Four ways to prioritize profitability from the start.
By Steve Tan March 24, 2020
Opinions expressed by Entrepreneur contributors are their own.
My number one piece of advice to all beginning ecommerce entrepreneurs is to prioritize profitability first. It’s great to have revenue, but if your expenses are continually putting your business into the red zone, it’s time to rethink your business model. Twenty-nine percent of small businesses go out of business because they run out of cash, and despite the significance of this statistic, less than half of small businesses are profitable and nearly 30 percent are actually losing money.
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I’ve run an ecommerce business for over 12 years, and in hindsight, I see that my prioritization of profitability has sustained my business through inevitable low points. There’s a mythical line of thinking that businesses can’t always be profitable from the start, but they can be — even if they’re bootstrapped. I’ve learned plenty about how to lay the groundwork for a profitable ecommerce business in my experience, and here are my top tips for beginning entrepreneurs.
1. Orient your product in what your target customer most wants
First, you have to guarantee that you have a product or service that your customer wants, or else you won’t have any profits coming in at all. A story I like to tell along these lines is about a failed business endeavor that my brother and I tried. We noticed that black face masks were gaining tremendous popularity, so we launched a line of gold face masks, marketing them as more luxurious than the black ones. They were a flop because we didn’t actually understand what our target customer wanted.
Marketing thought leader Peter Drucker once said that “the aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.” No entrepreneur can know with complete certainty that a product or service will sell itself until they conduct market research. Talk with your target customers, whether via social media or by organizing a Facebook group. Qualitative market research can be more helpful than quantitative, because the very definition means seeking to understand what the customer thinks. And, as we know, a customer’s buying behaviors are motivated by these thoughts and feelings.
2. Invest time in learning marketing
There isn’t an entrepreneur who just knows how to be profitable right off the bat. Even if they’ve stumbled onto a new technology or product that does fly off the shelves with minimal efforts, establishing profitability over the long term and beginning the process of scaling requires that you learn from people who have done it before. I believe that a major reason I succeeded was because I prioritized learning marketing to the fullest extent. I rank marketing first out of all skill sets you can learn, because marketing really does make or break your business. To learn, I took as many online courses as I could find, where I learned about building profitable businesses, how to succeed in the ecommerce industry and how to market. Courses are a popular alternative to hiring a business coach, because you can learn from many different perspectives. Courses are also usually less expensive than investing in a coach.
Regardless, it’s important to be willing to invest in yourself upfront. Seventy-seven percent of small business owners first relied on their personal savings when they got started. When I was just starting out, I found ways to make ends meet as I invested in marketing courses. These are more worthwhile than other investments if they’re credible courses that have helped others, because investing in your own knowledge helps you run your business more efficiently.
3. Partner with someone and hold each other accountable
In the trenches of building a business, it can be challenging to stay the course and continue to work hard after working overtime — especially if there are few wins along the way. I personally felt grateful to work on my company with my brother. We hold each other accountable and always have each other’s backs in business, which is exactly what you should seek in a co-founder.
Research also shows that companies with at least two founders are less likely to scale too quickly. I’ve learned that having someone in the trenches with me helps me slow down, discuss strategy in depth, have a sounding board for new ideas and have someone who I don’t want to let down. It helps me show up every day, which has an undeniable impact on a business’s bottom line.
4. Stay lean
Prioritize profit by keeping expenditures low and abide by the lean startup model. It can initially be exciting to bring in money, so you might think your company can now afford expensive business meals or to pay you and your business partner a salary from the start. However, one of the most expensive startup costs is payroll. Until it’s absolutely necessary, consider putting as much money as you can back into the business.
This is also useful advice if your long-term goal is to raise money. Investors want to see how you bootstrapped and saved cash while you were in the building process. Consider how you can offer trades and build relationships to eliminate costs here and there, and remember that every cent counts.
By keeping costs low and focusing on marketing a product or service that customers have said they truly want and need, you have the basis for a profitable ecommerce business. Aim to keep the gap between revenue and expenses as large as possible while also knowing when to invest in yourself through online courses. Learning how to be profitable is the most important lesson you can learn as an entrepreneur.