  Again, it’s probably changing quickly in lots of countries.  Here in Spain, where I live, I barely know anyone who would buy something over the internet, let alone anyone over the age of 30.

It’s something mid-priced

Really cheap stuff, like products in the £1-£5 range, has a very unattractive price-to-postage cost ratio, especially if it’s not really small and light (see below).  You probably don’t want to pay £3 postage and packaging for something that only costs £1.99.  Bundling together such small, cheap products into packs could provide a solution, but in general I’d say you don’t want to depend on products in that price range.  Of course, unless they have a huge margin, you also have to sell thousands of them to make any money.  On the flipside, really expensive products, like high-end jewellery, or perhaps cars, will usually have to be physically viewed by customers before they decide on a purchase, so they don’t make for the best e-commerce items.  For me, over the last  5 years, the average transaction value has been about £25, and the top end of the range is a little over £120.  We don’t sell any single item priced more than about £80.  I get the feeling we’re in quite a good price bracket.

Something with a high price-to-weight ratio

On a similar note, If you’re going to be doing logistics like 99% of internet retailers, you’re going to be using a courier and that means weight-based billing for shipping.  The more something weighs, the more it’s going to cost you to send to your customer.  That might not be a huge problem if it’s a high value item, but for cheap products, you’re going to have the same problem – the price of P&P is not going to be attractive compared to the price of the item.  Believe me, customers hate paying for delivery at the best of times – they’re not going to be happy about £5.99 to deliver a bottle of mineral water.

The same advice applies to bulky or funny shaped objects – you’ll pay more to ship them, and unless you can recuperate that in the price, it’s a no-goer.

It’s something not fragile

Fragile products mean one of two things, but probably both:  either extremely high packaging costs (which are constantly rising, by the way), and/or lots of breakages.

Breakages are the bane of any e-commerce operation – the costs implied are unimaginably high.  Firstly, the customer unavoidably gets a bad impression of you (although it wasn’t your fault).  Then there’s the cost of the replacement stock, to which you’ll have to add another shipping cost (because you can’t charge the customer shipping for replacing a breakage).  Finally, administrating customer complaints due to breakages and suchlike can become a full time job for someone if the problem is bad enough.

I recently had a customer who was going out of her mind because of breakages.  They had entered a product into one of these group buying offers – the margins were extremely tight and they had calculated costs to the penny.  Unfortunately, the courier was smashing all the little jars of olives, which meant a tonne of losses and then the need to invest in much more expensive packaging, effectively wiping out her margins and then some.

For me, a fragile product would be a non-starter.

It’s something not normally prone to failure

In the tight-margin world of e-commerce, anything that causes the need for administrative intervention is going to cost you more than you can afford – and product returns will do just that.  Not only are you going to be paying collection costs, re-shipping costs and possibly replacement stock costs (if you can’t recoup them from the supplier for some reason), but managing the whole returns and complaints procedure can become a black hole for your company’s cash.

It’s something uncomplicated

This is related to the above, because if it’s highly complicated, then it’s highly likely to fail at some point, even if it’s the fault of the buyer in some way (which they are not going to ever tell you, of course).  If your product comes in 250 pieces and needs to be built by the customer, imagine the aggravation because of missing parts and problems caused by sub-standard installation and usage.  More importantly, the more complicated and harder to use a product, the more requests for support you’re going to get and the more resources you’re going to have to devote to supporting the product.  Computers are complicated, so big computer companies have to hire armies of support staff just to avoid rampaging customers who are unable to identify the power button.  Do you have the resources to hire such an army?  Wouldn’t you rather sell wooden blocks? Or shampoo?

It’s something that won’t devalue (too much) with time

If you’re planning on holding stock, products that expire quickly are likely to do serious damage to your bottom line for obvious reasons.  If you can’t sell it on time, you’ll end up just giving it away.  This can be especially painful at the start, when volumes are low, or when launching a new product into the market.  Until you build up enough momentum behind a product, you might not be able to shift batches before they are obsolete.   The most obvious example of this is food, but nearly everything has a ‘shelf-life’ (think gadgets, or fashionable clothes).

It’s something one-size-fits-all

I have a lot of contacts working in fashion e-commerce.  They are almost universally unable to comprehend how their employers are still in business.  They tell me the returns rate is huge – up to 75%.  People see a shirt they like and they order one in every colour and in two or even three sizes, only ever intending to keep one.  The amount of customer service and logistics overhead this produces is enormous (and tells you something about the margins some fashion retailers work with).  Clothes are inherently problematic – what works for you might not work for me, and it is practically impossible to represent those variables (i.e., size) online.  If customers are not able to immediately identify whether the product you are selling will ‘fit’ them, the result is likely to be an administrative disaster and a high returns rate.  Food is pretty bad for this too – people complain that the sausage you sold them doesn’t taste the same as the sausage they tried in Spain.  Luckily, customers tend to understand that food is non-returnable, so it’s not a problem.  Subjectivity in e-commerce sucks – try to eliminate it.

It’s something exclusive

So, by now I can hear you all screaming at me – “Well done smarty, if there’s a product like that, everyone’s going to want to sell it!”  Of course, you’re right.  But not everyone will be able to sell it.  You must identify other barriers to entry that stop the market getting flooded – perhaps you invented it, perhaps it’s manufactured abroad and you can get an exclusive import deal, perhaps you need a special licence to sell it, perhaps it’s new and you can get a first-in advantage.  If it’s not exclusive to you, or somewhere close, you’re likely to drown in the competitive waters of today’s net.

OK, so please don’t come at me with a million examples of businesses that break all these conditions and are surviving nicely.  I don’t doubt they exist.  Hell, I even run one myself.  I’m not saying that you can’t make a success out of selling products that are cheap, heavy, fragile and complicated.  If you can make a big enough margin then you probably can.  You might argue that in the free market, the price of products will adjust to take into account these complexities and that this higher price will reflect the skill and added value provided by a retailer who attempts to sell them.  After all, if you’re not adding value, what are you doing? Just selling shampoo (my idea, I thought of it first).

Go ahead.  Give it a try.  Just don’t blame me if you go bald in the process.  I’m not joking, sometimes selling food online turns me into a raving psychopath.

If you’re running a small business selling goods to other small businesses, the chances are you’re giving credit.  There’s also quite a good chance, especially, I would guess, if you’re a ‘family’ type business, that there’s a bit of ‘give’ in your credit policy.  You know what I’m talking about.  Supplying customers with too many open invoices, or too much balance in excess of their agreed limit.  Perhaps you do it because you understand their predicament, perhaps you’re too weak to say ‘No’, or perhaps you’ll think they’ll stop buying from you if you don’t keep extending them credit.  The truth is that they very well might stop buying from you.  And the problem is that the reason behind their decision probably won’t be financial, it’ll probably be personal.  In my experience, the worst thing about giving customers credit is not the endlessly mounting Accounts Receivable ledger, it’s the fact that it almost always ends in tears.

Customers Don’t Like to be Told ‘No’. They take it personally.

