Starting a small business is a huge undertaking, and the biggest risk you will ever undertake. It’s also one of the few paths to wealth available for the average person. The Millionaire Next Door says self-employed people “are four times more likely to be millionaires than people who work for others.” Working for yourself means putting your fate into your own hands, but this decision comes with many new responsibilities and tasks.
Because of all the differences between “W-2 living” and starting a business, it’s incredibly common to become overwhelmed. You will need to get a handle on many business-related topics that you’ve never needed to worry about before taking this leap, but you’re already off to a good start since you’ve landed on this article.
When asking how to start a new small business, it’s best to start at the beginning.
What makes a great business opportunity?
This is the question that will determine whether you sink or swim perhaps more than any other.
Many people will tell you that a great small business is one that aligns with your passions and interest.
Those people are wrong. At least, sometimes.
It could be that the perfect small business idea for you is one where you follow your passions, but it might also be the case that your passions are better suited as hobbies. That’s a question you will need to ponder when deciding how best to move forward into running your own business.
These questions are what you will want to consider when researching business opportunities:
Is there a market for what you are selling?
This question applies whether you are considering product-based or service businesses. This may feel like an obvious point, but many new business owners jump into an opportunity feet-first without being honest with themselves on the question of whether or not there’s a large enough market for what they want to do.
Does the business idea fit into your geographic location?
Many prospective business owners will be able to ignore this question, particularly the ones with ideas that are web-based, but for most traditional business ideas you will need to ensure that your local area has a need for what will be selling or offering.
Does the business opportunity align with where you are in life?
This question covers many bases. You may uncover a terrific business opportunity that would need far more capital than you currently possess (or could access.) You might find a good opportunity that would require relocation, but you might have school-aged children that you don’t want to relocate from their current school district. You might have a terrific idea that would line up with your greatest dreams for life, but the financial potential of the idea might simply be too low for your current financial needs.
The point with this question is to make sure, before spending time and money on an idea, that you’ll be satisfied and happy once you are up and running. This is a point people too often skim past, but it’s one that many prospective small business owners would do well to sit with for a good amount of time.
Would this business leverage your existing skills and resources?
If the answer to this question is no, it doesn’t necessarily mean you should run from the idea, but it does mean hesitation would be wise. Most successful small businesses are organic outgrowths of things the owners were already doing successfully.
This is something we all know intuitively from observation. It’s the mechanic who opens a garage. The chef who opens a restaurant. The tradesman who begins doing odd jobs on the side, before eventually going out on their own to build custom homes. Even though we see this model over and over, many people still want to start a business that has nothing to do with any of their existing strengths. This is a challenging undertaking, because not only does it require learning all of the ins and outs that come with starting a business, but it also demands that a person simultaneously learn the actual work as well. Eventually, once a person has one (or two, or more) successful business under their belt, taking a leap on something new can work, because the stresses of things like knowing how to run payroll or hire good employees will be old hat.
There is one exception to this rule, and that’s franchising.
The benefits of purchasing a franchise can be numerous. A person buys into a (hopefully) proven system that has had all of the kinks ironed out. A good franchise system will have excellent training, copious documentation, local, regional, and national marketing (where applicable), and existing vendor relationships. In return for a franchise purchase fee and (usually) ongoing royalties, the new business owner receives a total turnkey solution.
The drawbacks can be as numerous as the benefits. For every gold standard (think fast-food giants like McDonald’s, Chik-Fil-A, or Wendy’s) there are many bottom-feeding franchise systems that seemingly exist only to leech franchise fees from want-to-be business owners who aren’t savvy enough to know just what they are getting into.
The ins-and-outs of franchising are beyond the scope of an article like this one, but when considering franchises it is smart to begin with the following.
Speak to existing franchise owners
It probably won’t come as a surprise that unhappy franchise owners are more than eager to tell anyone and everyone about the bad situation they have purchased for themselves. Whether an owner has good or bad things to say, you will probably be able to learn about the quality of training, how easy it is to make a profit with the required fees, whether the franchise owner protects territories or sells as many units as possible, and, in general, how much the franchise system owner is invested in the success of each franchise.
Check franchise disclosure forms
It probably also won’t come as a surprise that many franchise systems are very cagey when it comes to what they reveal financially, but luckily, we have a secret weapon: states that require franchise disclosure. In certain states, franchisors have to file financial disclosure documents. These documents are a wealth of knowledge for prospective franchise buyers. For example, these franchise disclosure statements are how we know that 99% of multi-level-marketing participants lose money.
The gold standard for these forms are the ones revealed by Minnesota’s system. With just the franchisor’s legal name and the franchise name a person can uncover all kinds of financial data. Click here to try it for yourself.
Starting a business as a side hustle to test
Certain business models lend themselves well to dipping your toes into the water before making the decision to go all-in.
In fact, starting a business as a side hustle can be the safest and smartest way to start a business. While this model requires a great deal of hustle and time, there is a built-in safety margin since existing employment is kept. A regular paycheck is a major asset during the early, and often difficult, days of building a business. There’s also an obvious tipping point for success. When a normal paycheck begins to be matched or exceeded by a side business, it’s time to quit and move full time into the new business.
Apart from the safety of regular non-business related income, there’s also the major plus of being able to learn and improve on your idea without the danger of destitution should things not go well. Almost every new business owner makes major mistakes during the first years of a business. That’s part of the learning process. Many mistakes that become fatal would not be so damaging if the owner had income still coming from other sources.
