After several years of making meager earnings from her wig salon, Rivky decided to try something new and daring: to design and manufacture her own hair pieces. After a year of hard work, she was already selling her custom-made line.
When tax season came, she tallied up a tidy $16,500 in revenues. But then she started deducting her expenses. Her actual profit: Nothing! She even lost $600.
According to Forbes, 80% of all new businesses fail — Rivky felt like she was joining the club. After all, if a business is not making money after a year or two, it’s obviously a failure, right?
Pay Now, Earn Later
Let’s say your neighbor’s son enrolls in dentistry school. By the time he graduates, he could easily rack up $100,000 in debt from student loans. When it comes to professions, we all understand that you pay now to earn later.
But for some reason, when it comes to business we expect to rake in the cash from Day 1. If we don’t, we start to panic. Well-meaning family and friends sometimes make things worse by asking: “made any money yet?” or “still wasting time with that meshugeneh scheme?”
Considering the deep stress and shame most of us feel around business failure, it’s no wonder so many people give up in the first year or two.
A more realistic view is found in the startup world, where it’s taken for granted that every new venture will pass through the money-losing “Valley of Death” (as it’s called) before it can hope to reach the coveted break-even point.
Why You Don’t Need to Make $$$ (At First)
The ultimate goal of every business is to make money — but there are usually a few things that need to happen before trying to squeeze out a profit.
For example, Rivky gave steep discounts to distributors to get her name out. Whenever cash flowed in, she spent it on new hair or improvements to her salon. In other words, she invested in her reputation, contacts, client portfolio, experience, inventory, and equipment.
During the earliest stages, building these assets takes priority over bringing home a profit. That’s because — like the dentistry degree — these investments can pay big dividends in the future. For instance, when Rivky mentions “I supply wigs to XYZ High-Class Salon,” she can attract high-paying clients. She doesn’t have to advertise that she made bubkes on that particular deal.
Think of her $600 “loss” this way: Rivky paid only $600 to invest over $17,000 in launching her business.
Putting Bread on the Table
So how much do you have to “pay” upfront if you want to build a profitable business? From my experience, a solo service-based business (e.g. freelancing, coaching, consulting) will take at least a year of continuous work to generate a supplementary income, and two years to produce a steady, salary-replacing parnasa. It will usually take longer — anywhere from 2 to 4 years — to establish a business with high startup costs (e.g. a brick-and-mortar store or a product line you manufacture).
To minimize the waiting game, choose a business model that is service-based and home-based.
Whatever you do, don’t quit your day job. A new business can’t be relied on to put bread on the table any more than a first-year dentistry student can expect to live off his profession.
Business Blip or Financial Suicide?
Let’s say you started your company a year ago and you’re still in the red. How do you know if you’re taking a temporary dip into the “Valley of Death” — or if you’re plummeting head-first to bankruptcy?
Assuming you’ve invested in marketing, my first question is: are people interested in your product or service?
If people are interested but not buying — or buying but you aren’t making a profit — these are problems that can be solved. If, however, you can’t get people excited about what you offer, you must seek expert advice before investing any more time or money.
When Malka launched her weight-loss coaching business three years ago, she paid big money for ads that resulted in floods of inquiries. She then spent hours giving “free initial consultations.” Unfortunately, only a few people actually hired her.
By the end of year one, Malka was frustrated and broke. But she didn’t lose hope because the response generated by her ads indicated there was a huge potential market. So she experimented with different pricing structures, money-back guarantees, sales pitches, and advertising channels. She overhauled her marketing messaging repeatedly. She rebuilt her website three times. This trial-and-error process took time but the more people Malka successfully coached, the more word-of-mouth snowballed, and now clients come to her.
Creating an offering that the market actually wants is often the trickiest part, even for big corporations that spend millions on market research. If you’ve cleared that hurdle, you’re off to a great start. Now, like Malka, you just need to experiment. Try something new at least once a month. If you keep testing, you’ll eventually find what works — and your business will climb toward profitability.
Box: “When the Phone Doesn’t Ring”
- The No. 1 reason new businesses don’t take off is because of inadequate marketing. It’s a numbers game: Let’s say that for every 1,000 people who hear about you, three will contact you and one will become your customer. Now do the math — if you’re not letting lots of people know how amazing you are (AKA “marketing”), your phone won’t ring and your email won’t ding.
- Expect to constantly invest in marketing. If you’re doing the advertising yourself, it could consume 20% of your work time on average. A good portion of that will be spent just learning how to market effectively.
- There are many low-cost or free ways to market yourself. Some examples: participating in networking events and forums; creating quality content (e.g. a free e-book or article); cross-promotions with other businesses. You may not get instant results from these inexpensive channels, but they can be extremely effective in the long-run.
Thanks to Mishpacha magazine for permission to reprint this column, which first appeared in Family First (#440, May 6, 2015). Major credit goes to my Mishpacha editors Bassi Gruen and Sarah Glazer.
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