Even with the best intentions and the most regularly paying customers, you’ll almost certainly get into the territory of having to make uncomfortable decisions about extending credit.  Perhaps in very large corporations it might be possible, out of sheer bureaucratic indifference, to stick to a hard-and-fast credit policy, but I doubt there are many small businesses who can just say “Sorry £500 is the limit”.  We all know the phone call: a trade customer right on the upper edge of his credit limit who is just desperate for a delivery and who will pay you first thing on Monday morning – promise.  How can you say ‘No’?  And what kind of person will you look like if you say ‘No’?  All the credit control manuals and “How to Run a Small Business” books say that you should absolutely refuse and that your customer will understand and respect you for it.  Sorry, but that’s bullshit.  Your customer will absolutely not understand and will absolutely take it personally, since as the business owner, the decision is entirely yours.  They may well decide not to bother buying from you any more and you know that.  You’re treading on thin ice now.  How do you know when to say ‘No’? Truth is, you don’t.  You just use your best judgment and sweat it out at night while you lose sleep over who owes you money.  Wouldn’t it have been better to never get into this situation?  When this customer approached you three years ago and asked “Hey, do you mind if I pay you after delivery?  I’ll pay you the very next day and it’ll never be more than £100”.  Maybe you should have just politely said “Sorry, we don’t do that”.  End of story.

Customers Don’t Like to be Credit Chased.  They take it personally.

Then there’s the monthly call – the one you dread making.  How many times have you heard these common excuses?

- “The person that deals with the payments is on/has been on holiday”

- “I’m sorry, it’s just been so busy over the last couple of weeks, I’ll pay you tomorrow”

- “Can you just give me a little more time, we’re really slow at the moment”

- “Really sorry about that, I’ve been in hospital recently”

What type of heartless bastard doesn’t accept those excuses?  But what happens after the third or fourth month running without payment and the continual stream of excuses.  Do you insist?  Do you get angry?  Do you make threats?  Well I’m sorry to say that once you’re into that territory, this customer is gone.  Finito.  And it’s not because he doesn’t want to pay you.  No, it’s because of your disgusting aggressive attitude towards credit chasing.  He, after all, knows that he’s a decent, honest guy with full the full intention of paying you straight away, so why are you harassing him?  It’s only been, like, 4 months and you should know he’s been closed for a month while he was in Tenerife and his girlfriend’s mum’s sister’s had chicken pox.  Didn’t you know that?

Wouldn’t it have been better to say ‘No’ 12 months ago when he asked you if you wouldn’t mind just making an exception this once because he didn’t have his card to hand?

Customers Can’t Organise Their Accounts Payable.  You’ll Have a Disagreement.  They’ll Take it Personally.

This is the one that gets me most and I have to say, it’s probably the most common one too.  When customers pay up front, there are exactly zero administrative complications.  An invoice is raised and paid in the exact same precise second, their account balance is always zero and their statement is a nice, shiny blank A4 piece of paper.

When credit starts, all that goes out of the window, and if your customers are anything like mine (restaurants), they will have their brother Tony doing the paperwork at the bar at 1am and will be leaving you voicemails (at 1.30am) saying things like

Hi Jon, it’s Brian here from the Turkey & Mongoose.  We’ve just received your statement which says we owe £1350.96, but according to our records we only owe you £2.50.  Of course, the chef is a woodpecker and eats most of the invoices, so we might have missed the odd one here and there and oh, I found one down the back of the cooker the other day but it was covered in pickle sauce so the accountant wouldn’t accept it.  Would you mind sending us a copy of every invoice since 1998.  Of course, seeing as all this is in fact your fault, we won’t be paying you for another month.  Please let me know if you disagree with any of this.

Wouldn’t it have been easier….

“Avoid generalisations” – that’s what were taught from the very beginning.  If you generalise, you’re either racist, sexist, ageist, appearancist, intellectualist or some combination of the many other undesirable ‘ists’ with which we’d rather avoid being labelled.  As any serial generaliser already knows, ’sweeping generalisations’ most often get swatted down with a “you can’t say that”.Technically, you can say anything you want, so what’s really meant by “you can’t say that” is more like “you can’t conclude that”, or in a slightly more mathematical-socialogical way: “you can’t extrapolate the characteristics of one individual to an entire population or subset thereof”.

Whilst generalisation is one of those crimes of reasoning, logic or simply attitude with which we all get familiar from a young age, its opposite concept, specialisation orparticularisation, is most often overlooked and it’s something we’re all guilty of to a greater or lesser extent.

Specialisation, for our purposes, means extending the perceived characteristics of a group to oneself.  The consequences of deciding that a certain rule applies to you because you have observed it or heard that it applies ‘in general’ can lead to, at best, errors in decision making, and at worst, personal catastrophe.  And it’s something I see happening more and more around me.  People say things like:

- Now is a good time to buy, but if I wait for the housing market to drop even further, I’ll get a better bargain.

- Populations with high levels of fat consumption in their diets tend to exhibit high levels of obesity.  Fat consumption makes you fat, so I’ll go on a low fat diet.

- The economy is bad at the moment, I’ll wait to sell my business.

- I can’t afford to go out and eat, this country is in the middle of a financial crisis you know!

Last year, I was looking around for a small flat to buy in order to make a smart financial investment for the future.  The housing market in Spain has fallen massively since its peak in 2007 and there were some very good value potential purchases out there.  Yet I argued almost weekly with my father-in-law.  “The market still hasn’t hit the bottom yet, you should wait more,” he’d say.  “Prices are predicted to fall another 10% within the next 12 months – if you wait you’ll get a better bargain”.

Here’s the thing though.  I don’t care whether the housing market drops another 10% or rises 15%.  These percentages are averages of millions of properties up and down the country.  I wasn’t planning on buying the whole available housing stock of Spain, or even a statistically significant representative sample of it.  I was looking for one flat.  I only needed to find one emergency sale, conduct one successful negotiation, or find one isolated anomaly and I would have my bargain.  It wouldn’t matter if the price of housing were to drop 10% in the 6 months after my purchase – as long as I could get the flat under value I would have done well.

Don’t get me wrong, finding a bargain is significantly easier in a buyer’s market, but concluding that a general 10% fall in house prices will mean you can get the house you are interested in for 10% less is a mistake is a fallacy of specialisation.

Of course there are markets with such low variance in the value of transactions that the general is a perfect indicator of the specific.  If I want to sell some shares and their price is 10% lower this month, then to a very tight degree of accuracy, I’ll get 10% less for them.  If I partake in a fund that invests in a basket of shares and suddenly 50% is knocked off the value of the stock exchange, then I just lost about 50% of my money.

But even if the stock market falls 50%, somebody always comes out winning.  Why?  Because the headline statistic is always just an average.  And averages are made up of a lot of stuff in the middle that follows the trend pretty closely, and then a few outliers that do crazy stuff.  In the stock market example, there were probably a load of stocks that fell by about 50% along with a few that fell by much more and a few that actually rose.

Therefore, your task is to be on the positive side of average.  To rise when everything else falls.

The current employment situation in Spain is bleak and has been for a long while.  Youth unemployment is up somewhere around 50%.

What does that actually mean?  Well, on average, across the whole country, only half of the young people eligible for work are actually in work.  That’s the general picture, and it’s a genuine tragedy for the current ‘lost generation’.  But that’s just the group perspective.  If I am a young person looking for a job, what should I read into this static which is trumpeted loudly on the news almost every single day on national television?  Should I assume that I have only a 50% chance of getting a job?  Should I assume that I will have to wait 50% longer to find a job?  That I will earn 50% less?

I’ve heard all of these conclusions.

