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Great Business Questions

What’s Your Customer’s Backstory?

I received an email from Cathy Goodwin (copywriter and copywriting trainer) that got me thinking about the importance of your customer’s backstory and how it’s an overlooked part of marketing.

What’s A Backstory?

I’ll quote directly from the email

A client’s backstory consists of 3 parts:
What’s their problem?
What’s holding them back from solving it?
What have they tried?

You’ve probably been told you need to develop avatars or personas for your main types of customers or clients. It’s something I’ve taught in the past to clients. The idea is to help you to get to know them and get into their minds so that your marketing can be more effective. It’s the difference between talking TO them and talking AT them. [continue reading…]

in 3 – Your Strategic Positioning, 4 – Lead Generation, Copywriting, Great Business Questions

How Much Should You Pay Yourself As The Business Owner?

One of the nice things about being a business owner is that, as your own boss, you’ll never need to ask for a pay rise.

You’ll have to answer the question…

How Much Should I Pay Myself As The Business Owner?

You will have conflicting feelings as you wear both the hats of the employee and the employer.

As the employee, the salary and benefits package you receive will determine your standard of living.

Benefits include things that you could buy as a private individual but the business pays on your behalf. In the UK this includes costs like company cars and medical insurance.

As the employer, you’ll be aware that there are many other calls on the money a business has at its disposal:

  • Your staff want to be paid more.
  • Your suppliers want to be paid faster and they want higher prices.
  • Your customers want you to reduce prices and add more free services or better service.
  • And of course, the taxman will want his fair share.

The Opportunity Cost Approach Of A Business Owner’s Salary And Benefits Package

I’ve discussed the opportunity cost approach in the article

How Much Should An Entrepreneur Or Small Business Owner Earn?

I’ve also had a much deeper look at it in my free report, The Profit Tipping Point.

The gist is that there are two market rates available to act as your guide when thinking about how high (or low) your salary should be:

  • How much you can earn doing something else. It doesn’t really make much sense that you should build a business that pays you a lot less than you could earn if you worked for someone else.
  • How much you would have to pay a general manager or chief executive to manage your business if you weren’t there.

As you can see, the twin hats of employee and employer are coming together here to give you an approximate range of how much you should pay yourself.

There is also the issue of how much is the work you are doing really worth. I mentioned earlier paying yourself as a chief executive but what if you’re doing much of the work of an administrative assistant.

It’s hard to justify a salary the equivalent of £100 per hour if you spend much of your time photocopying and filing!

The Three Big Questions To Answer When Deciding Your Own Pay

The three questions to focus on are:

  • How much do you want?
  • How much can the business afford to pay you?
  • How much are you worth?

That third question is not a particular problem if you own your own business 100%.

It becomes much more of an issue if you have one or more other partners or investors in your business.

Suppose you find yourself involved in a management buyout. One person has been the CEO earning £100k p.a. and there are three other senior managers who used to earn between £40k and £60k p.a.

You have provided different amounts of the finance based on your own personal financial situations and to cover the inequity, you’ve agreed that any profit above the base salary and agreed bonus will be paid as dividends back to the people who provided the finance.

Since you’re all working full time in the business, do you all receive an equal salary or do you recognise the market assessment of your previous worth?

I suspect your answer and assessment of fairness depends on whether you are the CEO or one of the other managers.

Do You Pay Your Salary First Or Earn The Profit First?

This is a controversial issue and you will read different views on the best approach. I’ll try to present a fair summary and give you my own particular solution.

If I could think of clever names, I’d create a 2 x 2 matrix to show the main four situations with Profitability Before Owners Salaries on the one axis and Owners Salaries and Benefits on the other.

There are four basic situations:

  • High Profit – High Salary
  • High Profit – Low Salary
  • Low Profit – Low Salary
  • Low Profit – Profit Salary

Let’s take a look at each in turn.

Situation 1 – The Business Earns A High Profit And The Business Owners Earns A High Salary

Here the business is performing very well and the business owner deserves the rewards of the success.

Taking a generous but affordable salary and benefits package out of the business is the ideal situation.

The format of the profit extraction is best agreed with your tax advisor to minimise the overall tax paid by the business owner and the business. Anything else damages your overall wealth.

Situation 2 – The Business Earns A High Profit But The Owner Pays A Low Salary

Some business owners don’t want lavish lifestyles with big houses and fancy sports cars and may not see any need to pay themselves a big chunk of the profit.

