January 9, 2023 - Entry 1009: Choosing the Business That is Right for You
Intro
Starting a business is a gigantic task, and it’s one that starts with deciding what business you actually want to start. A small or new business takes an enormous amount of time and energy to be successful, so it’s very important that you do something you know you will be passionate about. Being an entrepreneur isn’t all champagne and leer jets; when the business is going through difficult times, it helps to be doing something that you love.
For some people, the business they want to start is a version of what they’re currently doing - but in a situation where they’re the boss. A CPA who leaves a big accounting firm to start a small CPA practice in their hometown is a great example of this. These people have a skill or profession they can build a business around and the passion and grit to try it on their own.
Other people are trying to escape their current career and start a business to become financially independent. They may have a skill or a hobby that they never thought about monetizing until they saw that one guy on the internet doing it. Sometimes they have a dream of running a small business that they’ve been tentatively pursuing for years. In both cases, these people see entrepreneurship as a potential exit ramp from their career path and an opportunity to change their lifestyle.
Types of Businesses
It may help to know some of the potential options that are available when deciding which type of business is right for you. In general, there are five types of businesses: 1) Manufacturers; 2) Wholesalers and Distributors; 3) Retailers; 4) Service Providers; and 5) Creators.[1] The type of business you choose will have a major impact on the startup process and determine what resources you will need to get the business started.
Manufacturers
What is a Manufacturer?
Manufacturers are businesses that make physical items and sell them to customers. While what each individual company makes is different, manufacturing companies are all similar in that they take raw materials and labor as inputs and create finished goods through their manufacturing processes. In business school they refer to the finished goods as widgets, an all-encompassing shorthand for whatever any manufacturer might make. Manufacturers create value and generate profits through their ability to turn raw materials into widgets that people want.
Examples of Manufacturers
Companies like AB InBev and Miller Coors are manufacturers in the alcoholic beverages industry. They make beer and God bless them for it. These companies navigate complex, global supply chains, sourcing myriad raw materials to manufacture and sell their widgets to a relatively small number of domestic and international wholesalers that distribute their products to retailers across the globe.
Your neighbor’s lemonade stand is also a manufacturer, provided they make the lemonade in house and aren’t simply reselling store-bought lemonade. Little Suzy’s lemonade is conceptually similar to a Budweiser or Coors Banquet Beer, in that the humble ingredients of sugar, water, lemon juice, and ice, when subjected to Suzy’s manufacturing process turns into delicious, ice-cold lemonade that can be sold at a premium, relative to the cost of goods, to thirsty customers on a hot, summer day.
Things to Consider
Cost of Goods Sold – A business’ cost of goods sold refers to what it costs to produce a widget. This includes the cost of the raw materials, direct labor, and other inputs associated with producing a single widget. Because a manufacturer’s gross profit is measured by subtracting cost of goods sold from gross revenues, knowing your business’ cost of goods sold is critical to ensuring that your business’ operations are profitable.
Supply Chain Management – Maintaining control over your business’ supply chain is a key component of managing your cost of goods sold. This entails identifying multiple suppliers for important inputs, working with suppliers to reduce prices by buying in bulk, and maintaining sufficient inventories on hand to ensure consistent production. Weak links in a manufacturer’s supply chain can cause production delays, increased costs, and loss of customers if not managed properly.
Space, Labor, and Capital Requirements – As a manufacturer grows and develops, production bottlenecks will arise and need to be overcome in order to sustain the continued growth of the business. Three things that every manufacturing business needs are: 1) space; 2) labor; and 3) capital. Without sufficient amounts of all three, production capacity will eventually plateau, and the business will have to rely solely on its profits to fund its ongoing development.
Wholesalers and Distributors
What is a Wholesaler/Distributor
Wholesalers and distributors are businesses that work with manufacturers to place their products in the marketplace. Wholesalers and distributors generally buy products in bulk from manufacturers at wholesale prices which they then resell to retailers or the general public. Wholesalers and distributors create value and generate profits by reselling manufacturers’ products at a higher price than the wholesale price they get for buying in bulk.