The truth is that these statistics are almost irrelevant to any one individual.  Yes, we should worry about them from a point of view of social consciousness and group economic prosperity.  But to an individual, averages are just that, averages, and any individual has the ability to buck any trend with relative ease.  You are one in ten million,  a hundred million, 2 billion, do you think that the statistical world will implode because you have managed to find a flat for 20% less than its value, or find a job when 50% of your competitors can’t, or lose 10Kg on a high fat diet when the general advice is that high-fat diets make you, well, fat?

Did you know you have a 1 in 119 chance of dying by suicide?  Damn, better be careful then.  Or perhaps just don’t commit suicide.

Let this be our little secret.  You are you, and that’s it.  You are not representative of the average.  The general does not apply to you.  Be wary of generalisation, but be even more wary of specialisation.  When the news tells you that taxes, divorce rates and the cost of of living have gone up, that educational standards, living standards and life expectancy have gone down, and that we’re in for a rubbish summer, turn off the TV and say “I don’t care – this year I will be richer, happier, smarter and healthier than ever”, and go out and do something to make that happen.

We probably all remember how to work out an average from our schooldays, but what does the concept average really represent?  Do mathematical averages mean anything?  Is there a better way to encapsulate ‘averageness’?

Measuring Average

Mathematicians use three different measures to describe the overarching concept of average: mean, median, and mode. 

Mean

Mean is the calculation of average that we’re most used to and probably use fairly often in our day-to-day lives.  To calculate it, first compute the sum of all the values in a group (ages, heights, incomes, etc.) by adding them together and then divide that total by the number of values in the group. 

Example: Five friends have gathered for lunch and are discussing their yearly incomes, which are as follows:

• Lee: $20k

• Brian: $20k

• Tracy: $50k

• Warren: $80k

• Stu: $200k 

What’s their average (mean) income? 

Adding all the incomes together, we get $370k.  We then divide that number by the total number of friends, which is 5, to get an average of $74k. 

I know what you’re thinking - $74k is only really close to Warren’s income - it’s miles away from everyone else’s.  In fact, that observation leads us to the fundamental flaw in the concept of average (at least when talking about the mathematical mean - we’ll come onto other measures of average later): Averages can be virtually meaningless. 

I think it’s worth reading that statement a few times as this is the number one stumbling block and difficulty most have in getting their heads around this concept. 

Of course, a mathematician would argue that this is untrue, and he’d be right: a mathematical mean no doubt has a mathematical meaning - it is the sum of all the members divided by the number of members - no more, no less.  But from a conceptual viewpoint, that doesn’t help us very much. 

When I say “The average income of the group of friends is $74k”, does it have any meaning beyond expressing the result of a mathematical calculation? 

Consider these questions:

• Does any member of the group actually earn $74k? 

• Do some members of the group earn significantly less than $74k? 

• Do some members of the group earn significantly more than $74k? 

By now it should be clear that the number $74k has little real meaning beyond the purely mathematical - no member of the group actually earns that amount, and most members earn significantly more or significantly less. 

For $74k to represent anything in the real world, the friends would have to redistribute their incomes - with those earning above average giving part of their incomes to those earning below average, so that each friend finally ended up with $74k. 

That’s actually quite a good way to conceptualise the mean: it’s what everyone would be left with if there was a fair redistribution. 

Averages Ignore Variability

It sounds obvious: you can’t capture variability within a group with an average, but it’s so easy to forget that an average not only ignores variability, but really paints right over it - almost fooling us into imagining the group as a cohesive unit, where the members have similar traits that are neatly represented by a single number. 

The truth is, that is very rarely the case. 

Example: Consider the following excerpt from a report which appeared in the UK newspaper The Guardian in July 2015:

The price of the average property in the UK burst through the £200,000 barrier in June for the first time since records began, following an unexpected 1.7% surge in monthly house prices. 

As a reader, casually skimming over this article, we might be inclined to conclude that in June 2015, a lot of houses in the UK were breaching the £200,000 price tag. 

But was that the case? 

Well, probably not.  Like most places, house prices in the UK vary wildly by location. 

According to Nationwide, a leading UK mortgage lender, the average house price in London in June 2015 was £429,711 whilst the average price in the north was £125,189. 

In other words, houses in London sailed past the £200,000 price tag long ago, whilst prices in the North still have a long way to rise before breaching that level.  Only East Anglia, with an average price of £198,000, seems to be well represented by the average. 

So, this ‘average’ £200,000 house that we picture when reading the article is really an illusion. 

Distribution: The Key to Interpreting Averages

In the examples above, the calculated or quoted average was rendered useless because the values that made up the group were too spread out.  In the example of the five friends, the income ranged from $20,000 to $200,000.  In the house price example, the range was £125,000 to £420,000.  In both cases, the wide distribution of values produced an average that was misleading. 

The good news is that where values are not spread out over such a large range and in such an uneven manner, the average might just be more useful as both a number and concept. 

Example: Imagine a class of 30 10-year olds.  If we say that the average height is 55 inches, there is a fairly good chance that most members of the class will be close to 55 inches tall, give or take a few inches.  Of course there will be a few outliers - particularly tall or short children.  But the average height of 55 inches is quite a descriptive and useful metric - this stems from the fact that the heights are fairly tightly clustered around the 55-inch mark. 

Take a look at the graph above, which represents the distribution of heights I just described. 

Notice how most children in the class are tightly clustered around the average (the vertical dashed line).  You might have come across this ‘shape’ before - it’s called a normal distribution. 

Don’t worry if you’ve never heard that term before - just think of it as a distribution of values clustered around the average, with fewer and fewer outliers as the numbers get bigger and smaller. 

This type of distribution tends to occur quite regularly in many natural situations, from children’s heights, to people’s IQs. 

The more tightly the values are clustered around the average, the more we can interpret the average as representative of, well, ‘averageness’. 

Take this to the extreme and imagine every child in the above class is exactly 55 inches tall, and you’ll see that the average height of 55 inches is now extremely representative and useful - in fact it’s the height of every child in the class! 

So averages don’t have to be that useless after all.  Just remember to think about the distribution. 

Alternative Measures of Average: Median and Mode

Let’s go back to the example of the group of friends and their income:

• Lee: $20,000

• Brian: $20,000

• Tracy: $50,000

• Warren: $80,000

• Stu: $200,000 

To make things easier, I’ve arranged them in ascending order, from Lee’s $20k to Stu’s $200k. 

No prizes for working out the middle value, or the median, it’s Tracy’s $50k. 

You might want to consider whether you feel that $50k is a more useful representation of average than the mean of $74k that we came up with in the previous section.  What do you think? 

In defense of the median - at least it corresponds to someone’s income, rather than the mean, which doesn’t correspond to anyone’s.  And that’s really the median’s ‘strength’ - if you will - it’s just the value of the middle guy (or girl) in our group. 

But is $50k really any better a representation of average than $74k? 

Probably not - it’s still miles away from everyone else’s income - so the median still suffers from variability, just as the mean does. 

If we were to take our class of 10-year olds and line them up in height order (like they do when preparing for the class photo), the median height would be that of the 15th or 16th pupil, which, to be honest, would probably be almost exactly 55 inches - in other words, approximately the same as the mean. 

In a tightly clustered distribution, the median will be very close to the mean, both of which will be a good representation of average. 

So, when distributions of values are normal(ish) and tightly clustered around the average, both mean and median are useful.  But when distributions are a bit more ‘all over the place’, then both suffer from the same problem, and in fact, can be quite different from each other. 