Dotting i’s, crossing t’s: Planning, business registration, licensing, & permitting
Once you’ve come up with an idea for the type of business you want to start, you need to step into the planning stage. The first thing you should do is create a business plan. Studies show that companies with a strong business plan grow 30% faster.
Some people decide to start their business without a detailed plan, but launching your company and keeping it running is a lot easier with a roadmap. You’ve already figured out your next steps and your goals.
Many people finance to start their business or to offset costs until there’s a livable income. Most financial institutions will not grant a loan without some type of business plan.
The same goes for trying to find investors. The majority of people will not invest in a company that operates without plans for the future.
Writing your business plan
Business plans are a valuable tool for company owners. A strong business plan contains pertinent information lenders or investors would need. The better your list, the higher your chances of scoring funding or investors.
There are two types of business plans. Which one you select will depend on your needs: traditional and lean startup.
Traditional business plan
The traditional format offers detailed explanations about your new company. This includes financial projections, goals and forecasts, and company structure. These formats are usually many pages long and can take a while to compose.
If you want to borrow money for your company’s startup or attract investors, use a traditional plan.
Many new business owners download a template such as this to create their business plan. All you have to do is plug in your information. The hardest part is gathering the details you’ll need to include and support with proof. There are many sections to this style of plan.
The first section of your business plan should list your company’s background and goals. Include what your company is and what you do. You also need to include a mission statement. Provide necessary information about the leadership team and employees, and finance information.
You need to include high-level growth predictions if you’re going to apply for financing. Or if you want to work with investors.
In the second section, provide further detailed and specific information about your company. The best company description will answer the five W’s and one H: who, what, where, when, why, and how.
Go into more detail about who you are and what you do with your business. Also, talk about your potential customers. Describe your target audience. This will cover your Who section.
Next, discuss what type of products or services you offer. List your business goals for the short and long term. Your goals help explain how you want your company to grow. Financial institutions and investors use these statistics before deciding on your company. This is the answer to what your business is.
To answer where, talk about your location. How will you market your goods or services to customers? Consider brick and mortar, online, or traveling.
For when, list when your business plan will go into effect. Or when it did, if your business is already running.
There also needs to be an exit strategy detailing what you plan to do with your company in the future. Will you be selling your business when you retire? Will it go to a business partner or family member? Would you consider merging with another company or selling out?
For the final W, you’ll answer why your company. What will make customers choose your brand over others? This is a great place to mention your mission statement and how it applies to your customers. List any competitive edges you have over your competitors. How is your company different from similar businesses?
Finally, there needs to be a section for How, which explains how your company will run. Here, you will be outlining your business structure. Mention whether your business is a sole proprietorship, LLC partnership, or a corporation. List any experts you have working for you. Include any industry specialists, advisors, attorneys, or organizations.
You’ll also talk about how you’ll achieve your company’s goals. Will you be hiring staff to fill open roles? How many people would you need to hire? How big will your company grow?
Your final part of the How section will need to talk about your company’s future. List your vision statement in this area. A vision statement defines how you envision your company in the future.
Understanding your competition is a useful way to improve your company’s performance. Learn how to search for trends and themes from consumers, figure out how your competition is meeting the customer’s needs, and then tweak what you’re doing to be better than everyone else.
In this section, make sure you answer the following questions. What are my competitors doing, right? Why is it working? And how can I do it better?
Management and Organization
Every business plan needs a defined management structure listed. Is it a C or S corporation, general or limited partnership, sole proprietor, or an LLC (limited liability corporation)?
It’s crucial to mention your company’s management structure for funding or partnerships.
Some people like to use a chart or infographic to display the company hierarchy. You can choose to limit the list to the people in charge, or include your entire roster of employees.
Provide details showing the skills and experience of each employee. Attaching resumes and CVs provides additional evidence to support your management structure.
Marketing & sales
For this section, you’re going to explain your marketing goals and strategies. Be specific about how your plans meet your individual needs. Avoid cookie-cutter ideas that everyone uses, but at the same time, research the typical marketing strategies your industry uses.
You need to explain how you’ll find and convert your customers into paying clients. List any marketing ideas you’ll use. You’ll also need to explain the sales process. Will a client come into a store to browse and buy? Or will they order online, and you ship it to their door?
This section will be useful when you’re working on your financial projections. You want to go into detail in this section to explain your strategies for marketing and sales.
This section is crucial if you need funding or financial help. You may need money to get your company started. Or to help cover costs while you’re not working and waiting for your company to profit. You’ll need this section filled out in precise detail.
In this section, you will need to include your calculated funding amount for the next five years. You can’t list a number. You need to discuss where this money will go. Lenders are more likely to choose to finance a plan that shows where every penny of money will go.
Discuss whether you’re looking for equity or debt and outline your terms, including the loan time. Breakdown what you’ll use the money to cover, such as payroll, new equipment, or bills.
You also want to list your financial goals, such as how you’ll pay off your debt. Or what happens if you sell your business before the end of the loan’s term.
Use your financial projections to show how you see your company will profit over time. For companies already running, add any financial records. Try to go back as far as three to five years, if possible.
Income and cash flow statements and balance sheets are useful to show your company’s growth. If you’re a new business, use forecasted predictions instead. Include predicted balance sheets, income statements, capital expenditure budgets, and cash flow statements.
The first year of your business is the most crucial. Many people break down the first twelve months into quarterly or monthly forecasts. Explain each piece and how it will relate to your funding. Don’t be afraid to add graphs or charts to this section.
Many business owners also use this section to list any collateral they own. Lenders like to know there’s a way to recoup any losses they may suffer if your business flops.