This makes sense if the business has third party borrowings that can be reduced or if the business needs the money to expand.

It’s also OK to have some rainy day money in the business that protects its future.

However, it is unwise to leave too much money in the business. Basic wealth management principles emphasise the need to spread risk with a diversified portfolio of investments.

Businesses can suddenly run into financial trouble because of changes in the wider political, economic, social and technological environment.

If you take money out, you always have the choice of investing it back in the business.

Situation 3 – The Business Earns A Low Profit And The Owners Earns A Small Salary

The business owner has adjusted the salary to reflect how the business is performing by not taking out any more than it can afford.

Many will argue that this is responsible ownership, cutting the cloth to make sure that the business remains viable while steps are taken to improve profitability.

Others say that the business owner should pay themselves first. Before employees, before suppliers, before the government. They argue that the owner didn’t go into business to live on a subsistence wage.

Situation 4 – The Business Earns A Low Profit And The Owners Earns A Large Salary

In this situation, despite the fact that the business is struggling, the owner continues to take out a high salary that the business cannot afford.

Some argue this is the right thing to do. It shows the business is making a loss and that should motivate the business owner-manager to take corrective action.

Others say this is irresponsible and threatens the future of the business because the owner refuses to recognise the real situation and is blindly continually to live a lavish lifestyle despite the business problems.

I want to delve into this debate much deeper.

First I’ll declare my own position so that you can allow for any bias.

I believe a business owner should cut back salaries and benefits. In fact, I go further. I think the business owner should take out a small amount to live and then take a bonus when the business is doing well. This way, the rewards automatically adjust for the performance of the business.

Does Your Salary And Benefits Package Make Sense Financially?

I’ve seen business owners do two strange things to fund their salary payments when the business is just starting or struggling:

  1. Invest a significant amount at the start and then pay a generous salary in the early months before the business gets into profitability.
  2. Make regular loans back to the business to top up the cash flow and to keep the business within its bank overdraft limits while drawing a big salary and large benefits.

This doesn’t make sense financially.

In the UK, when a person earns a wage or salary above a low level, it has to pay PAYE (income tax) and national insurance (social security costs). The business also has to pay employers national insurance.

While rates vary depending on the value of salary, you can find the business owner trapped in a situation where it lends the company 100% and receives back as salary 50% to 60% and pays the remainder to the government.

This is crazy.

It’s wealth destruction and financial suicide.

What Will Cause The Most Pain To Help You To Focus On Fixing The Underlying Performance Problems?

This sounds masochistic but the best solution to the “how much should you pay yourself as a business owner” question, if your business isn’t doing very well, is whatever the salary that will motivate you enough to take the right actions.

The downsides of the issues with solutions 3 and 4 are obvious.

If you pay yourself a high salary while profits are low, you are eating into the time you have to turn your business around by consuming valuable resources. Worse, you may not know you’re doing it if you don’t have regular financial information or perhaps you’re in denial about the situation and you don’t care because you believe the business will get back to profitability on its own.

If you pay yourself a low salary and your business trades just above the break even point after paying you a pittance, you may put up with the situation for years.

That’s exactly the trap many business owners find themselves in.

They believe they are being financial responsible by cutting back on their own pay and benefits but they don’t find the motivation to make changes. Instead, they get used to the struggle.

Saving money, in their personal and business lives, becomes the norm. They refuse to speculate to accumulate.

It’s one of the reasons Why Don’t Business Owners Buy More Business Advice.

It’s well established that the desire to move away from pain motivates people to action. If it doesn’t, then the problem isn’t painful enough.

People tolerate all kinds of problems until they reach the time when they say “enough’s enough.”

Nearly every business can be improved if you’re motivated, if you diagnose the problems correctly and you find the right ideas yourself or you get help.

To help you make the right diagnosis, please read 21 Reasons Why Your Business Isn’t As Successful As You Want It To Be

What Do You Think?

Do you have a policy for how much you should pay yourself?

in 1 – Your KPI, 2 – Your Inner Game, Business Start-Ups, Great Business Questions

Why People Buy What They Buy

When you think about why people buy what they buy, you will find that the decision process operates at two very distinct levels.

Why People Buy Is Really Two Questions

  1. Why do people buy the generic solution?
  2. Why do people buy a specific product or service?

An Example – Why Do You Buy And Own A Car?

The reason probably goes something like this…

You have a need or want for personal transportation that gives you independence from public transport and from other people.

