“Most of the problems with businesses not being scalable is due to a margin issue…people are pricing their stuff too low and that’s an easy one to solve…to make sure your business is long-term scalable just build in a stinkingly huge margin… because once you start adding in all the costs that actually go around the business, the stuff that you probably haven’t anticipated or can’t anticipate. If you don’t, you’ll probably end up making no money.”
– Sam, on charging enough for your product
One of the biggest mistakes I see with new entrepreneurs is they are trying to build a business that isn’t scalable. They either don’t think about it or assume that due to economies of scale things will get cheaper. Unfortunately, that is not normally true and a lot of people find themselves doing a business that is impossible to scale. In this episode of The Lazy Entrepreneur Podcast we talk about how to make sure your business is scalable.
Resources Mentioned In This Episode Of The Lazy Entrepreneur:
00:27 – Why does a business need to be scalable?
02:15 – Why to price your products higher
03:56 – The t-shirt business example
07:06 – Understanding margins
11:27 – Explaining hourly wages and how to set your rate as a freelancer
15:05 – Doubling the price of paintings
16:30 – Exploring owner operated small local businesses
20:13 – Balancing the businesses function with its profitability
Sam: hello and welcome back to another episode of the lazy entrepreneur I’m your host Sam Priestley and as always I’m joined with my lovely wife Emma
Emma: hello today
S: we’re gonna talk about something we touched on very briefly in the last episode which is building a scalable business that is how to make sure your business is scalable right from the word go. I want to talk about this for a couple of reasons first off is a lot of businesses that people start in their basement or in their garage that look like they’re great businesses and work really well owner operated with you doing all the work don’t actually make sense when scaled up and the other reason is that this is a trap that a lot of people fall into there’s this idea that we have of economies of scale that as you grow you’re gonna save money and that whatever margin you’ve got now you might not be making much money but as soon as you grow the business you’re gonna start making a lot more. well that is true in some cases but for the stuff we’re going to be talking about today if that’s not the case and this is really because a lot of the things we’re gonna be looking into is where you’re doing the work yourself that you’re not taking into account that you’re not the kind of including in the cost for your business and in the margins that you’re attributing to the items you’re selling. does that make sense?
S: great so what I’d like to do is I’d like to run through a few examples of the kind of businesses we both have experiences with all that we’ve looked into in the past but before we start I want to say that most of the problems with businesses not being scalable is due to a margin issue is that people are pricing their stuff too low and that’s an easy one to solve just make sure that like even if you don’t listen to the rest of this and you don’t want to sort of do deep research to make sure your business is long-term scalable just build in a stinking ly huge margin someone that’s you know large enough that you probably feel a little bit uncomfortable about the business but it feels like the that if you told someone you might be a little bit embarrassed because once you start adding in all the costs actually go around the business and stuff you probably haven’t anticipated or can’t anticipate if you don’t you’ll probably end up making no money. so to start off with probably most common example of a basement business and one that school kids and want to be entrepreneurs are starting all over the place is a t-shirt printing business. it’s very simple to get started all you need is a plain t-shirt you can get a Gildan soft style and Gildan is the sort of biggest brand of plain t-shirts that. you get some transfer paper that cost about 50 P a sheet and you have an iron you kind of stick it in your printer at home you draw your design on you print it out and then you kind of iron it on so all in all your t-shirt your finished product t-shirt is only costing you about to two pound 50 you can get a Gildan soft style t-shirt for about two pounds on Amazon transfer papers yeah about 50 P 250 a t-shirt so let’s say you’re selling it what would be a good margin for that? maybe you sell it for 15 pounds
E: yeah a 15 pound sounds good