You’ll list all your supporting materials to match any claims you made in your proposal in the appendix.
Some forms you may see in this section include:
- product descriptions and photos
- reference letters
- credit reports
- legal documents
Lean Startup Business Plan
In comparison, a lean startup is a shorter summary of your business goals.
A lean startup is better for companies that will make changes to their business plan over time. Or if you’re in a hurry to get your business started.
This plan summarizes the company’s infrastructure, finances, potential clientele, and value proposition. Formatting usually includes graphs or charts showing basic facts and tradeoffs.
You can download a template and then plug in your information in less than an hour, making it a quicker solution for a business plan. The most common format is the Business Model Canvas, created by Alex Osterwalder. This template has nine separate sections to complete.
Here, you’ll list any separate companies that work with you. Include distributors, manufacturers, subcontractors, business partners, or suppliers.
Here, you will list your plans for how to beat your competitors. Point out the unique techniques that get more customers, such as direct selling or incorporating technology.
List any resources or assets you have at your disposal to increase value for customers. This area could include capital, staff, or intellectual property.
Provide a strong statement summarizing what your company brings to the table. What makes them valuable? How are you different from the competition?
Relationships with Consumers
Next, describe the customer process. How will clients interact with your company? Through an automated service or a personal sales representative? Will customers come to you in person? Or only access your services online, without a face to face interaction?
Your lean startup business plan should describe the ideal customer demographic. If you don’t know who you are targeting with your sales, you may not see as much profit as you predicted. You must define who your primary targets are and what you are doing to attract their business.
You will use channels to interact with your customers. Figure out how you will communicate and list them here. Many businesses use many media rather than limiting to just one.
This area needs a detailed explanation of your strategy. Are you reducing costs or maximizing value? Explain your goals. And provide supporting details such as the highest costs you’ll encounter.
How will your company make money? Will you be drawing income from the sale of your products? Through monthly membership fees? Or by working with other companies with affiliate links or advertising? List every source of income you will have coming in.
More business plan resources:
This helpful video from Wharton School Of Business goes more in-depth on business plans and will help guide you when filling out your business plan template.
SBA.gov’s guide to business plan writing
SCORE’s guide to business plans
Registering your business name
Once you’ve completed your business plan, you can move on with registering your business name. The rules on registration of your business vary by location. Depending on your business, you may not need to do anything except file for a federal tax ID number.
If you are running a business solo, you may not have to register under your legal name. There are perks to having a business registration. You can get tax and legal benefits and personal liability protection.
Registering with the government can help with tax exemptions and trademark protection. Visit the US Patent and Trademark Office if you plan to file for a product, brand, or business trademarks.
Nonprofit organizations needing tax exemptions have to register with the IRS as a tax-exempt entity. If you are going to form an S corporation, it requires filling out form 2553 and submitting it to the IRS.
LLC, partnership, nonprofit, and corporations should register in any state where they will operate. If you meet the following criteria, you should check about registration.
- Your company is physically present in a state
- There are in-person interactions between you and your customers in a state
- Your company draws a large part of the revenue from the state
- Your employees work in the state
Depending on your location, you may be able to register your company online. Otherwise, you may have to register using paper documents through the mail or in person.
You may also have to register with a Business Bureau or Business Agency. As well as the Secretary of State’s office.
Registering your business usually costs less than $300. It depends on your location and type of business. Information you will need to have handy to register your company includes:
- Name (of the company)
- Agent information (if applicable)
- Number/value of shares (for corporations)
Your business structure will determine which forms you need to register your business. Check this link to determine the documents you need for your company. You can also search for the rules for your state.
Depending on the type of business you have, you may need a registered state agent. Companies that need a registered agent fall under nonprofit, partnership, corporations, or LLCs.
Registration agents handle official and legal documents for your company. You don’t have to do any of the work. If you’ve never registered business, you may find it more helpful to use a registered agent. They should be in the same state as your business.
Depending on your business, you should not have to register with local governments. For LLC, corporations, nonprofits, and partnerships, you may need licenses and permits.
Getting a federal tax ID
Getting a federal EIN (employer identification number) is quick and easy. Go here, to the IRS EIN page, and follow the instructions to register an EIN. You will need an EIN in many situations, including:
- Paying employees
- Formation of partnership or corporation
- Filing tax returns for employment, firearms, tobacco, alcohol, or excise
- Holds out taxes on income (other than wages) to a non-resident alien
- Handles tax-deferred pension plans (Keogh Plan)
- Deals with specific organizations
Complying with state tax and registration requirements
The need for a state tax ID will vary by state. Look into your state’s business laws to see what you need for things like reporting employee income.
Getting a business license, if necessary, and how to check
Some businesses need specific federal licenses or permits. This will depend on the types of activities, services, or products you provide. You may have to register with particular organizations to get a license. The fees for these permits can vary.
Activities that need specific federal licenses and where you find these licenses include:
- Agriculture – U.S. Department of Agriculture
- Alcohol – Alcohol and Tobacco Tax and Trade Bureau plus Local Alcohol Beverage Control Board
- Aviation – Federal Aviation Administration
- Firearms, explosives, and ammunition – ATF (Bureau of Alcohol, Tobacco, Firearms, and Explosives)
- Fish and Wildlife – U.S. Fish and Wildlife Service
- Commercial fisheries – National Oceanic and Atmospheric Administration Fisheries Service
- Maritime transportation – Federal Maritime Commission
- Mining and drilling – Bureau of Safety and Environmental Enforcement
- Nuclear energy – U.S. Nuclear Regulatory Commission
- Radio and tv broadcasting – Federal Communications Commission
- Transportation and logistics – U.S. Department of Transportation
Depending on your state, you may also need licenses and permits from a state, county, or city level. States often regulate more industries than federal such as vending machines, farming, construction, dry cleaning, restaurants, retail, auctions, and plumbing.