In our friends’ incomes example, there is a $24k difference between mean and median - that’s quite a lot. However, if Tracy’s income had been $30k instead of $50k, then things would look quite different.  She’d still be the middle member of the group, so the median would now be $30k, but the mean would have only moved down to $70k - which is not that much of a difference from $74k (perhaps the mean isn’t so useless after all!). 

So you can see just how dependent on one member the median really is - it just seems a bit arbitrary, doesn’t it? 

Again, it all comes back to the distribution - if we’re dealing with a large, fairly homogenous group, there shouldn’t be any problem - the median should be close to the mean and fairly representative of average.  On the other hand, if we’re dealing with a small group with a somewhat funny distribution, like our group of friends, the median can be really dependent on just one member, which really affects how useful it is and implies we should approach it with caution. 

The mode is just the most common value in the group, and of course suffers from the exact same issues as the mean and median - its usefulness is determined largely by the distribution of values. 

Looking back at our group of friends, the mode would be $20k.  How does that compare to our mean of $74k and our median of $50k? 

Truthfully, it’s a world away - and we’d have to conclude that it’s the least useful metric. 

Why? Because our small group meant that just two members are determining the mode for the whole group, which is leading to an extremely skewed value. 

Just as in the case of the median, the result is somewhat arbitrary, but just happens to be different from the median of $50k, which was determined by just one person! 

What a mess! In the end, the mean of $74k seems to do the job of ‘averaging’ quite well, even though it’s not that representative of any one particular person’s income.  Perhaps you can now see why the mean is the most commonly used of the mathematical averages, with its power to simply brush over the whole group and come up with a single number that describes everyone, without getting thrown off by any one member. 

Just remember how to interpret that number! 

What Does it Mean to be Average?

That’s enough maths for today.  But we’re still left with the question of just what it means to be ‘average’. 

Consider the following statement:

I’m an average tennis player. 

Does this mean that I have considered the distribution of tennis playing abilities of every single person in the world?  Or just those that play tennis regularly?  Am I referring to mean, median or mode?  What number am I using to represent ability? 

The same doubts apply to pretty much any similar statement that casually refers to ‘average’:

Is he good looking? Not really - about average. 

I’ll leave you to decide what it means to be an average tennis player, or ‘averagely’ good looking.  You should now have the tools in place to make that judgement. 

Use the Concept

• A good way to conceptualise average is to think of it as the way everyone would end up (money, height, tennis ability, good looks) if those who had more gave to those who had less until everyone had the same amount. 

• Think twice before drawing any conclusions from any averages you see quoted - they can be almost meaningless. 

• If you absolutely must apply a global value to a group in order to encapsulate some numerical property (like income, price or height), think carefully about the distribution of the values in that group.  Are they likely to be tightly clustered around the average?  Is the average a useful, or representative metric? 

• Be extra careful interpreting the median or mode of small groups with odd distributions of values - they may be very skewed by the particular value of the middle member or a few common values which are not representative of any other values. 

I hate to say it, but a lot of the business advice you’re googling for is either outdated, inapplicable – or both.

Let’s face it, there’s too much advice out there these days – and yes, I am only making the problem worse. From your closest network of friends and contacts, to the furthest extremes of the net, your world is most likely populated by gurus who are more than happy to throw a constant stream of wise words your way.

In day-to-day life, choosing which advice to follow is somewhat easier than when it comes to business. Of course, there are hard decisions to be made from time to time, but gut feeling and a strong sense of morality or principle are often enough to get you through. Not so in business. The entrepreneur’s path is continually bisected by a myriad of minute technical decisions that need to be made, all of which have a potentially explosive effect on business? Sell on Amazon, or not? Increase Adwords budget, or decrease? Go with product x, or choose product y. And that’s often where so many people turn to google. Try it now – go to Google, and type in the words ‘should I’ – what suggestions do you get? Currently, for me, it’s

- Should I stay or should I go

- Should I buy an iPad

- Should I text him

- Should I upgrade to Lion

Not that it’s of any relevance, but my advice would be ‘go, yes, no and yes’ respectively.

There’s a lot of people with a lot of doubts out there, but there are more than enough ‘experts’ available to fill the gap. But what do you do when your ‘advice stream’ gets overloaded with repeating, differing and contradictory statements? How do you identify what’s most applicable to you.

I have to constantly remind myself that everyone (including me, of course) writes or speaks from their own perspective born of their own experience married with their own values.

Back when man sat around fires telling stories and eating dinosaurs, the wisdom imparted to younger generations by the elders could pretty much be accepted without question. When food is plentiful, stash some away for winter. Don’t get into fights you can’t win. When faced with bear, run in opposite direction. Life didn’t change much from year to year, and what worked a hundred years before, probably worked a hundred years later.

But now we live in a world that changes at breakneck speed. What’s here today is gone tomorrow. What worked this morning, might not work this afternoon. So beware advice that comes from ‘years of experience’ as we so often hear. It might just be outdated.

This is especially true in the internet era, when business models are being creating destroyed in a continuous, rapidly moving cycle. An entrepreneur might extol the virtues of a model that has worked well for him or her, and you might be tempted to go the same way, but ask yourself first – does this still apply?

If you read, in isolation, some of the ‘first wave’ blogs written by internet entrepreneurs who started before about 2005, you’d be inclined to think that with a little work you could be bringing in $40,000 a month just through blogging. If you read some of the stuff written over the last year or two, you might come to the conclusion that blogging is dead in the water for income generation. Before taking anything you read on the internet to heart, take a look at the post date first. I’m not saying that absolutely all advice has a sell-by date; nor that everything that was written yesterday is more useful than that written a year ago. It just pays to think about the landscape that gave rise to any particular piece, and consider whether it might have changed significantly since then.

Of course, it’s not just the passing of time that gives rise to irrelevancy. An entrepreneur, when giving advice out of experience, speaks from a singular perspective. Perhaps you operate in the same industry, with the same products, even with the same client base. But your business is ultimately yours and represents your unique combination of past decisions and future aspirations. What works for him, may not work for you. In fact, the reverse might be true, it might do your business harm.

At the end of the day, a business, at its core, is just a system to produce profits for its owner(s). Engineers define systems with formulae and algorithms, with their constants and variables. Each unique system is defined and described by a unique formula. When trying to discover the formula that describes a particular system, a good engineer will certainly look to the past and to similar systems and their underlying formulae. But he will realise that the object of his attention is unique, that he must experiment, tweak and iterate in order to discover the inputs and outputs of his system.

Each business is unique, and so is the formula that describes it.  Learn to identify the variables and separate them from the constants, the concepts and ideas that change very little as times passes.  Good customer service, proper branding, effective marketing, solid financial control – these are all concepts that have shaped businesses for decades, if not centuries, and the best advice stands the test of time and applies to the vast majority of businesses.  Variables – the combination of factors that make your business unique, are much more individual and transient.  Only you can find out what particular combination of products works for you, how much you should spend on adwords, whether you should sell on Amazon, Ebay, both or neither.  Searching for advice can help you envisage and set up the system, but the variables that have to be plugged in are yours to discover through experimentation, test, success and failure.

Take what others say with a healthy dose of skepticism. Accept the uniqueness of your business. Accept that what worked for others, even in apparently identical circumstances, won’t necessarily work for you. Experiment and find your own formula.

This is a lighthearted concept introduction and the first in a series of pieces looking at business models in the modern economy and what they mean to potential Non-9-to-5′ers. If you are an expert economist, probably best to look away now.

