In what might seem like a contradiction of my column last week, I encourage you to consider building a customer base before you start a business.
That means you have enough customers ready to go on the first day of a new business so that break-even point and stable cash flow are practically guaranteed.
Knowing you have enough demand for your products or services in place before you start up would hugely reduce risk and provide some peace of mind.
It might at first thought seem so idealistic that it doesn’t seem plausible.
But it is.
And I believe that building your clientele before your business’s start date can be no more time-consuming nor expensive than doing it after the doors are opened and the fixed expenses start adding up. Here are a couple of ways to do it.
If you are well-established in an industry because of a previous business or successful employment history, you can pitch your product or service on the QT to your network and get commitments for support in advance of starting the business.
I have even gone so far as to get letters of intent or memoranda of understanding signed for a business so third-party financiers could follow up during due diligence. For one client, we actually had purchase agreements signed, subject to the entrepreneur meeting agreed-upon conditions.
This can work in businesses such as professional services, for patented or proprietary new product commercialization, and in trades businesses. These networking and sales efforts are the same ones you are likely to conduct after the business is open, so, why wait?
If you have a new invention, it is protected by patents or other design trademarks, but you have too few or no industry connections, do market research by actually pre-marketing the product.
I’ve used prototypes and samples to demonstrate a product, shared pricing information, attended trade shows and even participated in advertising to get future customers interested and solicit their feedback before I and other investors jumped in with both feet.
This can be expensive, of course, but it’s the same target audience you are likely to market to for the rest of your business’ life, so why wait?
Isn’t it better to spend a smaller amount of money before signing leases, hiring staff and making other expensive commitments? What if it teaches you that you need a different approach or that the market isn’t going to respond the way you had expected? This would be money well spent, in my opinion.
In one of my business startups, I got enough commitments from a single trade show for more than a year’s worth of production and valuable feedback about how the product could be tweaked before it went into mass production. I also received licencing offers and other non-solicited business opportunities that I might not have considered seriously if the potential customer hadn't ’t actually been standing there right in front of me.
With both approaches, you need to be completely transparent to future clients about the stage your business is at, and offer likely time lines and milestones that need to be achieved before the business can be formally put into operation. The last thing you want to do when establishing your customer base before starting up is over-promise and under-deliver.
These and other approaches are possible, and, in some cases, it is really about your mindset – when in the business’s development stage you are willing to connect with potential customers and ask for the sale.
Building a customer base equal to breakeven before starting a business might not have been an option for Walt Disney Co.’s theme parks or your average independent retailer, but it is a possibility for many startups, and presents an opportunity that should not be overlooked.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and sold seven businesses.
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