Be aware that some permits and licenses have a time frame. You will need to keep track of the dates, so your credentials don’t lapse. Check your state government website for the types of licenses you may need, and you’ll also be able to view pricing information.
Trademarks and patents
Many companies apply for trademarks to protect the unique components of their company. Trademarks can cover a specific brand, a logo, a catchphrase, or product design. Or anything else that sets your business apart from your competitors.
Claiming a Trademark
There are currently 45 different trademark categories. Your product may fall into one or many categories, so you will need to figure out where your product fits. The next step will be applying online to submit a TEAS (Trademark Electronic Application System) application.
Pricing will vary depending on which filing basis you choose. Is it for use in commerce, intent to use, foreign registration, or foreign application? And which application form you select – standard or plus.
A TEAS Plus form costs $225 for each class. A TEAS Standard is $275 per class. If your product covers multiple classes, you owe a filing fee for each class.
Filing a Patent
If you have unique inventions as part of your company, you may want to file a patent. Before you apply for a patent, you should check to ensure the idea doesn’t already have a patent.
There are two types of patent applications you can apply to protect your creations. A nonprovisional application starts the process to determine if you can patent your design. With this method, you may or may not get a patent after the examination process.
A provisional application sets a filing date. But it does not start the examination, which you must pass to receive a legal patent. It can protect you if someone else is also working on the same idea as you and tries to file first.
You can file for both types electronically by going here. Fees vary by type of application and can change annually. The best way to get an idea of the cost you’ll have to pay is to contact USPTO (the United States Patent and Trademark Office).
Opening a business bank account
Keeping your finances organized is a crucial part of running your own business. Many companies use their personal bank account to manage business money and expenses.
This method can make it difficult when it’s time to file your taxes or to manage your budget. The best way to manage your business finances is to have them in a separate account. Plus, having an account set up for your company makes you look more professional.
Attempting to keep track of the money coming in and going out for your business can become a headache. You’ll do a lot of filtering through your banking details to separate business from personal.
And when you’re filing taxes, you have to list your transactions and deductions. You will spend more time trying to collect and organize your data. You may even face challenges with claiming deductions, because of the complications introduced when mixing business and personal funds.
Keeping your business transactions separate from your finances saves time. It reduces frustration, and you get a better understanding of how your company is growing and performing.
Incorporated businesses require a separate account from your personal one. It does not matter if you classify as a corporation, partnership, or an incorporated sole proprietorship.
Obtaining funding for your business
When you’re getting your business off the ground, you may find yourself in need of immediate funds. You may need to buy equipment, pay your employees, or expand.
The most significant consideration is how you want to handle your funding. Do you want to cover all the costs yourself, or do you want to borrow money?
Bootstrapping vs. loans
There are two common ways that people get the funds to start their own business: bootstrapping and loans.
Many owners start their own business by bootstrapping. This means that all the money comes from your finances and company revenue. Bootstrapping is a great way to to introduce financial discipline to your business.
When a person uses bootstrapping, there are no loans to pay back or investors to please. The most typical technique is to avoid investing in a physical location until you can afford it. If you do get a place, keep it minimal and small.
Other bootstrapping techniques include aggressively seeking discounts and ways to save money such as negotiating for extended repayment terms or setting up an exchange of goods with companies that buy from you.
Bootstrapping Pros And Cons
The benefits of bootstrapping include no loans and their often high-interest rates. That means less debt.
The cons of bootstrapping are that you are liable for all the money for your company. If you fall on hard economic times, there may not be a way to provide your company funds.
You may also find limitations on production. This issue can cause you to lose business if your competition can handle the order. Finally, bootstrapping may limit the potential for growth overall since all decisions made are constrained by the amount of funds currently on-hand.
Funding a business out of pocket may not work for everyone. Especially if you face high start-up costs or need expensive materials.
When entrepreneurs cannot bootstrap, they may decide to secure a business loan. Loans allow them to borrow the needed funds in exchange for repayment of the loan, plus interest.
Getting a business loan is a great way to come up with a large amount of money immediately.
Term loans have specific requirements. Each loan comes with a date for repayment, a set number of payments you’ll owe, and an interest rate (fixed or variable).
You can also look into securing a short-term business loan. These are useful for getting the money for working capital. Or to buy immediate necessities. These loans are easy to pay off faster, giving you less debt.
Loans are a great option when you don’t have the money you need to start your business. But you can face problems if you aren’t generating enough income to cover the loan.
Depending on the interest rate, you often pay back more than you borrowed. And it can take a while to pay a loan off, especially if you have a higher interest.
What loans exist for starting a business
There are different types of loans you can get to help you cover your business startup costs. We’re going to look at SBA, traditional loans, and borrowing from friends and family.
SBA loans come from various lending partners. The SBA (Small Business Administration) partially guarantees these loans. If you default on your loan, the SBA pays the lender their guaranteed amount. The guarantee is 85% on loans up to $150,000 and 75% for loans exceeding $150,000.
The borrower has the same requirements as a traditional loan, including a repayment date, monthly payment, and an interest rate. But they often have lower interest and better terms and rates.