Examples of Wholesaler/Distributor
Because wholesalers and distributors typically engage in business to business (“B2B”) sales, most people don’t have much exposure to these businesses. You may know the name of the restaurants and bars in your neighborhood, but have you heard of Sysco and Micro Star, which distribute food and beer, respectively, to your favorite local haunts? Wholesalers and distributors are a critical component of the supply chain in any industry and are often overlooked simply because most people don’t interact with them on a daily basis.
Things to Consider
Cash Flow – In addition to being the middleman between manufacturers and customers, wholesalers and distributors are often also in the business of financing their customers’ purchases. Absent a long history of on-time payments, manufacturers will typically want cash up front when they sell to wholesalers, while customers, especially retailers and other businesses selling to the end customers, will generally request payment terms so that they can pay for the products after they’ve sold them. Managing cash flow so that there’s always funds to purchase products and pay other expenses when needed is critical to ensuring that offering terms to customers doesn’t bankrupt the business.
Logistics – Wholesalers and distributors have to be masters of logistics in order to succeed. These businesses require sophisticated warehousing operations and depend on truckers, delivery drivers, and logistics managers to ensure that products get to where they need to be when they need to be there. Without a firm grasp on the logistical aspects of the business, wholesalers and distributors can make mistakes and cause delays which seriously interrupt business operations and cause customers to look elsewhere for their product requirements.
Sales and Marketing – Sales is a critical component of any wholesale or distribution business. It is relatively easy to get products at wholesale prices from manufacturers but finding and retaining customers to purchase these products is much more difficult. Building or engaging a team of trained salespeople who know how to sell your products is critical if a wholesale or distribution business is going to succeed over the long term.
Retailers
What is a Retailer
Retailers are usually the final link in the chain between manufacturers and the customer. Retailers purchase products from manufacturers, wholesalers, and distributors and sell them to the general public. Traditionally, most retailers operated physical locations, often known as brick-and-mortar retailers. In recent years however, the rise of the internet and e-commerce has moved a large percentage of retail business online.
Examples of Retailers
Thanks to their daily interactions with consumers, retailers are some of the best-known brands in the business world. Companies like Wal-Mart, Target, and Home Depot are massive retailers with national and international networks of brick-and-mortar locations that serve thousands of customers each day. These companies buy products from hundreds of manufacturers, wholesalers, and distributors, providing their customers with an extraordinary diversity and quantity of consumer goods.
Things to Consider
Brick and Mortar v E-Commerce - Over the last decade we’ve seen the rise of e-commerce companies that eschew brick-and-mortar retail locations and sell their products 100% online. Proponents of this business model talk about how e-commerce businesses are more efficient and have low overhead while detractors rhapsodize about the human connection that brick-and-mortar retail creates between a business and its customers. Many businesses are exploring a hybrid model where online sales support a flagship brick and mortar location. As the world moves increasingly online, businesses with an online sales platform will enjoy an advantage over those that are brick-and-mortar only.
Inventory Management - Regardless of whether a retailer is brick-and-mortar, online only, or a combination of the two, every retail business has to keep a close eye on its inventory management practices. A retailer has to ensure that it always has products on the shelves for its customers, and a business that can’t keep products in stock is sure to lose customers to its competitors. Retailers must know how quickly they sell each product and how long it takes to receive orders from their suppliers so they can maintain a consistent supply of goods for sale.
Customer Service - Retailers are in direct contact with the end consumer every time they make a sale. This means that retailers, more than many other businesses, are expected to cater to the customers’ needs. Retailers need to invest in customer service to stay on top of the consumer’s needs. Without a quality customer service program, retailers run the risk of loosing sales as customers look to other businesses with better customer care.
Service Providers
What is a Service Provider?
Service providers are businesses that do things for individuals and businesses, like bookkeeping, copywriting, and babysitting. Many service providers have specialized training or education, like attorneys and CPAs, who go to school for years and have to pass rigorous tests to engage in their profession. In a corporate setting, service providers often act as independent contractors who are brought into a business to fulfill a specific task or complete an individual project.
