Four Elements of Small Business Success
This is for good reason; the appeal of being your own boss and launching a lucrative business is tempered by the high failure rate of small businesses. A quick internet search reveals no shortage of studies providing causes and statistics regarding small business failure rates. While the exact rate of each study varies by industry and timeframe, most studies indicate that roughly half of small businesses remain in operation within a few years of opening.
This reality invites the question of what makes the survivors successful? I recently had the opportunity to speak with a few small business owners, each of which owns a retail storefront. The purpose of my inquiry was simply to learn a bit about the challenges of being a small business owner, and even more so, to learn what has contributed to their survival and success.
Factory Direct Trains is an Asheville, North Carolina-based online and storefront retailer of scale model trains. Factory Direct Trains specializes in HO scale trains, and has been in business for six years. The Music Shoppe is a music store located in Harrison, Ohio, a suburb on the west side of Cincinnati. The Music Shoppe, which has been in business for 21 years, sells musical instruments and offers instrument repair service and music lessons. Originally founded by three partners, the Music Shoppe is now solely owned and operated by one of the original three. The Practical Outdoorsman, which is also located in Asheville, North Carolina, has been in business for two years, and sells retail and consignment outdoor goods for hunting, fishing, camping, hiking, biking and paddling.
In speaking with the owners of each of these three businesses, a few consistent themes emerged that were attributed to their success: conservative financing and the general avoidance of debt, a priority on customer service, business differentiation, and the service of an identified market void or opportunity.
All three businesses started small, slow and deliberate, and did not go into debt to launch their business. Often small retail operations with comparatively little overhead can avoid business loans with proper planning. Each business owner interviewed began with his own money, and in one case, also the money of two partners. Launching with savings as opposed to financing carries the benefits of a heightened personal commitment, as well as the absence of the burden of third party debt. Business loans or some manner of external funding are often unavoidable in other businesses with higher overhead and fixed costs, but retail can offer more flexibility in this area, depending on the scale of the launch.
A contributing factor to the low overhead of these businesses is the small number of employees, the largest of which employs four people including the owner. The absence of debt facilitated a business growth pace for all three, which was directly linked to the growth in sales and revenues. Conversely, some of the interviewees cited the opposite scenario in which a business owner, typically a rival, borrowed money to build a business that was of a scale larger than the market it served, and as such, the business was then unable to both service the debt and generate enough money to cover operating expenses.
Commitment to customer service was emphasized by each business. The age of internet retailing and large discount box stores makes it imperative for smaller businesses to offer value through other means, as they generally cannot compete on price and selection. This is where the human element becomes critical. A personal selling effort and cultivated relationships with return customers, if managed properly, are able to win out over the appeal of larger retail options. Some people are willing to pay a higher price for a more personalized buying experience.
Differentiation was another key factor identified by all three businesses. Something needs to set your business apart to draw customers through the door. As previously discussed, customer service is one area of differentiation when competing with box stores and online retailers. Customer service is the primary differentiating factor between The Music Shoppe and larger, national chain music stores.
Other differentiation criteria were also cited. Factory Direct Trains competes in the scale model train industry. This business, which maintains a physical storefront but is primarily an online retailer, differentiates itself from its competitors by having a sophisticated web presence. Integral to this web presence is a robust and growing degree of social media connectivity. This is a relatively modern model in an aging hobby business. The social media participation makes a small company in North Carolina highly accessible to online customers all over the country and internationally and as such, social media is a key component of Factory Direct Trains’ customer service efforts.
The Practical Outdoorsman is unique in that it offers retail and consignment outdoor gear under one roof. Additionally, this business carries local, handmade outdoor items such as hunting knives, fishing lures and flies, and hunting calls. Such products give The Practical Outdoorsman the appeal of local authenticity that is not found in the larger chain outdoor goods stores.
Each of the three businesses has remained viable by serving a market demand that was either growing or previously under-served. Two market opportunities were dictated primarily by geography. The Music Shoppe opened in a suburb on the west side of Cincinnati that is roughly 20 miles outside of the city. Since the store’s opening, this suburb has grown significantly, and the Music Shoppe has grown along with the population and economy. The Music Shoppe secured dealer status for large music brands such as Guild, Taylor and Martin guitars, and thus serves as the nearest dealer for such brands for the west side of Cincinnati as well as southeastern Indiana.
Research prior to opening revealed to the owner of The Practical Outdoorsman that the nearest similar consignment and retail outdoor goods store was located over 150 miles away. Additionally, this store is located in the northwest quadrant of Buncombe County where there are very few outdoor goods stores. The Practical Outdoorsman is also the only North Carolina Wildlife Agent in this quadrant of the county, which provides such services as selling hunting and fishing licenses. Serving as a Wildlife Agent generates significant customer traffic.
Factory Direct Trains found its market niche by establishing a strong web presence in a hobby industry that has been comparatively slow to embrace online retailing and social media usage. In doing so, Factory Direct Trains has been able to reach out and expand its customer base in areas under-served by local hobby shops with more limited selections.