Depending on your credit score, you may be able to get a traditional or conventional loan. These typically come from banks or other accredited lenders.
These are small business loans which can mean higher interest rates, higher payments, and less flexibility plus no protection if you fail to pay. You will usually need excellent credit, proof of cash flow showing you can pay the loan back, and capital or collateral.
Friends and family
Some people have the luxury of being able to ask their family and friends for a loan. But mixing business with pleasure can have its downsides if your company doesn’t do well.
Many people sign a formal contract to help protect the separate parties from any issues. This protects both sides from any misunderstandings or unjust claims.
Business lines of credit
Business lines of credit allow you to have capital at your disposal for your business needs. This is the most flexible type of funding. It works by letting you use a line of credit to pay for your expenses.
The larger your credit line, the more money you have available to spend, like a credit card. With a business line of credit, you only pay interest on the money that you borrow. You repay the funds and borrow against your credit whenever you need it, so long as it’s within your credit limit.
Venture capital, angel investing, crowdfunding
There are other ways to secure the money you need for your business. These types of financing use equity from your company in exchange for the cash you need.
Venture Capital firms operate using private equity. This funding comes from investors who offer to finance a business. In exchange, they get equity, which gives the company a bit of control of your company.
Trying to get funding from a Venture Capital firm can be difficult due to the high degree of competition. These firms only invest in ventures that they believe will be successful. If you’re a new business, you may not have the reputation and proof for a Venture Capital company to work with you. This is a more likely road to take if you have successful businesses under your belt, or if you have a partner who brings a history of success with them.
Angel Investing is when you receive funding from a single individual. They are usually another colleague or entrepreneur. An angel investor is often a person with many investments in a startup or ongoing ventures.
When you receive funding from an angel investor, you repay them with equity in your business. But, an angel investment may want to make decisions about your company. If you’re inexperienced, you may find the guidance and advice of an angel investor useful.
Crowdfunding is where you rely on small donations from a bunch of people to cover your costs. The donations occur via the Internet via platforms such as Kickstarter. In exchange for contributions, you offer the investor something in return.
Crowdfunding may be useful for a small venture that won’t need a lot of money. Much like venture capital, crowdfunding is most likely to succeed if you have already had a success. It can also work if you have an existing audience or fanbase of some kind.
More: Crowdfunding.com compares all the existing crowdfunding platforms
Your Value Proposition
Every business needs a value proposition as part of their marketing strategy. The value proposition is a statement explaining why customers should choose your company.
The value proposition should be one of the first things your visitors see. The statement should give details about what you can do for customers, and it should state how you stand out.
Your value proposition should list the main problem you’re helping a customer solve. Define what your business offers. Show your customers why they need your products. This isn’t a time to be vague; precision matters here.
Who are you targeting? Who are your customers?
It can be hard to attract customers if you don’t know how to target the right customers.
There are three types of markets to target. A market is a group of potential or current buyers of a product.
The consumer market is someone who buys products for personal use.
The second is the industrial market. This is a person, group, or company that purchases goods to use in day to day operations or create new products.
And the final market is the reseller. This is wholesalers, retailers, or middlemen who buy products to resell for a profit.
Three simple steps can help you determine your target audience.
Start with determining what features your products have that will be useful to a group. This will give you a marketing standpoint.
Step two is to segment your market. This step means splitting your target groups into smaller sections. Knowing what groups to appeal to saves you money during marketing. And converts to more sales.
The third step is researching the markets you’re targetting. Many companies use statistics on demographics, location, age, jobs, family size, and gender.
Building a customer avatar
One way companies figure out the right customers to target is by building a customer avatar. To create an avatar of your ideal customer, you compile data together. The best results come from conducting market research. And collecting data from your customer base.
Get information for your customer avatar by creating surveys for existing customers. Or using Ask Your Target Market to get feedback from a broader audience. You can also conduct interviews or focus groups.
Character avatars can improve your marketing by advertising at the right spots. It also lets you create content that appeals to your avatars. You can find pain points and expect your customer’s future trends.
Many people use many customer avatars. They can target different groups of people, expanding their sales. You can also create a negative avatar. These help you determine the traits you don’t want to bring to your company.
Things to include for your customer avatars are:
- Demographics (age, gender, education, income, religion, and other factors)
- Psychographics (interests, lifestyle, values)
- A name
- A stock photo that shares similarities with your target audience
- A dossier (a one-page explanation of your avatar)
- Make up a story (imagine the process your avatar would take to get from an idea to buy your product)
Try this helpful customer avatar template.
Market segmentation separates your customers into specific groups by characteristic similarities. These groups are segments.
Market segmentation improves marketing campaigns by being able to customize their advertising. With customers separated into groups, you can target the demographic as a whole.
Marketing to appeal to everyone can backfire. You can lose clients who prefer a more specialized market. Segmenting your customers into smaller markets can save you money.
Break your markets into segments using characteristics of geographic, psychographic, behavioristic, and demographic.
What industry are you in? Who are your competitors? How to research in these areas. The best marketing plans include a variety of techniques, including competitive research. Understanding your competitors is the best way to become better than them.
Competitive research means you figure out who your competitors are. And then analyze what they do. When you look at your competitors, you often find ways to spruce up what you’re doing. Or get inspiration for new markets.
Keeping up with your competition is also a great way to stay on top of developing trends. You can get into the action at the front of the line.
