We started a new four part series last month looking at some of the basics of business survival. Last month’s topic dealt with cash flow. We chose this as the first topic as the technical definition of insolvency is cash flow based. Also the need to collect money should be fairly obviously to business owners, albeit that it is done exceedingly badly at times.
This month we look at the business offering. Readers that recall the Kevin Costner film Field of Dreams will remember that the premise of the movie was ‘If you built it, they will come’. So Kevin’s character built a baseball field on his farm in the middle of nowhere, and people arrived at his front door to use it. Unfortunately some business owners follow the same business plan.
For a business to be successful .. No let me start again. For a business to have a chance to survive it has to comply with three factors. It must sell something that people want to buy – for a price that people are willing to pay – and do so with sufficient margin and in sufficient quantity to make a profit. There is no point selling the most popular widget at a price that no one will pay, or selling something is such low quantities that gross margins will never cover overheads. But even more fundamental than that, you must sell something that someone wants to buy. This leads us to this month’s basic:
Lesson Two: Build it, and they may not necessarily come!
There are many examples of goods and services that have limited markets, especially in an economy like we have today. $10,000 cocktail dresses would be a hard sell at any time, even harder today. The market for high end – read ‘expensive’ – discretionary items has undoubtedly reduced, but in goods economic times business models based on selling these items have proved profitable. But this month’s case takes this theory to a new level.
For some reason unknown to me – and I hasten to add I have never tried it myself – karaoke is or was popular. It usually involved a late night, some like-minded friends, a few drinks and a relaxation in inhibitions. Karaoke bars appeared as new ventures or in established hotels and made money for these business owners.
Then there was the case a few years ago of SLI Pty Ltd. It opened a karaoke bar on the Gold Coast. That area is popular with Asian tourist and karaoke is – or at least was – very popular in parts of Asia. The business appeared to target the groups of young Asian tourists that were in the area relaxing on holidays and looking to party. On the face of it, the business plan seemed reasonable. There was a target market, the location was where that market would be, and the offering was something that should have been popular.
So the company built it and waited for them to come.
The company rented premises. It bought a karaoke machine. But the Korean company director purchased a karaoke machine that only had Korean songs, in Korean. This limited the appeal of the offering to people that wanted to (or could) sing in Korean – and these were probably only Koreans. This was not a good business decision as the majority of tourists in the area were Australian or Japanese and the offering would have limited appeal to them. But it got worse.
I believe that one of the necessary factors in any karaoke experience would be alcohol. Unfortunately the company did not have a licence to sell alcohol or a BYO licence. Not wanting to break any laws, no alcohol was allowed on the premises. So the offering to the market was a sober Korean karaoke experience (and sober karaoke probably is an oxymoron).
But the business also did not have a kitchen or any of the required permits to prepare and sell food. Patrons could bring their own, but that in itself was not a huge draw card. The offering to the market was now a dieting, sober, Korean karaoke experience. The business did not have sufficient – let’s be realistic, any – customers and failed. The director was not able to tell us why he believed this business model of limited offering would succeed.
Some people believe that if they can turn their hobby into a business they will be able to do something they love and, because they are passionate about it, will be successful. Leaving aside the fact that these people may be hopeless at running a business anyway, just because they and their friends like doing something does not mean that sufficient numbers of other people are interested in it enough to pay for it.
If there is a moral to this story, it has to be that – regardless of all of the planning, marketing and capital in the world – unless you are selling something that someone else wants to buy at whatever price, you will never have a viable business. And that ‘something’ that you sell will probably change over time as tastes, fashion or technology change. Business owners must ensure that their offering is relevant, and stays relevant, to their market.
Just because you built it, they may not necessarily come.
Next Month – Indigestion and Starvation