If you don’t know what a ‘business model’ is, join the club – nobody really does. It’s a concept that entrepreneurs and bank managers toss around casually but when it comes to the crunch, good definitions are hard to come by. That is, unless you’re a business studies professor, in which case you might say something like: “an architecture for the product, service, and information flows, a description of the benefits for the business actors involved, and a description of the sources of revenue” Got that? No? Here’s an easier way to think of it: it’s the answer to the question “How the hell are you going to make money out of that?”. Listen up.

- Hey Bob, I’ve got a brilliant idea.  

- Oh yeah?  

- Yeah, I’m going to set up a car rental agency and undercut everyone else. I’m thinking of charging £25 a day.  

- That sounds like it’d be less than cost. How the hell are you going to make money out of that?  

- Well, you see, I’m going buy loads of brand new vehicles all the time and make people sign a contract with tiny print that says they’ll have to pay £500 for every scratch on the car when they return it. Then I’ll sell the cars for a bit less than I bought them for, leaving me with a fat profit.  

- Nice.

Of course, this entirely fictitious conversation is in no way related to any practices going on in the vehicle renting industry in the UK and has nothing to do with the fact that you can rent a van for £30 a day whereas in Spain it costs £100. Seriously.

So, a business model is best thought of as how an organisation makes money doing what it does. It sometimes helps to think of businesses that look impossible on the surface and dig deeper for examples of clever or innovative business models. Or illegal ones. A knitting materials shop that is still in business today is clearly a front for something sinister.

Now the example I’ve given is clearly highly contrived, and in the old days, the question “How the hell are you going to make money out of that?” was easy to answer. “I’m going to sell it”, was the about the only option.  Most industries ticked along nicely under the assumption they would always be able to make piles of money just selling the product or service they were making or supplying.  Then the internet came along and ripped up the rule book, and the conversations now go:

- Hey Bob, I’ve got a brilliant idea.  

- Oh yeah?  

- You know those lovely wicker baskets I make? Well, I’ve decided to make it into a business.  

- Good for you. How much are you going to sell them for?  

- No, caveman, I’m going to give them away for free.  

- How the hell are you going to make money out of that then?  

- Well, I’m going to weave clues to websites into the fabric of the baskets and set up an online treasure hunt with prizes of holidays to Lanzarote.  Then, I’m going to sell timeshare companies rights to 30 minute sales pitches to the winners once they arrive.”  

- Oh.

In short, people are finding ingenious ways to make money out of virtually anything, including, in many cases, giving it away for free.  Now, I don’t know this for sure, but my feeling is that if walked into Harvard Business School or a board meeting twenty or even ten years ago and propounded this as a vision of the future, they would have sent you away for treatment. Of course, this movement is causing old school businesses to rethink the way they make money as consumers change their habits and their willingness to part with cash in the same way as before. The public face of this is often the music and film industries first trying to sue everyone, and then having to adapt to the market with innovative value propositions, like iTunes or song downloads included with GSM airtime bundles. Other businesses, and their models, will just wilt and die. Blockbuster had stores all over Spain once – now they’re gone.

The point to take away from this is that you don’t need a shop to make money. Even if what you’re selling seems wholly traditional and mundane, with just a a bit of imagination and an observant look around your sector, you can probably come up with a crazy (perhaps even profitable) way of selling it. Just think outside the box a bit.

To get your creative juices flowing, I’ll let you in on an idea I had for[my own company but will almost certainly never do. A note to competitors: if you’re reading, please have a go at this and tell me how you get on.

Right, we sell speciality food, OK? How about we sell that food at cost price (we could even scan and upload purchase invoices to show that we were being honest). This essentially amounts to what creators of knowledge are doing when giving away their product for free. “How the hell are you going to make money out of that then?”, I hear you ask. Well, as standard we’ll do 3-5 day delivery and premium number telephone support. Then we’ll offer yearly ‘Preferred Customer’ subscriptions for £100 which entitle the holder to unlimited 24 hour deliveries and unlimited freephone telephone support.

Novel and 10-years-ago-lock-you-away-in-an-institution business plans are not just for porn hawkers and bloggers, they are for the whole business community – particularly Non-9-to-5′ers who feel that ‘old’ business is inaccessible. Well, here’s your invitation. Try something new. Experiment with novel business models. Then, when people ask “How the hell do you make any money out of that?”, just keep the secret to yourself and lie – tell them you don’t.

The first half of this double post comes from a rambling, ranting conversation I had with my girlfriend in the car yesterday; the second half comes from the niggling sensation I’ve had ever since I wrote the very first post on this blog that I never quite made my intentions clear. Depending on whether you’re Gen X or Gen Y, your brain might be running out of hard drive space – mine certainly is. The more crap you read on the internet, the more secondary school French trickles out your left ear, never to be heard from again.  What will you do, monsieur, when your tire bursts on the A-10 from Tours to Biarritz, eh?  My solution to this problem is generally to construct never ending mental summaries which tend to spill forth when anyone is stupid enough to ask my opinion on, well, anything.  As time goes by and more information comes in, I adjust these miniature world views until they are compact answers to some of the world’s trickiest questions.  And so it came to pass yesterday, on the road from Leon to Burgos, after taking far too seriously what far too many people I don’t (physically) know have to say about life, the world and business, I loosely formulated my personal summary approach to world domination.  These are not really my own, original ideas, but more how I understand and conceptualise what a lot of people far more intelligent than myself are currently saying about the way the world works.

First, let me clarify what I’m talking about, and that’s business – business in the widest sense of the word.  I doesn’t matter whether it’s big or small, short or fat, charitable or selfish, employed or freelance, online or offline, full-time or part-time, legal or illegal.  We’re talking about activities that are designed to make money – the more the better.

From the millions of words that have been written about commercial success, and the thousands I’ve read, it seems to all come down to three things (which are so intertwined that they’re really just one thing):

1. If you’re a person, find a genuine niche.  If you’re are a business, find a proper Unique Selling Proposition, then…

2. Be great.  Better – be the only one, then…

3. Find an innovative, honest business model which makes big company execs cry and makes you money whilst treating your customers as human beings.

That’s it.  Really.  I’m tempted to leave it there for maximum impact, but I’d like to expand at least a little bit on each of the above points.  If you like the maximum impact idea, stop reading now and just take that little snippet away with you.

If you’re a person, find a genuine niche.  If you’re a business, find a proper Unique Selling Proposition.

For the sake of simplicity, I’ll consider these concepts as one for the time being.  The question to ask is “What makes me, or my company, different?”.

The more time I spend in business, the more I realise that being different isn’t reserved for Nando’s chicken restaurants where you have to order at the counter but a server brings the food to the table (?).  Being different is your ticket out of 15-hour days, a prolonged cash flow struggle and eventual financial death.

It would be pointless for me to go into USP, niches and value propositions in any detail here as there is already an overwhelming amount written on those topic.  The ground truth is this:  if you’re considering an activity that isn’t going to make people wet themselves with excitement, even if it’s accounting, don’t bother.  If you’re already running an enterprise that isn’t doing something astoundingly different from everyone else, change – or shut down.

All the bad stuff in business comes from ignoring this most fundamental piece of advice.  And by ‘all the bad stuff’, I mean competition.  As any small business owner will tell you, being part of an over-competitive market is no fun at all – you end up slashing margins until you’re making next to nothing and spending what you do make on advertising to get noticed.  It’s a short cut to baldness, divorce and bankruptcy.