Benefits of using competitive research includes:
- Understanding the market (lets you identify and foresee trends)
- Helps your marketing skills (helps you target your audience)
- Find gaps in the market (analyze the strengths and weaknesses of others to find new areas to target)
- Setting up the future (helps you plan for improvements to your marketing)
How to Do Competitive Research
The first step is to figure out your top competitors. There are two types: direct and indirect.
Direct competition is when a business is targeting the same type of customer like you. They sell similar products or services.
The indirect competition targets other audiences than you. They may sell similar or slightly different things than your company. They may or may not also target the same people like you with their marketing.
Identify your competitors by searching for your products. See what sites pull up other than yours.
Step two is analyzing the data. After learning who they are, do some digging. Check out the website, social media, and any trends.
You should also gather and organize data about your competitors in Step three. For step four, you need to keep up with important information. Save all the material in a spreadsheet for comparisons.
In step five, you want to see what the customers are saying. Read reviews of what people say about the company. And read about any products that compete with you.
For step six, figure out where to make improvements to your business. These may be changes to target a new audience. Or to improve your rankings against your competition.
Porter’s Five Forces
Porter’s Five Forces is another useful tool to help understand the competition. And it helps identify strategic ways to improve profits.
According to Michael Porter, there are five forces in the competitive environment. These can decrease your profitability.
Competitive rivalry is the number of competitors you have. And how their reputation and products compare to your business.
In some markets, there may be stiff competition that causes you to lose customers. You can see what’s driving your business away.
You can also discover where there is little competition. You can maximize profits by targeting these areas.
Supplier power is how easy it is for your suppliers to alter their prices. What happens to you if your suppliers want more money for their goods? Is it worth the cost, or should you switch to a new supplier?
It’s a smart idea to have many suppliers, as you can switch to save costs without sacrificing quality. Limited suppliers can drive prices up, which can affect your profit margin.
Buyer power is how easy it is for your customers to push your prices down. Consider how many buyers you have and the size of their orders.
Could they get the same thing from your competitors at a similar or better cost? The fewer customers you have, the easier it can be for your customers to affect your profits.
The threat of substitution is when your customer would substitute your business for another’s.
If your customers use other solutions, you may lose out on the substitution of services.
The threat of new entry is the final threat that can affect your business. Consider how easy it would be for a new company to come into the same market and steal your business.
If you have a popular niche business, you may find yourself losing money. The competition may be willing to sell cheaper products at lower quality.
An elevator pitch is a quick summary of your background and work history. Many people use elevator pitches to mention their most prominent attributes straightforwardly.
Many people use elevator pitches for online profiles such as Twitter or LinkedIn. Elevator speeches can also help introduce yourself and your business to potential clients. Or to learn about potential employees you may be considering for an open role.
An elevator pitch should be between 30 to 60 seconds long. You don’t have to go into detail. Keep it simple. Provide your name, skills, and career goals. Be sure you’ve done your research so you can tailor your pitch to your audience. And always provide a business card.
Hiring a team
When you first start a business, you may be the only employee on your payroll. While this can save you money by not paying employees, it can also cause you to become overworked. You could end up with too big of a workload for you to maintain on your own.
Go solo or do you need to hire?
One of the biggest mistakes people make when they start their own business is hiring staff too soon. You don’t want to bring in new employees before you can afford to handle the payroll. The point of your business is to make money, not lose it.
When you first open your doors to start your own business, you may find that you can’t afford to hire staff. And when you are finally ready to hire an employee, don’t pick the first person you interview. Take time to consider all candidates and find the person who best fits with your needs.
There are thirteen signs that it’s time for you to stop working solo and hire someone to help your business.
1. You have to turn away work because you can’t handle all of the orders.
2. You’ve found new revenue streams.
3. Customers have started to complain.
4. Your product or service quality is suffering.
5. There’s no time for daily bookkeeping and paperwork.
6. There’s a need for a unique skill set.
7. You don’t have time for breaks or vacations.
8. There’s no company growth.
9. Your customers cannot get into contact with you.
10. You can afford it.
11. You need multiple freelancers.
12. There’s enough work to keep an employee busy.
13. You plan to sell your company in the future.
How to hire
If your business meets the thirteen criteria, you may be ready to hire your first employee. Hiring a new candidate can be overwhelming, nerve-wracking, and even frustrating.
It’s crucial to take the time to make the best choice. A bad employee can hurt your company more than understaffed. There are thirteen helpful steps for hiring the perfect candidate.
- Conduct research to figure out the skills and experience your candidate needs.
- Create a clickable and appealing standard job title.
- Provide a detailed job description. Include the candidate’s responsibilities, requirements, and benefits of the position.
- Filter through incoming resumes. Look for past achievements, work history, skills, and experiences that match your needs.
- Hold interviews with potential candidates (15 to 30-minute phone interview to start). Narrow down to top three potentials for a face to face meeting.
- Confirm references (at least three). Use these references to find out about the candidate.
- Stay organized. The best way to keep track of your candidates is to use statuses to mark where they are in the process.
- Pick the perfect candidate. Write an official offer letter of employment.
- Contact candidates, you didn’t choose ASAP.
- Complete all legal obligations. This includes getting an EIN or social security number. Plus, registering with the state labor department.
- Refine your on-boarding process. Welcome the new employee, give a tour, have lunch, give goodies.
- Measure your progress.
Considering freelancers, independent contractors vs. employees
When you start a business, you will have periods of too much work, followed by days of little to no work.
Many businesses use freelancers or independent contractors instead of hiring employees. When you work with a freelancer or contractor, you hire them to handle one job. This usually means you only pay for that piece, which can save you money.