S: 15 that’s still a big margin you know you’re making 12 pound 50 out of that sounds like you’re doing great and that’s where a lot of people start. maybe to be doing it for let’s make me something for 10 pounds because they feel like they can’t justify saying for that much after all it’s a t-shirt that anymore person can go to Amazon and buy for 2 pound 50 and all you’ve done is put your artwork on it maybe your artwork is worth that they should want 150. so let’s talk about what this business looks like as a scaled up and by scaled up I’m talking about a business that is effectively infinitely scalable. one that doesn’t involve your time and where kind of every portion of the process is outsourced or you’re paying people to do for you. so how do you know well first of all you probably start off by building an online store somewhere to buy it. then you’re going to find someone to actually do the t-shirt printing for you but for them it’s not just going to be t-shirt printing and also gonna have to find a sort of bag to put it in. they probably want to get rid of that little Gildan label in the back so people don’t know you were just selling a generic t-shirt and replace it with some brand that you’ve come up with and then you need someone to sew it up as well then you also got to think about returns and wastage you know people might not like it and might send it back and once someone’s worn it you can’t just put it back in a bag and sell it on again so you lose a few t-shirts at that point then you got to talk about where you’re gonna store it you know it’s fine if you’re storing in your basement but at some point your your mum or girlfriend or wife is gonna get a bit frustrated with all the boxes of t-shirts lying around
E: sounds familiar table tennis bat
S: sounds familiar we can’t got a garage full of gin and table tennis equipment um and so you’re gonna find some sort of warehouse or fulfillment service that’s gonna be able to deal with that for you. you’re gonna have to pay em to warehouse it and then you also can pay them to pick and pack and ship it out and I’m not even including the delivery charge here let’s say you’re charging on top so you’re charging your 15 pound for your t-shirt and then whatever delivery cost is maybe another three to five pounds but you know you’ve got a little bit of economies of scale so your t shirt might be a little bit cheaper well so this is not a this is not a random example there’s something I’ve actually looked into in quite a lot detail and got all the exact quotes for a few years back so the numbers might be slightly out of date but the concept is correct. your t-shirt it’s about two pounds to pay someone to do a screen print for you that’s about a pound to get your own label done to go in the back at the collar that’s another 35 P to pay someone to pick and sew it for you that’s about 1 pound 25 so the bag up is about 25 P then to deliver it to your warehouse is probably about 10 p a t-shirt then your online fees for running a web site it’s gonna be about 50p a sale your warehouse you probably gonna have to pay around 30 P and storage charges the pick and pack fees gonna be about 1 pound 85 returns I kind of put in an idea about 75 P same for wastage another 75 P so all in all we end up with the total cost being about 10 pound 50 on a sale price of 15 pounds
E: that’s quite different to 2 pound 50
S: that’s quite different it’s way more than whatever the t-shirt is worth and all the printing still selling it for 15 pounds but you’re still making four pounds 50 something that sounds alright S: what about the marketing well marketing
S: exactly that’s not your only cost is it how are you going to get your sales so there’s a few ones there’s marketing and then the other big one is v80 once your business is grows past a certain point something the taxman wants to take a big chunk of it in the UK here it’s one to get to 80,000 pounds of sales well you might think your t-shirt business will never reach 80,000 pounds of sales but bear in mind if you want this to be a business that pays you a salary that’s 80,000 in turnover not 80,000 in profit so let’s say for every 15 pound t-shirt you’re making 5 pounds that’s a third so for 80,000 turnover you need to be doing my math isn’t that good 25,000 pounds or something in profit. well 25,000 pounds is about kind of the basic salary that a lot of people start on here in the UK so if you want it to be a big business or one that kind of grows you’re probably going to hit that v80 threshold and what does that mean that means that you get to reclaim a little bit of some of the other costs but then the v80man is taking a big chunk so once you take that into account for marketing I’ve looked at kind of what I normally do for marketing I’ve worked out it probably cost me about 1 pound 20 per sale of a t-shirt so after all that your cost suddenly get to 13 pounds 86 on the 15 pounds sale price so your profit would be 1 pound 14
E: oh ouch
S: so that point it’s just not worth it if you want to make any profit at all you need to sell thousands and thousands of these t-shirts yeah you can put the price up let’s say you put up up to 25 quid and then you think is it justified is this 2-pound t-shirt that I’m reselling for 25 quid worth it like maybe not. so we actually decided not to do this business and we went a slightly different route we found that’s the other thing what do you if you plan out a business like this taking it from at the basement stage and just seeing what happens if you scaled up and you will realize it doesn’t work then you can look for another approach and another way to do it which is what we did here what I’m gonna do is on my blog I’m gonna post all these numbers it’s a post I wrote a few years ago it’s one of my favorites that a lot of people haven’t read because it’s quite old and I think you’ll find it really interesting and really useful.