Robert Stephens of Geek Squad once said that ‘marketing is the tax you pay for being unremarkable’.  Aside from semantic quibbles, it might be the single most sit-up-and-kick-you-in-the-nuts piece of advice I’ve ever heard, and it turns out to be painfully true.  The newspapers, business press and internet are full of examples of clever businesspeople leveraging their uniqueness to get mammoth amounts of free, prime publicity.  The television news wouldn’t look twice at another new fruit smoothie on the market, but might give you 30 seconds of coverage if your USP was that you were shooting it into your customers’ mouths from the International Space Station.

The bottom line is that real uniqueness creates its own publicity and leaves you with a viable business rather than a massive AdWords bill.  

Be great.  Better – be the only one

There’s a lot of people around at the moment that want a lot of pieces of lots of pies.  The world has turned into a horribly competitive place.  The means that even if you’ve found your niche and are crystal clear about the value you are bringing that your neighbour is not, you’ve got to do it seriously well.  If the only pizza place in your town was rubbish, they might still make some money off their uniqueness.  If the only pizza place in your town had been voted one of the top five in the country…

You’ve got to be the go-to-guy (or organisation) to the exclusion of everyone else.  You don’t have time to be mediocre or even good – even being the best won’t cut it these days.  If you nail your market positioning  right, you should be the only entity worth considering for good or service x.  Of course, if you nail your niche right, nobody else should be around to stop you anyway, but to be 100% successful you’ll still need to offer an outstanding service to your clients.

Why? Because customers talk.  Not like they did back in the day when if you failed a customer, you might lose them and their immediate family, no, nowadays customers Twitter.  If you’re really crap to a single influential player, you could conceivably lose 10,000 potential customers overnight.  If you’re amazing, the reverse can happen.  If you write something mediocre, you might have 5 or 6 friends and your Mum read it.  If you write something earth-shattering and its merit takes it to the front page of Digg, 100,000 people might read it.  The connected, social world of commerce is a meritocracy the likes of which has never existed before.  If you don’t believe me, check out what Get Satisfaction are doing for customer service (and if you’re a business owner, don’t bill me for new pants).

Find an innovative, honest business model which makes big company execs cry and makes you money whilst treating your customers as human beings

Let’s not beat about the bush, most big business have made vast sums of money by treating consumers like dirt and generally ripping them off wherever possible.  We’re so used to it we’re immune.  It’s what we expect.

But anyone who spends any time on the web must have noticed that things are slowly changing for the better.  Look around the trend-setters and you’ll get a good feel for what it means to treat customers as human beings: clear, honest product descriptions written in every day language, no misleading offers, no long-term contracts or tie-ins, no small print, no extortionate pricing.  You might have to look hard for companies doing this sort of thing right now, but you can bet your arm that everyone will be doing it five years from now.  Terms and conditions will be ditched in favour of more human agreements, like the Company-Customer pact.  ‘Offer Subject to Conditions’ will be a thing of the past.

As usual, the web croud are light years ahead of everyone else on this.  Bloggers have already embraced hyper-honesty.  In times past, blogs were full of links which took you to places to buy stuff if you inadvertently clicked on them thinking they might give you some extra info.  Nowadays, bloggers routinely include disclaimers about affiliate links, often disclosing just how much they will earn should you buy something via their site.  Why do they do this?  Because it turns out that deliberately but subtly misleading people to make a sale really annoys them. When confronted with a bit of good, old-fashioned honesty, they’re more like to go for the product.  I came across a currency exchange company recently that proclaimed total transparency.  They would show you the price they were buying the currency at for any trade you asked for and would then show you exactly how much they were making out of the deal.  Madness?  Of course, you might be turned off to know how much they are making out of you and run a mile.  That’s probably why almost nobody is doing this yet.  If they’re charging a fair price though, isn’t it more likely that you’ll appreciate their honesty and transparency and probably consider that the minimal fee they’re charging you is fair dues for a unique and excellent (remember?) service.

Being honest and transparent, means you can’t hide behind a rip-off business model which is going to make you insanely rich on the back of little work or talent.  An 800% markup won’t cut it anymore.

Contrary to popular imagination, starting a new small business does not always involve waltzing around in a sharp pin-stripe talking to venture capitalists about start-up funding.

Instead, it quite often involves long evenings hunched over books and magazines, or topping up on facial radiation in front of your computer screen, learning about topics which may have seemed unimaginable, even unpronounceable to your former self. Not many of us understood double-entry bookkeeping, tax law, health and safety regulation or search engine optimisation before starting our businesses, but we sure as hell had to learn them. Sure, there’s a subset of entrepreneurs who are happy to farm out as much as possible to the specialists, but as I’ve argued before, even if you can afford it, you’ll be a much more effective manager if you can understand what the specialists are actually doing.

The dying art of versatility, or the ability to quickly and effectively turn your hand and mind to almost anything, is hugely under appreciated in our ‘specialist’ society, where you’re either an ‘expert’ or ‘guru’ in one particular field, or you’re nobody. It’s a common criticism of national education systems – that kids are forced to specialise too early, and that this forced specialisation is pushed up the chain through school, further education, higher education and even on to research level studies. The result is a professional community where we highly prize in-depth knowledge within a very narrow field of expertise.

But starting and running your own business requires a multitude of skills and expertise and that’s why I think being a ‘jack-of-all-trades’ is a great character basis for a small business person.

Of course, I would think that since I consider myself a bit of a polymath. In fact, I’ve recently come to accept that it’s my defining characteristic along with curiosity about the world and a desire to learn (concepts that are so intertwined that they are probably a prerequisite to mastering multiple fields anyway).

If you’ll forgive just a little reminiscing, I’d like to relate how I came to that conclusion.

At school, at a young age, I was good at all the subjects. What I did differently to a lot of people though, was to perpetuate this multidisciplinary approach right through to the highest levels of study. At 16, when in the UK we sit our first round of ‘big’ national exams, many are already set on the path that will mark them out as ‘artists’ or ‘scientists’. By 18, when we sat our A-Levels, that was certainly the case. I didn’t know anyone that mixed arts and science subjects – in fact, I don’t think the school allowed it. I had to fight to be allowed to mix two foreign languages with economics and computer science. “What the hell are you going to do with that?” the teachers asked me.

At the time, of course, I had no idea. It turned out that Linguistics was the answer. Linguistics, or the science of language (not any particular language), is one of the most cross-disciplinary subjects you can imagine – taking in aspects of sociology, philosophy, logic, biology, psychology, neurology, even mathematics. It’s perfect for a Polymath – and I loved it. I loved it so much that I continued right up to doctoral level. In my last year of university, I started to specialise in phonetics, particularly acoustic phonetics, which is about as close to ‘hard science’ as linguistics gets. When I continued on to a Masters degree, it was in acoustic phonetics in an engineering department – a total step-change from what I was used to. I had to learn maths, which I had given up at the earliest possible opportunity.

Back then, it seemed like an out of character move for me. I had always considered myself more of an artist than a scientist, and certainly never an engineer. But looking back, I can see how it was perfectly in character. I was forced out of my comfort zone, forced to learn another whole set of disciplines and a completely different way of looking at the world (the scientific method). I now know that I wasn’t really studying anything specific – I was indulging my curiosity. I ended up doing a doctorate that covered three entirely separate academic disciplines: engineering, acoustic phonetics and psyschoacoustics. Just as they probably don’t to you, those ‘P’ words meant nothing to me just a few short years earlier. Of course everyone, myself included, thought I was crazy, but I’ve now come to realise that those years, the research and the resulting thesis, are a very accurate reflection of who I am, even if I now have nothing to do with those academic subjects.