Freelancers are self-employed people who do not work for your company. You do not have to pay them a regular income, taxes, or provide benefits. Freelancers offer their services on an as-needed basis. And often work with many companies. Freelancers usually work from a remote location.
A contractor also does not work for your company. Contractors are self-employed and offer their services to companies in need, for a fee. Some contractors have contracts with an agency, which helps them get work.
The difference from a freelancer is that contractors usually only work on one project at a time. Either from a remote area or onsite at the company’s office.
When you hire employees, you pay them for every day they work, even if there’s nothing for them to do. You may save money by using freelancers or contractors instead of hiring employees. However, it’s vital to classify people who are doing work for you correctly, both from a legal and an ethical standpoint.
Keeping Your Finances Straight
To track how well your business is doing, you must keep your finances in order. You already know to keep your business finances separate from your personal accounts, but there are many more things to consider when setting up your finances in a way that will help you succeed.
The book Profit First, is a great resource to help you maximize your profits. Written by entrepreneur Mike Michalowicz, you’ll learn five ways to maximize your earnings.
A traditional formula looks like: sales – expenses = profit. But, Michalowicz designed the flipped business formula sales – profits = expenses.
Choose the best accounting software
There are plenty of accounting software programs to help keep your books in order.
Accounting software helps reduce common mistakes from miscalculations. It can also reduce the number of files and papers you have to file. And you can spot trends in your company based on each quarter.
The best way to pick accounting software is to figure out your needs. There are plenty of advanced features you may not need with the larger products. Don’t pay for what you won’t use.
Types of programs include:
- small business payroll and accounting packages
- full-service business management
For a new small business, you should be ok with a basic solution.
Bookkeeping: DIY or hire out
Many people wonder if they should do their bookkeeping or hire someone to do it for them. Which you choose depends on several factors.
- Do you have the time to do bookkeeping?
- The experience?
- The tools?
- Can you afford to hire someone?
Having a bookkeeper can ensure your books stay up to date. And it can help make sure everything is correct. An expert may even see ways you can save money.
But most bookkeepers charge for their services, so you’ll have to decide if this is an expense you can afford. If you do the bookkeeping, you’ll have to get a bookkeeping program.
Part of owning a business is paying taxes. Depending on the type of business you own and where you run it, you may have to pay state and local taxes in addition to federal taxes.
All business structures except for partnerships have to file annual income tax returns. You have to pay taxes on any money you earned through the year. This money can come from withholding or paying estimated taxes.
If you are self-employed, you may also face taxation for any income you earned. As an employer, you’ll face employment taxes. And in some industries, you may even owe excise taxes.
You may choose to file your business taxes using tax software. Other people prefer to use professional help. Experts often know how to include tax exemptions and write-offs to reduce the amount of money you’ll have to pay in.
Operating and marketing your business
Many businesses fail because the owner doesn’t have experience with operating a business. Nor do they know how to market their company. Using helpful resources is a great way to improve your skills.
Building systems and delegating
Michael Gerber offers industry-related insights in his book, The E Myth. You can learn many techniques to improve your business. This includes building systems and learning how to delegate.
Small companies often fail because there’s bad or no systems to keep things organized. Systems allow you to repeat the same processes, so you end up with the same results.
There are three types of systems:
- hard – anything that you use that isn’t alive
- soft – living things or ideas – divided into two categories. Substance (how to do something) and Structure (what you need to do)
- information – how to track and manage the data from your Soft Systems
Another vital aspect Gerber discusses is how to delegate. Delegation occurs when you assign work to other people. As much as you want to control everything, the reality is others would better do some stuff. That leaves the big things to you.
A useful business model is the value chain. This is a description of the process needed to produce a product or service. Conducting a value chain analysis of your business process can improve company efficiency.
Business activities fall into two categories – primary and support. There are five crucial primary activities for improving value and competitive advantage.
1. Inbound logistics – details about your inventory like receiving, storing, managing
2. Operations – method of production to create finished goods
3. Outbound logistics – how your goods get to the customer
4. Marketing and sales – advertising; promotions; pricing
5. Services – how your company manages products after-sales. customer service, repair, refund, maintenance, exchanges
Support activities are what makes the primary activities work better. There are four support activities. Improving any of these will reflect on your primary activities.
- Procurement – how you get your materials to create your goods
- Technological development – changes in the R & D (research and development) phase. Improve aspects of the company
- HR (Human Resources) management – hiring employees that understand the company goals
- Infrastructure – company systems, plus the management team (accounting, finance, quality control, planning)
How To Grow Your Business
Once you’ve got your business up and running, you want to have it grow. The more customers you have, the more profits you will make. We’re going to look at a few common and easy ways to help your business grow.
There are four simple steps to branding your business. Branding helps set you apart from your competition.
- Define your image – What you want customers to expect from you? (quick service, friendly staff, unique products). What does your company do? Who are you? And why should people choose you over anyone else? These are the promises you make to your customers.
- Organize your company to match your image – Make changes in your company that helps you keep your promise.
- Announce your promise – The promise you make should reflect in all aspects of your business. Display your specific colors, logos, and commitment in various formats.
- Stay consistent – Keep your message the same in all areas of your business. Stick with the image you’ve branded.
More: Shopify: How to Start Your Own Brand From Scratch in 7 Steps
4 Ps of marketing
Another popular business model is the 4 Ps of marketing – product, price, place, and promotion.
The first P, product, is what a business sells to the customer. It can be a physical good, an electronic item, or even a service. For the 4 P method, you need to have a good understanding of what your customer wants. And produce it better than the competitor.