E: What is that blog post called
S: creating and scaling a t-shirt business that’s probably why no one read it because it is such a boring title
E: very practical
S: very practical and it is very applicable to a lot of things because I kind of go through each logical step what does it cost for an online store but do you know the rest of stuff yourself what’s the cost of doing the fulfillment between the rest of our stuff and just work through it with examples and pictures and all that kind of thing. as I said, I think it’s a very good post but I didn’t get much love at the time but let’s leave t-shirt businesses for the moment because you might be thinking us a bit of a weird example you don’t want to start a t-shirt business let’s talk about another type of online business that a lot of people want to start and have started including you Emma. this is freelancing. you did freelance marketing back when you first quit your job
E: I did yes
S: as we started travelling you did freelance marketing one of the big problems that people are non problems one of the one of the ways that people work out their pricing when starting freelancing is they think to himself well what did I get paid when I was working a full-time job was my hourly rate then and they add a little bit and then that’s what they charge for the freelancer
E: well that’s ridiculous
S: that’s because you can see why they think it this is how much a person is worth why would they know any differently the whole life you’ve been in this hourly wage environment even when you’re doing casual work you’re still getting paid these low hourly wages so you might be thinking well when I was working I was getting paid fifteen pounds an hour so let’s bump that up let’s pay myself 20 pounds an hour for a minute that doesn’t include any of the time spent looking for jobs yeah it doesn’t include any to free work around it free consultancy or something or if there’s problems a client isn’t happy with where they want you to make changes and aren’t willing to pay for it and probably most relevant to work to talk about here is it doesn’t leave you any room to scale yep because you can’t outsource any network because in order for you to outsource any work you’ve got to find someone who’s willing to do it for less than that and how many people who are good are you gonna find on that? there’s a reason why law firms charge out rates are huge if you ever speak to if you’re only friends who are kind of trainee lawyers or recently what you call them recently finished their training contract and are now proper lawyers asking what that charge outright is it’ll probably be a 300 pound 400 500 pounds depending on the quality of the firm there in an hour I’m talking about then ask him what do they get paid an hour yeah and the answer will probably something like twelve pounds a lot of them actually are on less than minimum wage when you take into account the hours yes but there’s a reason that there’s a difference it’s because they’re part of this scalable business which is now grown into a huge law firm. if it was just a one-man business charging what he thought he was worth which it’s gonna be a lot more than that that 12 pound 50 but it it’s not gonna be anywhere near 400 500 pounds then there’s no way to scale it and it just happens in law people have got use of those prices and it’s acceptable same with consulting you used to work at PWC. they rent out their grads for whatever two hundred pounds an hour or something yeah and paid them basically minimum wage
E: yeah pretty much and the partners would be getting a lot more
S: and the partners would be getting a share in this lovely bill outsource business are getting a chunk of that change yeah which is great that’s freelancing you gotta charge, again it’s the whole point of this just have a stinky big margin if we’d started off with the t-shirts and not many 15 pounds but 25 pounds it would still be a pretty good business yeah we start freelancing charging 50 pounds an hour instead of 20 pounds an hour it’s still bigger business
E: well effectively that’s what I did didn’t I and and the feedback was that I actually stood out amongst other freelancers because I was actually a freelance and marketing strategy and I was competing against people in say India charging $10 an hour and I was charging $75 an hour so automatically those clients could see there was a big pay gap and they would look into my credentials and my background and my feedback and tell me that they’ve gone with me because I provide more value.
S: yeah I mean there’s loads of reasons why it’s good to charge a lot and one of them is that we used to attributing a price to quality yeah price to value yeah so if you’re charging five pounds an hour they think there must be something wrong with you. If you’re charging 200 pounds an hour they think you must be worth 200 pounds an hour. I was reading this the other day I don’t know who said it but in the art world and in galleries they say that if your paintings haven’t sold double the price because there’s certain people who are looking at a certain price bracket and they just even if it’s a painting they like they just ignore it because to them it doesn’t have that value