To be honest, I’ve struggled for years with the concept of not being dedicated to any one thing. It always seemed to me that everyone else had no trouble defining themselves around a passion – they were either a photographer, a writer, a scientist, a journalist, an artist etc. That was what they had studied, that was their passion, that had always been their passion. It’s just what they did. This feeling was never helped by the constant advice to “find your niche” or “be the go-to person in a particular field”. Being good at everything, but expert in nothing, just didn’t feel like a proper way to be going about life.  It felt like a sure-fire path to mediocrity.

Recently though, I came to accept that being a jack-of-all-trades is a perfectly valid, and liberating, self-definition. I don’t have the patience nor persistence to devote the rest of my life to any one particular pursuit – I have a very low boredom threshold. This leads me to jump into a topic, learn as much or as little I need to or want to, and move on. With practice (of which, by now, I’ve had a lot) you can become an exceptionally quick and effective learner. I like to teach myself from books and other resources – I’m not particularly into classes or anything that involves being taught. And what I’ve realised is that not everyone has the capacity for almost endless knowledge acquisition. In fact, a lot of people seem to drop their curiosity and desire for learning as soon as they leave school or university. Curiosity, the desire and the capacity to learn, and a low tolerance to boredom or any other kind of long-term commitment to a particular field, are all hallmarks of my character. Since I accepted that this was ‘me’, I’ve lost the need to define myself within a narrow field or according to a life-long passion. Curiosity and learning themselves are my passions. The subjects in which I immerse myself are merely manifestations of that.

So I’ll never call myself a photographer, or a writer, or a mountain climber. I’ll never be called ‘the football guy’, or the ‘SEO guy’. I just don’t care that much about any one thing.

But as I found out for the first time in 2005, this type of personality is incredibly well suited to launching and running a business. There aren’t a lot of people out there that are able to take care of everything – from the technical implementation of IT systems, to the graphic design elements of branding, to copywriting, to the inter-personnel skills needed for good sales and networking.

If you feel like you’re a multi-disciplinary kind of person, starting a business is a great way of putting your skills to use.  If you’re interested in lots of subjects and can’t decide ‘what you want to be when you grow up’, business is a great way to go.

It’s a better reason than just doing it for the money too.

Let’s be realistic for a minute.  Out of the hundreds of would-be-entrepreneurs who quit their day job each week, all but a tiny percentage will be back at the office doing 9-to-5 before a year’s out.  The statistics speak for themselves – something like 90% of all small business are gone within 12 months, out of those that remain, the second year failure rate is similar, and even then, out of the remaining group, the five year failure rate is comparable.

Why on earth do so many small businesses fail so quickly?  Are good business ideas really that hard to come by?  In fact, viable ideas are almost certainly nothing to with the problem.  Success, after all, is often in the implementation, and an average idea, bought to life by a a truly talented team, can trump even the most groundbreaking innovation where the realisation is weak.  The fact is that so many small business founders are just not honest with themselves about what it takes to successfully realise their dreams.  Making money from an idea is hard, but being truly brutal in your own self-assessment is even harder.  Really now, who wants to admit that they probably don’t have the numerical skills to understand pricing or cash flow?  Who could imagine their business failing because their marriage just couldn’t stand up to the strains of debt?  So the first instinct is to just jump in, thinking “I’ll deal with whatever problems arise later”.  Far better, surely, to be honest with yourself from the outset. Do you really have what it takes to start your own business?

This is my rundown of what I think are the key attributes needed if you really want to be a successful small business owner.  Of course, by ‘small business’, I’m referring to ‘Say No! to the Office’-type small businesses – modern, flexible, possibly location-independent, possibly little to zero startup capital, innovative business model etc.  For other types of business, not all of these may apply.  By ‘successful’, I’m talking about getting going and just surviving, not necessarily bringing home truckloads of cash within six months.  There’s a lot of luck in business, but luck favours the bold and, without a doubt, those that have the skills to bring luck onto their side.

Are you multitalented?  Are you smart enough to learn, literally, anything?

For me, and for the types of businesses I have been involved in, this is the number one.

Starting and running a small business demands a range of skills so vast and varied that you cannot possibly imagine what you are getting into until you’re into it.

Some might say that the only skill you really need is the ability to find, bring into your business, and manage people with the right abilities, rather than actually having any yourself.  Perhaps many even start out with that very idea.  For me though, that’s the approach of someone with a limited skillset and an even more limited ability to acquire new skills.  Your new idea isn’t a middle-management company, is it?  At the beginning, when money is limited, or worse still, non-existent, you’re probably not going to have the resources to find people to take care of every little task that’s outside your field of expertise.  Even if you do have access to that much cash, how can you expect to effectively monitor and guide what your team are doing without understanding it yourself?

The truth is, being multitalented by nature is a massive advantage in startup business.  Many people, either consciously or subconsciously, bracket themselves as ‘creative’, ‘numerical’, ‘artsy’, ‘non-technical’, ‘logical’, ‘scientific’, etc., and then put up barriers to anything which falls outside the definition of what they consider themselves to be.  Those are the people I have seen struggle or fail quickly.  Help is either slow or expensive – if you want real success, you’re going to have to depend on yourself, and if you don’t know how to do something at first, you’re going to have to learn.  Be honest with yourself – are you strongly right-brain, or left-brain dominant?  Do you struggle to acquire creative, or conversely, technical skills?  Or are you a polyglot, able to turn your hand to almost anything?  Test yourself – how do you feel about learning 80-100% of the following?

Business and Entrepreneurial

- Banking

- Book-Keeping and Accounting

- Small Business Technical and Legal

- Business Communications – Phone/Email/Fax

- IT Systems and Solutions for Business

- Market/Competitor Research

- Business Processes/Management/Productivity

- Logistics/Warehousing

- Personnel Management

Web Design

- HTML, CSS

- Javascript, PHP

- Web Graphics, Buttons, etc.

- SEO, Website Optimisation, Google, Yahoo, Sitemaps

- WordPress, Blogger, Ebay & Other Template Based Design

Graphic Design

- Photography, Photo Editing

- Logo and Brand Graphics Design

Software, Hardware and Programming

- System Set Up and Configuration

- Email/Web/Applications Configuration

- Microsoft Office Applications

- Adobe Photoshop, Indesign, Illustrator, Acrobat

- Javascript, PHP

Online Marketing

- Ebay, Amazon, Google, Shopping Portals

- Search Engine Optimisation (SEO)

- Adwords, Pay-per-Click Advertising

- Affiliate Programs

- Website Optimization, Promotions etc.

- RSS, Blogs, Feeds

- Social Networking, Facebook, Forums

- WordPress, Blogger, Feedburner

- Google Analytics

Offline marketing and Sales

- Leaflet, Flyer, Printed Material Design

- Catalogue Design

- Sales Agents

Writing

- Web Copy

- Proof Reading

- Product Description

- Press Releases, Articles, Reports, Blog Posts

And that’s probably only scratching the surface.  If you’re coming from a non-commercial background, chances are you’ll have almost none of the above knowledge to start with.  That’s OK, as long as you’re able to acquire it quickly.  The opportunities and resources for teaching yourself just about anything are virtually limitless these days – just hit Google or Youtube with the topic you need to learn about for an endless stream of information.  Think about how you have approached learning new skills in the past.  Have you been frightened off?  Or have you successfully applied your intelligence to new fields?