First look at a need for a car.

Perhaps you live in the countryside and you work in the city. There is no public transport that will get you to and from work in a reasonable time.

You don’t know anyone else who lives nearby who makes a similar journey at a similar time so there is no opportunity for you to receive a regular lift.

You could use a taxi service every day but buying and owning a car is cheaper.

Your need for a car might not be that strong and compelling.

Perhaps it’s your want for a car that makes you choose to spend some of your spare money on a car rather than saving it or other forms of expense.

Perhaps you value the freedom and independence that having your own car gives you. While you can accept that other people may decide to spend their money in a different way, owning a car is important to you.

Why buy a new BMW 520 rather than a second hand Mercedes C class?

Once you’ve decided that you will buy a car, why do you buy a particular car?

The issues come down to your purchase criteria for what you want your car to do for you, and in this case, say about you.

There are some functional issues:

  • How many people do you want or need to carry?
  • Do you need a car to be a certain size so that you can fit in it? I do.
  • How many doors do you want?
  • How big a boot do you need?
  • How important is the fuel consumption and the other running costs per mile?
  • Will something stop you from having the car you want? For example sky-high insurance premiums?

These narrow you down to a broad category of car that you want.

Then you have to balance how much you can afford to spend on a car (to buy it or lease it per month) with how you feel about a new car rather than a second hand car.

Then you need to focus on particular brands and models. Is one appealing to you particularly because of its looks, its image or performance?

Can you see how a decision like buying a car is made up of many smaller decisions which gradually narrow down the choice until there are a small number left.

Using These Ideas

There are fundamental questions you need to answer:

Why do your customers buy what you sell at the generic level?

Why do they buy from you rather than your competitors?

Why do they buy that particular product or service from you, rather than something else you sell?

And, just as important…

Why don’t well qualified prospective customers buy from you and either:

  • Buy from one of your competitors?
  • Don’t buy at all?

Answering these questions will go a long way to showing how you need to improve your lead generation and conversion activities.

in 4 – Lead Generation, 5 – Lead Conversion, Great Business Questions

Why Don’t Business Owners Buy More Business Advice?

I’ve written about buying business advice from the perspective of the business advice junkie or addict in the past.

These are the business owners who buy too much and never get around to implementing much in their own businesses. Unfortunately this has become particularly prevalent in the make money on the Internet niche. I’ve written an article, Protect Yourself From Guru Greed for these people.

Today I thought I’d look at it from the other perspective…

Why Don’t Some Business Owners Buy More Business Advice?

First, why should they buy advice?

Many Small Businesses Perform Badly

Various statistics are bandied around for small business failure (see What Causes Business Failure) that may exaggerate the situation but too many businesses fail.

Even more struggle to survive. One of the big insights I received when I was a trainee accountant in the early 1980s was that the dream of being your own boss wasn’t as good as most people think. Since I’ve gone back to work with small businesses, I know this situation hasn’t changed.

Even if a business is doing well, I don’t believe that there is a business that can’t be improved by an injection of new ideas.

The Different Types Of Business Owner And Their Response To Business Advice

Business Owner Type 1 –  “I don’t need any business advice.”

Some people are born with incredible instincts for what customers want, have a clear vision of how it can be delivered, the confidence to take action and the natural ability to lead and persuade other people.

It sounds like you are a budding Bill Gates or Richard Branson destined to change the lives of millions of people. You’re a natural risk taker.

However, while these people have great insight, if you read their biographies, they surround themselves with excellent people to compensate for gaps in their skills and knowledge.

Business Owner Type 2 “I don’t want any business advice.”

You may not be happy with the performance of your business but you don’t want to take business advice.

Perhaps you believe that you’ll just be told what you already know or that business advice is only common sense anyway.

Often there is a good dose of common sense but I often hear clients say “Why didn’t I think of that. It’s obvious when you say it.”

It’s often difficult to see what’s happening (or not happening) in your own business because you are so close to it.

Perhaps your pride gets in the way and you are determined to do it your way without any outside interference.

I wish you luck, but tactfully I feel obliged to point out that you are likely to get better results if you open yourself up to ideas from other sources.

Why try to invent the wheel when it’s already been done?

Business is difficult enough without trying to start from scratch every time you try something new. It’s better to build on the accumulated knowledge and best practices of the past.

I don’t understand why you are prepared to waste time and money making mistakes which can be avoided.