Examples of Service Providers
Like retailers, service providers are often in direct contact with consumers and are well-known to people thanks to marketing and advertising efforts. Companies like Jackson Hewitt and H&R Block are accounting firms that file taxes for individuals and businesses across the country. Car rental companies like Hertz, Dollar, and Enterprise are service providers that allow people to rent cars all around the world. These service providers allow individuals and businesses to do things they wouldn’t otherwise be able to do cheaply or easily.
Things to Consider
Assets Requirements – Excluding the education and training requirements, service providers like CPAs and attorneys can be relatively inexpensive businesses to start. Other service providers, like car or heavy equipment rental companies, require large capital investments to acquire the necessary assets. Knowing what assets you need to get started, whether education and certifications or capital and equipment, is the first step towards starting a service provider business.
Management – Many service businesses are owned and operated by people who have a profession, a craft, or skill that is the basis of the services that they provide. What many of these people realize too late is that there is so much more to running a business than providing the service. Lawyers who are brilliant in court may not be able to read a balance sheet and having people in the organization that are focused on running the business is critical to ensuring success.
Scale – One of the main challenges in growing a service provider business is getting the resources necessary to scale. A law firm’s monthly revenue is tied to the number of hours it bills its clients for each month and, once a certain level of productivity is reached, the only way to increase the law firm’s revenues is to hire more lawyers. Without the resources to hire another lawyer, purchase another rental car, etc. a service business will either plateau or grow only at the rate of reinvestment in the business.
Creators
What Is A Creator?
A creator is a person or business that makes tangible or intangible products like songs, books, Tik-Tok videos, and websites. Creators are similar to manufacturers except that the widgets that they make are not necessarily physical objects and include ideas and digital creations. Some creators make a product, like a painting or a website, that is only sold once by the creator while others, like writers, YouTubers, and musicians are able to earn continuing royalties each time their work is experienced by consumers.
Examples of Creators
Musicians, writers, influencers, artists, and web designers are just a few examples of creators working in today’s economy. Banksy is a creator, as are Beyonce and Jay-Z, Quentin Tarantino, and Warner Brothers Studios. Even the writer of this article is a creator, if not quite on par with the other examples. Creators are often overlooked unless they are famous celebrities or working in marketing, but every day we see their murals on walls, hear them playing in bars and clubs, watch their videos on YouTube, and read their articles on websites.
Things to Consider
Ownership – One of the most important questions a creator can ask is “who owns my work?” Works created “for hire” i.e. made because a client or customer paid for it to be created, typically belong to the person that pays for it. Works that are not created for hire generally belong to the creator and the creator has the right to monetize their work however they like.
Monetizing Your Work – What separates creators from hobbyists is creators are able to monetize their work. Whether they are getting paid for views on a YouTube channel, streaming their songs on Spotify, or selling paintings at a market, making money from their work is what allows creators to create for a living. Successful creators study the market for their work and adapt their production to meet what the market wants.
Marketing – Just like every other type of business, creators have to focus on marketing their work in order to drive demand. One of the unique features of creators is that the work and the creator are inextricably intertwined and therefore creators must pay close attention to their personal brand to ensure that it fully supports their marketing efforts. Developing a plan to market and gain exposure for their work is critical to a creator’s ongoing success.
Choosing the One That’s Right for You
With so many different types of businesses, it should be easy to find one to be passionate about. Most people who are interested in starting a business already have a good idea of what they want that business to be. However, for those who are just getting started on their entrepreneurial journey, I hope this article has provided some clarity about what sort of options are available.
As stated above, the most important thing in deciding which type of business to start is finding something that you can be passionate about. Owning and operating a business takes long hours and dedication and unless you’re passionate about what you’re doing it is very easy to burn out and start to flounder. If you choose a business that you’re passionate about, when the going gets tough, at least you’ll be doing something you enjoy.
[1] These are not meant to be hard and fast categories, and many businesses may fit in both. Restaurants, for example, are manufacturers because they make food but they’re also retailers because they sell their products directly to the general public. They’re also service providers, hence “the service industry.” These categories are meant to provide a conceptual framework for understanding what businesses do rather than create a formal taxonomy of types of business models.
