Every week as @SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wed on Twitter from 8-9pm ET. This is excerpted from my recent interview with Ramit Sethi @Ramit. New York Times bestselling author of I Will Teach You To Be Rich. He co-founded PBwiki and graduated from Stanford. His blog, I Will Teach You To Be Rich is a community focused on personal finance and entrepreneurship and hosts over 250,000 readers per month. http://www.iwillteachyoutoberich.com/
Smallbizlady: 60% of all small businesses are not profitable by any measure. Why are so many people in business not making money?
Ramit Sethi: There are a lot of possible reasons. A big one is that most people don’t do any sort of market testing to verify that their business idea is viable. They’ll throw themselves at the first brilliant idea that comes along when a simple Google search would have shown that there were 10 other people that had the same idea beforehand, and that they all failed.
Another is that some businesses and industries simply have higher costs and lower margins than others. If you start a coffee shop, for example, you’ll be paying a lot of money before you can earn it all back, and you might go bankrupt before then. But if you start a freelance business, you can be profitable from day one because your business expenses can literally be zero.
There’s nothing wrong with starting a high-cost business, as long as you’re aware of what those costs are and you’re okay with the risks.
Smallbizlady: What are three things every business owner should do daily to make sure their business is making a profit?
Ramit Sethi: Market, sell, and do less of everything else. Getting paying customers is everything. As business owners, we all have a tendency to waste too much time Twittering, Facebooking and going to random one-off networking events because they feel good, not because they make us money.
Smallbizlady: Why is your program called Earn Your First $1,000 on the side?
Ramit Sethi: $1,000, because it’s a nice, round and meaningful goal for most people. On the side, because most people have jobs and can’t just drop everything to start a business that may or may not work out.
Like you mentioned, most businesses don’t make any profit. We want to change that by helping you make your first $1,000 as quickly as possible, and you don’t even need to quit your job to do it.
Smallbizlady: What would you say to someone who says they don’t even have a business idea yet?
Ramit Sethi: If you don’t have a business idea, that’s fine. But there’s a big difference between waiting around for a business idea to miraculously come along, and actively seeking out ideas.
What have you done today to find a business idea? Anybody can come up a few new ideas every day. Then it’s a matter of learning about those fields to see they’re right for you, and maybe trying one or two out until you get some traction.
And finally, the “perfect idea” is a myth — it doesn’t exist. People will wait around for the perfect idea because they’re afraid to take action, when in reality any of their “just average” ideas could have earned them thousands of dollars.
Smallbizlady: Once you have a business idea, how do you know if it’s a good one?
Ramit Sethi: Assuming you’re starting a service-based business like freelancing or consulting, you’ll want to first decide who it is you’re going after, whether it’s moms, internet startups or accountants in San Diego. Then find a few potential customers and contact a few and talk to them without trying to sell them anything. Just talk to them — figure out what they do, the problems they face, and how they feel about your service — as in would they pay for it?
Smallbizlady: What are the most common mistakes people make starting out in business?
Ramit Sethi: Trying to do everything else except getting clients. Most people have an imaginary checklist of things they have to do before they can officially be open for business: get business cards, start a website, start a Twitter account. Oh wait, I have to start a blog too. Get real — you’re just procrastinating. Start calling, emailing and getting in front of clients as soon as possible. It’s scary, but you have to do it.
Smallbizlady: So how do you go about finding your first few clients?
Ramit Sethi: Come up with a short list of people you want to work for. That’s not hard — look at popular blogs, Google them, read Inc magazine.
Write a short, descriptive and personalized email introducing yourself, your service and most importantly, what you can do for them. Busy people don’t care about you, they care about “what’s in it for me?”
If you already know what it is your market desperately wants and needs (which you should have figured out when you were doing your market research) you should at least get a few interested responses. Jump on the phone with them or meet for coffee and see how you can help them with what they need.
Smallbizlady: Lots of freelancers say it’s hard to find clients willing to pay them enough. How much should you charge as a new freelancer?
Ramit Sethi: There’s no wrong answer. You should charge what you think you’re worth and not worry so much about scaring people away. When you’re new, it’s okay to charge a little less, because your goal should be to increase your rates as fast as you can with each new client you get.
Smallbizlady: What if the client objects to your rates, saying “I can get someone else for half the price?”
Ramit Sethi: Just say, “That’s okay. In my experience there’s always someone willing to work for less, so I’m not surprised. I’ve already laid out why I think this is a great investment for you and I believe my rates are reasonable. It’s fine if you’d like to explore other options, but unfortunately I don’t lower my rates.”
The thing is, the client will probably want you even more when he thinks he can’t get you. Having a high cost and standing by it will give you high perceived value.
Smallbizlady: So what are the best ways to market your business and get the word out there after you’ve gotten the ball rolling?
Ramit Sethi: Referrals, referrals, referrals. They are by far the most powerful marketing tool at your disposal. The thing is most people have a passive, inactive approach to getting referrals. You should make getting referrals a key part of your marketing strategy by asking for them, expecting them and incentivizing them in a way that gets your clients actively participating.
Smallbizlady: So how does someone go from working on the side to taking their business full-time?
Ramit Sethi: Minimize as much risk as possible before doing so. I wouldn’t quit a full-time job without having at least 6 months of minimum living expenses on hand, and ideally 12.
Second, make the transition as gradual as possible and it won’t be so hard. Instead of quitting outright, maybe work with your boss to get a more flexible working schedule so you can spend more hours on the business. When you do quit your job, cash flow might be tight, so it wouldn’t be a bad idea to pick up a part-time job to cover your living expenses as you grow your business.
Finally, the first person I’d get in touch with is an accountant who specializes in small business. At least talk to one and see if there’s anything else you’re missing before you make the leap.
Smallbizlady: Any other advice you’d give to someone thinking about starting a business?
Ramit Sethi: Don’t make excuses. I’ve heard them all: I’m too young, I’m too old, it’s the economy, I don’t have a big network, etc. The truth is anybody, even someone with no skills or connections, can learn something valuable in three months and earn plenty of money. Complaining might feel good for a while, but it won’t change your life. So take action today.
If you found this interview helpful, join us on Wednesdays 8-9pm ET follow @SmallBizChat on Twitter.
For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog www.succeedasyourownboss.com
What refreshingly honest and useful advice Ramit gives in this interview. I especially like the list of excuses that are used far too often by people who are just fearful of taking the leap and starting their own business.
The only point I would contend with is taking it gradually and staying on in your job part time so that you can ease into it. I think you need to fully focus on your business for it to be a success.
As Seth Godin says in the Linchpin if you have a back up plan or something else you’re able to fall back on then that’s exactly what you’ll do instead of forcing yourself to focus solely on making your business a success.
.-= Natalie Sisson´s last blog ..How To Retire Early And Create Financial Freedom =-.
Hi Natalie–
Thank you for your comment. Ramit made some great points and I completely agree with him that you need to keep the paychecks rolling as long as you can so that you do not put yourself or your family in complete financial peril starting your business.
Here’s to your continued business success.
Melinda
Great information, Melinda! As a freelance copywriter, I liked your “why I don’t lower my rates” response. I love how you worded it as an “investment” – absolutely true.
You offer a lot of practical and useful tips for us freelancers out there. Thanks for sharing!
Hi Therese—
Thanks for your comment. I am glad to help you with tips to run your business.
Continued success.
Melinda F. Emerson