Remember those so-called true stories you shared at camp, sleepovers, or around a fire?
The man with the hook. The strange noise a parking couple hears outside the car. The guy who wakes up in a bathtub of ice without a kidney.
Urban legends that never seem to die. Harmless stories meant to teach a lesson.
Myths in business will kill you faster than a zombie bite.*
*If zombies were real.
Just like the supply of urban legends, there are countless business myths. You haven’t even heard all of them, much less need to worry about them. Today we’ll focus on the Top 3 Small Biz Myths That Will Torpedo Your Profit.
Small Biz Myth #1: I’ll Make It Up In Volume
Let’s listen in to a conversation I’ve had countless times with entrepreneurs.
“What’s your expected profit on this awesome product / service?” – Me
“Well, here’s the thing. I don’t make a profit on just one. But my goal is to sell 1,000.” – Small Biz Owner
“How exactly do you expect that to work?” – Me
“Well if I sell 1,000 of this I will bring over $20,000!” – Small Biz Owner
“Hmm… Play with me a minute. How much do you lose when you just sell one?” – Me
“Only a dollar or two. No biggie” – Small Biz Owner
“If you hit your target sales you should hit your target revenue amount of $20,000. That also means you will lose at least $1,000.” – Me
“What? How is that possible? I’ll have brought in $20k!!!” – Small Biz Owner
“Yes you will, but you will lose at least $1 for every sale. That means if you sell 1,000 you’ll lose $1 for every sale, or $1,000.” – Me
“But I’ll have all that revenue!” – Small Biz Owner
“Revenue doesn’t equal profit in your pocket. Look at the US car companies. Billions in revenue and some of them went bankrupt.” -Me
This myth isn’t limited to small businesses. I’ve seen it in Fortune 100 companies – they call it “economies of scale”. 9 times out of 10 they never achieve these mythical economies of scale.
If you don’t have a concrete plan and reason why you stop losing money as you sell more, then you will simply lose more money.
Small Biz Myth #2: Loss Leaders Attract Quality Prospects (Credit: Groupon)
Ever wonder what happened to Groupon?
They used to be the big thing. Want to run a special? Use Groupon! Want to attract new customers? Use Groupon! Want to achieve world peace? Use Groupon! Ok that last one is in jest, mostly. It seemed as though any problem your business had, Groupon could solve it.
So what happened?
Let’s take a look at the model behind Groupon – using loss leaders to attract new clients.
A loss leader is selling a product or service at a major discount, in other words a loss, to attract new customers. The idea is that this great deal will pull them in, giving you a chance to knock their socks off. Once they’re hooked they’ll buy more from you at regular (profitable!) prices. You’re awesome right? How could they resist?
Here’s what really happens.
A few of your regular customers buy the special. Why wouldn’t they? They already know you’re great.
Those new customers? The ones you were going wow and turn into repeat customers? They’ve moved on to the next deal. They weren’t attracted to you for your quality service, unique approach, or amazing speed. They saw the price. Once the price deal was gone, they were gone.
Unless you’re the Walmart of your industry, this approach will not attract your right people.
This is exactly what small businesses discovered on Groupon, which is why it’s no longer billed as the go to, one size fits all, solution for small businesses.
Small Biz Myth #3: Freebies are a MUST to make customers happy.
Think about the last time you bought a car. Did they give you a free upgrade to heated seats (a must here in Minnesota)? Were custom rims thrown in gratis? Did they install an entertainment system on their own dime? Nope.
Are you an unhappy because of it? Do you refuse to do business with them again? I doubt it.
When you go to the dentist do you ask to have an extra cavity filled at no charge? The dentist is in there anyway right? It should only be another 10 minutes. Why can’t they just do it, and make you happy?
Not only have I never gotten a cavity filled for free by a dentist, if I did I would probably be worried why. Is it part of a conspiracy to hide secret files? Did my business rival ask them to inject slow release arsenic in there? Perhaps it’s some new take on Total Recall. We all know dentists don’t just throw in extra services to keep their patients happy.
You don’t need to give away freebies to make customers happy.
Why do you do it then? I find it boils down to mindset. Having the right mindset is crucial to being profitable and prosperous. That’s why I created Daily Money Mindset Boosters. Think you might need this? Head over now and try it free for a week.
Update: After posting I realized how totally hypocritical this link appears, so let me explain. No time? Let me summarize. Giving someone a free trial is a legitimate marketing technique. Like when Baskin Robbins offer you that taste on a small pink spoon. It awakens the appetite and now you want more. You don’t get another free sample, you have to buy a cone. My offer is not free forever. It’s a sample. If you like it, then you can subscribe.
What are common business myths you see people believe, and have their bottom line suffer? What have you experienced? What challenges are you facing now? And if you ARE the person who lost a kidney (not their first cousin, college roommate, or best friend’s sisters dog’s owner), sounds off below.
This post is part of a monthly word carnival hosted by small business experts. This month’s topic: Business Urban Legends Every industry needs a good bit of mythbusting. This month, we’re tackling the myths and misunderstandings of our particular fields.