Business experts and luminaries have long since estimated that existing businesses waste at least 25% of total expenditure. This ocean of wasted cash comes from all corners of every business and I suspect that this figure is higher, maybe considerably higher, for startup businesses.
Government statisticians estimate the startup costs of a small business between $3K and $25K. I am not sure what sort of business you can start for $3k. By the time I had settled on a company name, set up a company, registered for tax, researched available websites, thought about the business I wanted to start, the products, services, competitors, reason for being and so on, my $3K would have long disappeared.
Here is a summary of 5 areas where I wasted money, call them good ideas at the time….
:The major mistakes I made that cost me dearly are:
- business branding that in the end wasn’t as important as I thought it was;
- website design that is over-complicated for what I needed
- online advertising that was never going to be cost effective for me
- paying lawyers to do a patent application, do I even need a patent? I still don’t know.
- overdue, over budget and over everything software development
My startup started almost 8 years ago and I am still going for it. It has been a learning experience but learning costs money and/or time usually. It’s called learning by messing up.
After making so many bad decisions, I decided to rewrite my rule book. I decided to set a hard and fast rule for my business spending. Now I have a kind of checklist that I follow:
a) Does this spending have an immediate influence on my profit, cost structure or have extra benefits to my customers?
b) Is this spending related to legal, ethical, safety or environmental requirements?
If the spending is outside these parameters, then I don’t do it. Its that simple.
I do not do Return On Investment (ROI) like some businesses do, I am not interested in waiting 10 years to get my money back, I have bigger fish to fry.
If I look at my major waste examples.
I look back at my business branding exercise. All sorts of bright, young people all wanting to give me great, hip advice for my business branding. After all these years, it didn’t matter to my customers. Maybe it does for some companies or some industries but it was a complete non-event for me.
My customers did not care if I had fancy $1500 business cards, you can get them delivered overnight now – 500 for $9.99. In 10 years from now I will probably still have 480 original cards left. My logo was good, well better than good really but Ive never used it, never needed to. Again, my customers didn’t care. I fell in a trap that most new business owners fall into, I over-invested in a process I liked to do, rather than a business-critical process I had to do a
Number 2 - Website Design Costs
Number 3 - Online Advertising
Not sure where to start here. I stopped counting at $50K and I had virtually made nothing out the deal at all. On top of that, I had invested hundreds of hours putting together advertising headings and content as well as researching keywords, phrases and negative words.
Firstly, I had to learn what these were, how they should be used and how the entire system worked together. At one stage I did a webmasters course and got accreditation for my efforts, so that was a plus.
After the first year, I knew enough to see that I was being seriously ripped off.
After I had set up an account so I could check the analytics, it was very obvious that the system was set up to favor big business, no big surprise there, but the defaults were certainly more advantageous to them than it was for me.
For example, when I started I accepted the initial defaults because I didn’t know any better. In some cases I didn’t even know what the various options did. After I started though I knew that my options went through my money very quickly. My daily limit was exceeded in minutes.
In addition to that, I was getting charged for every click, mostly clicks from people who were never going to buy anything in a million years.
People researching, doing school projects, looking for something else entirely and people from countries in Africa were all costing me money every time they clicked.
It was just crazy.
Over the years I worked on my negative words that I could add to the search terms to try and weed these people out before they clicked and that was somewhat successful. However, by then my clicks had more than quadrupled in price to $5-$6 range. Now if you go with the online industry conversion rate that can be as low as 1% or as high as 4%, that’s a lot of clicks I am paying for before I get someone to buy something.
In cold, hard figures, out of 100 clicks, that would cost me at least $500, I would be lucky to get 3 or 4 actual purchasers so whatever I was selling had to have a selling price upwards of $150 to $200 just to break even. If I only got 1 purchaser in that timeframe, the selling price would have to be closer to $1000 per item.
The system could be summed up by an email I received numerous times from the company saying “if you increase your daily budget by 35%, you would get 0 more clicks”.
Number 4 - Applying for a Patent
Well, with software and intellectual property, there has to be some lawyers involved somewhere. I paid $15K for the initial notice and there was to be another $35K for the actual submission.
I ended up researching the main points of a patent application and wrote the main submission myself and the patent was granted without amendment. I just assumed it was specialist work that was beyond my scope but it was just too much money to lay out. So, in the end, I wasted $15K but saved myself $35K so that wasn’t a bad result.
Number 5 - Software Development
Software development is the toughest process I have ever seen in my business life. I spent more than $50K getting something reasonably simple built for me. I have had quotes for as much as $200K to build the same application on another platform but nobody really knows how long it will take to build, they dont really know if it can be built – its mostly guesswork with something new.
If its not something new and has some track record, there is some basis for hope, but software development can be a massive money pit that has no guarantee of ever getting anything that works.
I knew that going in and I got something that worked. It was a lot of work-arounds but it works. When I asked the question I was told “some people pay 10 times that amount and don’t come away with anything.”
If i do this again, and I am looking for software, I think I would be looking for a complete prototype. A lot of companies don’t like prototypes, they don’t know how to quote them, because they can’t estimate the hours and they fret that they will underquote. Others will say “the cost of a working prototype is almost the same as building a complete, working software application”.
So this is really an area of trust…..