S: and there are loads of examples of that there was again from another book which I can’t remember what book it was I was talking about an example of a jewelry shop where they mistakenly doubled the price everything instead of halving it because they can sell a stock and they thought I should half t and yeah they doubled it and sold out really quickly there’s all sorts of things like that. There’s a certain anyway and that but that’s kind of outside the realm of what we’re talking about here I’m talking about if you can’t scale your business whereas there are actually other reasons why you should charge a lot of money yes let’s talk briefly about the same principle when it comes to Amazon FBA which is a very popular topic at the moment and when we’ve done previous podcast on again a lot of people ask how much margin should you have and my answers often like a lot more than you think. The difference is he had um she found the I think you buy for five pound and sell on Amazon for fifteen pounds you’re probably gonna lose money on that. It’ll cost you a pound to get it into the Amazon warehouse, if you’re buying it from China it’s gonna cost you another pound on import duty, gonna cost you about two pound 25 on Amazon fees, then two pound 50 on pick and pack and then another two pound 50 on that and then once you add in returns and all the other stuff around it including like warehouse and long-term storage fees and things like that you’re probably losing money and finally the final example I want to talk about is it’s one of my favorite topics one I would actually like to do is kind of research dissertation on because it is something I believe strongly and I haven’t been able to find much data to back it up. and that is on owner-operated small local businesses such as coffee shops, off licenses, restaurants places like that where the owner is doing most of the work they’ve built themselves a business that is making money but that’s only making money when they don’t take into account their own salary. You need to remember there’s no minimum wage when you’re self-employed and I’ve met countless small business owners who are trapped in these businesses because they’ve invested quite a lot of money. Let’s say your owner on off license and you spend twenty thousand pounds on the stock in there the only way to get rid of that stock is to sell it anyway to sell it it’s for you to stand behind that counter selling it and yeah I’ve met so many people who are earning two pounds an hour three pound an hour working ridiculous hours because they’re trapped on this treadmill they’ve got a run on and saying you can’t just wait until you settle that stock because if you go into an off license and there’s only free things on the shelves three a handful of items on the shelves you’re probably gonna walk out in order for them to sell they’ve got to have a full shop and so they end up on this on this treadmill because when they started, I started doing it and they go oh we’re making money even though they’re working for free basically. I fell into this trap a little bit with our coffee shop their own coffee we built that as an outsourced business from the get-go we priced in a general manager who was running it I didn’t need to be there working on it at all but what I kind of didn’t appreciate was there’s a bit that’s quite a bit of other stuff that goes it around that did take up our time and that wasn’t really in the general managers remit it’s not just a day-to-day running. stuff like strategy stuff like new products stuff like HR stuff like marketing there’s kind of a bunch of things that even if you’re not working full time you’ve got to spend, it does take up quite a lot of time. There’s an owner operated business at the bottom of the road I’ve no idea how they’re doing but maybe every month or so he shows me a new menu he’s working on and the menu never appears I’ll see why I mean the answer is it’s because he’s too busy with all the other stuff, he’s working behind the counter making coffees I mean he’s got plenty of staff but when you’re dealing with short part-time staff your chance are not going to turn up yeah well or you’re gonna be short-handed and you gonna have to get behind that that coffee machine actually and do there’s a lot of training and work and there’s a lot of recruiting there’s a lot of other stuff. so there you go how to make sure your business is scalable simple answer: build in a huge profit margin and if it doesn’t look like the business if you think nobody’s gonna buy this product with this huge profit margin it’s probably not a good business you probably need to look into something else. that’s about that. anything to add emma?
E: I don’t think so I think when you’re saying that about make sure you’re baking in a huge profit margin it makes me think that the product or service there’s got to have something unique about it and stand out so whether it’s the design of the product whether it’s the features whether it’s the quality of the service
S: indeed like there’s two angles you’ve got to think about here. one is in order for this business to work from a logistics point of view, it needs to have a big margin but just because it works logistically doesn’t mean it’s going to work as a business. so I could bake in a huge profit margin or we could sell our gin for a thousand pounds of bottle yes we’re not gonna sell any we might sell a bottle but that’s it
E: it’s not scalable at that price it’s not
S: well it’s a very scalable business logistical especially but you know and this is the balancing act having to pay is what and if it turned out that we couldn’t price it at a level which would give us a big enough margin to cover all the scalability stuff that people would still buy it at we’d probably have to not do it
S: and I’m only saying when I say a huge profit margin if you’ve worked out all this scalability stuff then you don’t need to do this but if you’re starting from oh this is my time I’m putting in I don’t know how much my time is worth I don’t this is the raw product, this is the cost of the commercial product cost. if you’re just looking it from raw product to sell price yeah in between yeah if you look at it from little freelance team the price you pay an employee versus the price here you pay out there’s got to be a huge margin there there’s loads of hidden costs at hidden things did you probably haven’t appreciated. all right a nice quick short episode but one I think is very important I’m gonna talk a little bit more about that problem I think that a lot of small businesses have which I’m gonna call I don’t know like the small business owners dilemma or the trap a small business or something like that maybe I see it published somewhere at some point if I ever get around to researching quickly but apart from that we’re getting close to Christmas so if you don’t hear from us before then have a very Merry Christmas and we’ll talk to you soon goodbye