Luckily, most people will never be able to take advantage of this torrent of learning.  We are educated to be specialists, not generalists.  If you are truly multitalented, that works to your advantage.  Those are the barriers to entry that you will overcome and others will not.

Are you persistent? Will you survive ‘the dip’?

I’ve referred to ‘the dip’ before.  If you don’t know what I’m talking about, pick up a copy of the book and read it now.

It’s unlikely your business will work straight away.  In fact, it’s probably going to take a number of years before you really start seeing the fruit of your labour.  At some point into its growth and development, you’re going to hit a dip – a point in time where the initial motivation that kept you up all night designing logos is a fading, distant memory, yet the shining light of success, profit and perhaps even fame are so far in the distance that you can’t even imagine them yet, let alone see them.

Luckily, at this point most people quit.

Will you?  That’s what you need to establish before you even start.  Getting into the dip mindset is almost impossible – that’s why so many people start out blindly on a journey they were never, ever going to finish.  You can’t feel those feelings of despair and distress until you are up to your eyeballs in workload, bogged down in cashflow issues or debt, and facing one customer complaint after another.  That’s the nature of the beast.  You tell yourself that you’ll never be in that situation.  But you will.  You’ll tell yourself that even if you do get into that situation, you will be strong enough to pull through.  Be realistic.  Will you?  Most people don’t.  Getting through the dip takes more motivation, self-control and patience than most people can ever muster.  That’s another barrier to entry that stops the market getting flooded.  Not everyone is cut out for this.  So, you can fool yourself into thinking you’ve got the staying power – but wouldn’t it be better to consider whether you really do before wasting your time.  Look back at your past endeavours.  Have you done anything to suggest you won’t drop out at the first sign of trouble?  Have you achieved something that took extraordinary commitment in the face of strong pressure to quit?

The worst case scenario is that you waste a load of time, effort and money getting to the dip, only to quit when you get there.  Save yourself a lot of pain by only starting projects you are sure you can persist at, no matter what.

Are you patient?

Even if you don’t hit a strong dip, it may take a lot longer than you think to produce the kind of results you want.  If you plan for the business to be fully functional, perhaps even paying you a wage, within a year, what will you do if it takes two, three or even five years?

Even some of the best businesses, with outstanding implementation, still need time to find their niche in the marketplace, develop a strong customer base, and to gain the sort of momentum that propels them forward without the constant grind typically needed to push a startup along.  Perhaps yours is the type of business that gathers pace quickly, but in my experience, most startups are relatively slow-burners and thus their success is mainly limited by the owner’s patience.

When you find that your business is plodding along at a much slower pace than you expected, how will you react?  Are you impatient by nature?  Will you soon be looking for other avenues to explore rather than consolidating what you have?

Are you resilient?

I have never encountered the quantity and degree of obstacles, barriers and problems as I have whilst growing my small-business.  Sometimes I have felt like there was no solution, sometimes I have felt like I was banging my head against a brick wall and a lot of the time I have felt like throwing the towel in.

In the second year of trading with my food import company, we had outgrown the small storage unit from which we were trading and desperately needed more space.  We weren’t able to hold the levels of stock we needed to, which meant we were constantly letting customers down and more often than not, losing customers due to our inability to consistently provide what they needed.  We were, however, still small and not yet profitable, and really needed to find somewhere on a shoestring budget.  I have never encountered such a large obstacle to progress in my life.  We searched for months on end.  We almost quit.  When we finally found somewhere, it took 9 months to get the contracts sorted and move in.  It almost killed the business.  I can’t even begin to describe how close we were to losing it all.  But for some crazy reason we held on.

Business, for me, has often been like that.  I have encountered problems to which I had come to the conclusion that there was no solution, only to find that with time, luck and hard work, one does eventually come along.  At first, I was knocked back by each and every problem we encountered.  It seemed so impossible to progress.  It seemed what we were trying to do just couldn’t be done.  But as time has gone by, I have grown better at standing up to problems, at finding solutions, at being more resilient.

How resilient are you?  Do you have a defeatist personality?  Is the first, fifth, or hundredth problem or barrier likely to kill your business? Or can you turn a problem on its head, find a solution and move on?

Is your life flexible enough to adapt to your new business for an unpredictable length of time?

It’s not only your patience that’s going to be tested as your business takes time to grow and develop – your life, too, will feel the strain.  Relationships, kids, personal finances and social life are all likely to influence whether your business will succeed or flop.

It’s hard to imagine what a drain on your resources setting up a new business can be.  You are likely going to devote a huge portion of your available time, money, effort and love to your new project, and these are resources that won’t be available elsewhere and for others.

If there are others in your circle that depend on you – a partner, children, relations, friends – they are going to lose a large part of you for an unspecified period of time.  Do you think they can cope with that?  Or is it likely to cause tensions so strong that they threaten the development of the business?

Think practically – are your finances in a good state?  Can you afford to live for perhaps three years without a solid source of income?  Do you have another source of income?  Is your partner’s income large enough to support your family until the business is ready to pay its way.  You could bet on your business paying within a certain time frame, but what if that time comes and the business is not profitable yet, or not profitable enough.  Being forced by personal circumstances to leach money out of a business that is not yet ready to pay a salary is a sure recipe for cash flow trouble.

Personal circumstances can do more that put financial pressure on a budding business.  If both your life and business demand a greater amount of time than the sum total you have available, at least one, if not both, are going to suffer.  Make sure you are realistic about the personal resources you have available to devote to your project.  Don’t underestimate the investment that you are going to have to make, only to find six months down the line that your life doesn’t, in fact, permit you as much flexibility as you thought.

Stability and comfort is also a key factor.  I have seen friends really struggle with early stage businesses because of instability in their personal circumstances, such as:

- Unstable, volatile relationship with partner.

- Unstable finances.  No reliable source of income.  Constant unexpected expenses. No backup funds.

- Nowhere stable to live. Constantly moving from flat to flat.

- Nowhere comfortable to work.

- Insufficient physical resources.  E.g., no car, no computer.

None of these are limiting factors.  Of course you can start a business without a car.  But with all the difficulties you are likely to face anyway, wouldn’t it be easier if you could rely on yourself to get from meeting to meeting, rather than having to wait for the bus?  Of course you can start a business without a stable place to live and work.  But you’re going to be putting in mammoth work sessions at the beginning, and aren’t you going to be more comfortable and motivated to continue if you have a suitable, dedicated workspace?

As my own personal life has become more comfortable and stable throughout the development of my business, I have found it easier and easier to leverage my environment to produce better, more professional results.

 Do you have what it takes to start your own business?  Ask yourself the following questions and, above all, be realistic with yourself.  Wasting a load of resources and time on a project that’s never going to go anywhere is worse than not starting at all.

• Do I posses a wide range of skills? Am I able to learn new skills relatively easily and quickly?

• Am I a quitter? Do I have the staying power to work through the dip when times seem rough?

• Do I have the patience to see the project through, even if it takes much longer than expected?

• Do I have a strong, resilient personality? Enough to deal with the extreme difficulties business will throw at me?

•  Can my life, my loved ones and my personal circumstances deal with the investment?