The second P is the price, and this is what your customers pay to get your product or service. It can be challenging to decide on pricing for your goods. Too low, and you lose profits. Too much and you risk losing customers to your competition.
The place is the third P, and it’s your location. Many times a business loses customers due to their location being in the wrong place. It can be hard to get new customers to come to you if they don’t have a reason. Pick a place where you’ll get a lot of traffic from your target audience and find ways to market them to come to you.
Promotion is the final P, and it’s about how you market your business. Promoting your company is one of the best ways to improve your business revenue, or how much money you bring. Analyze your traffic and that of your competitors to see how well you rank. Then figure out where you should start promoting more often and where you should stop.
Social media has become one of the top places to promote your business and products. Social media lets you interact with customers, attract new clients, and form relationships. It’s also a great way to help improve your branding. There are eight ways you can use social media networks to promote your business.
1. Pick the Proper Platforms – there are tons of networks out there. Do your homework to find the ones that will get your message in front of the right audiences.
2. Make a Calendar – Another part of effective marketing is producing fresh content. Having a content calendar ensures you meet your marketing goals. And it prevents you from not posting or recycling old material to post something.
3. Interact with your visitors – If your customers reach out on social media, respond.
4. Avoid over promoting – Stick to a one in seven rule. Out of every seven posts you make, only one of them is promoting your brand. The other six should be useful content interesting enough to share.
5. Use videos – videos are a great way to attract customers.
6. Address issues ASAP – There’s always going to be a demanding customer who has complaints. Don’t ignore the person but instead comment to them to see if there is a resolution.
7. Create a community – Don’t try to reach new customers with your social media. Attract a loyal fan base. Communicate, share each other’s material, and offer solutions and questions.
8. Offer something of value – Social media is a great place to get advice, learn new tips, and discover ideas. Use social media to give your customers more than marketing. Entertain them, teach them, invoke emotions.
Cultivating customer loyalty
Customer loyalty is something you want to strive to achieve. When your customers feel loyalty, they are less likely to buy from your competitors. And when a customer is loyal to you, they give you repeat business. Here are a few tips on how to improve customer loyalty.
- Communicate – communicating with your customers makes them feel important and valued. You can send emails with discounts, birthday wishes, or newsletters. Connect with your fans on social media to show you appreciate their business.
- Give perks – The best way to get loyal customers is to reward them for their support. Reward systems, tier points, and buy X and get Y free are great tools to encourage repeat customers.
- Excellent customer service – Poor customer service will make you lose business.
Growth mindset and looking for new opportunities
When running a business, you’ll often discover new areas to take your business to the next level. Never be afraid to try something new with your business.
Keeping a growth mindset is the best way to ensure your business grows. Instead of falling stagnant and never growing outside a small clientele. A growth mindset is that you act and believe that you can continue to grow your talents and learn new things.
The world seems to change in unbelievable ways. You have to be flexible enough to roll with these developments. Learn to incorporate them into your business and your career.
You and all your employees should have a growth mindset. If you don’t stick with the times, you could stay in the dust, while your competitors take all your business.
Keeping employees happy and helping them grow
The best businesses have little to no turnover with their staff. Happy employees translate to higher productivity. Plus less downtime and missed work, and a more relaxed work atmosphere. Here are some helpful tips to help you make your business a good place to work.
- Offer career advancements – Many employees prefer companies that help plan for promotion. You can offer paid training opportunities or mentor programs. Encourage your employees to consider advancing within the company through different career paths.
- Support your employees – A simple email expressing your appreciation for your employees. Promote from within the company rather than bringing in outsiders.
- Be appreciative – Always show appreciation and gratitude for your employees. Say thank you, and offer smiles rather than barks of orders and grimaces. It’s okay for your employees to see you as a friendly boss.
Considering business models
The last thing you need to do to start your business is to determine what business model you will use. Nine types have successful track records for startups and ventures.
- Middleman (Warby Parker Model) – The middleman means you and your consumers can save money. You work with distributors to sell products to customers.
- Subscription model – You offer your products or services as part of a subscription plan. This ensures you get money every month that the customer stays enrolled. In exchange, they get your products.
- Start a marketplace – a marketplace is when you help with supply and demand. With this model, you don’t have inventory, and you don’t need retail space. You connect the buyers with the sellers, getting a percentage of each sell.
- Customization – everyone wants to find a way to stand out and show their personality. A business that customizes goods is a great way to set yourself apart from competitors. And you can charge more money for your products or services.
- On-Demand – offering services at the push of a button has become very popular. You can order a car, food delivered to your door, get a dog sitter, or a plumber immediately. If you offer services that a customer can directly receive, you will do well in this market.
- Modernized Direct Sales – Direct sales means your business sells to your consumer. This can be through in-person, social media, your website, or other avenues. You hire employees to sell your goods, in their ways, for a small commission.
- Freemium – a combination of free and premium. This model is when you offer a primary product for free and offers premium services for a fee. This is a great way to attract new customers. But be careful that your premium services offer enough that customers will upgrade.
- Reverse auction – With a reverse auction business, the buyers bid on price with the sellers. The sellers get to accept or deny the bid. If the seller agrees, the buyer has to meet all the seller’s terms and conditions. This model gives buyers the ability to get a good deal, and the seller gets access to a large marketplace. The business hosting the sale receives a profit.
- Virtual good market – Virtual goods are items that you cannot use in a physical sense. This covers a wide variety of businesses that can include things like apps, information products, and more.