Business Owner Type 3 “My friends at the golf club (or pub) give me all the business advice I need for free.”

That’s great if your friends are business professionals or fellow business owners who have committed their life to learning.

It’s not so good if you are benefiting from their bravado that masks moderate performance in their own businesses that comes from doing the same old things in the same old ways.

Appearances of success can be deceptive. There is no shortage of stories of businesses collapsing when the top managers and owners appear to be financially successful.

A famous insolvency practitioner in the UK had an informal early warning system to identify distressed companies. These warning signs included businesses where the owner drove a Rolls Royce or a similar fancy and expensive car. These status symbols can be leased while there is money but when the money runs out, everything collapses.

Your business friends have the advantage of knowing you and your situation. Or at least the situation as far as your pride lets you admit. It is tough to say that things aren’t going well to friends who like and respect you so you be not even be giving them the chance to help you as much as they could.

Business Owner Type 4 – “I can get all the business advice I need free off the Internet”

It’s true there is a lot of business building information available for free on the Internet.

Some of it is very good, some is OK and some is poor.

There are two big problems:

The first is being able to assess the quality upfront. If you can’t, you waste a lot of time while you are searching for the golden nuggets.

The second is that you are rarely given the complete answer. Most business advice information is posted on the Internet by business advisors, consultants and coaches of one variety or another. This is part of their marketing strategy and tactics and it’s designed to attract and convert you to buy their services or products.

I admit that I am the same. I sometimes write very long, informative blog posts but I know that the advice I give to clients is even better because it’s more comprehensive and tailored to their particular businesses.

I accept that one of the big problems with business advice is that it is expensive.

I should also remind you that free advice is only good value if you gain from it. Even then, it may not give you the best result.

Learning how to make £1,000 extra profit for free is great – you’ve got £1,000 that you didn’t have before.

Spending £1,000 to earn £5,000 is even better because your gain is bigger.

This is a key issue to think about because it’s not the cost of the advice that matters but the difference between the gain you make and the cost of the advice.

There’s a danger to thinking that the marketing consultant who charges $2,000 per hour is much better than the one charging $200. You might hear the same ideas from both.

However, if you’re much more likely to pay attention to what the expensive consultant says, he may be the one to hire.

Business Owner Type 5 – “I only need specialist advice.”

You accept that you don’t know everything about the specialist compliance subjects like tax and employment law because it is impossible to keep up-to-date with everything.

You will therefore pay your accountant and lawyer, perhaps not willingly, but they are saving you money over the long term.

However, you don’t believe that you want or need general business advice on sales, marketing, finance and team leadership.

You could be right or you could be leaving yourself open to making common mistakes that cost you time, money and lost opportunities for extra profit.

I’m not going to try to convince you that all business coaches, advisors and consultants are great or that you should buy a multitude of books and audio programs.

You’ve made your own mind up and whatever I say isn’t going to convince you.

Will you do one thing for me?

Will you commit to learning from your experiences as a buyer and a seller, as an employee and a manager, as a borrower and a lender.

You can learn a lot from watching and listening to other business people.

It takes an open mind and plenty of effort to keep alert to the tactics that work and don’t work. It is well worth doing if you’re determined that you’re not going to tap into the knowledge of the people who make it their business to learn about business improvement ideas.

Business Owner Type 6 – “I can’t afford to buy professional business advice”

This business owner knows that there is a gap in knowledge and other people have good ideas, but they’ve got themselves trapped in a money-saving mindset.

They know professional business advisors are expensive. The better they are, the more expensive they will be.

And they’re scared of the costs, not recognising that it’s not what you pay that matters but how much you gain over and above what you pay.

How Much Should You Pay Yourself As The Business Owner?

Do You Recognise Yourself In One Of These Business Owners?

I’m the opposite. I believe in business advice and I buy plenty of it.

I believe in constantly improving my knowledge, especially in the areas of marketing and strategy because that’s where my interests lie.

I know a lot but I know that there are always more ideas to learn.

Even If You’re Reluctant To Buy Business Advice, Isn’t It Worth Trying Some?

You may have lots of doubts about the benefit of business advice but don’t you think you should suspend your disbelief occasionally, if only to prove that you are right?

Just as I encourage the business advice junkies to stop buying and go “cold turkey”, so that they can start implementing, I encourage you to try it.

in 2 – Your Inner Game, Business Coaching, Business Problems And Mistakes, Great Business Questions