What if your business doesn’t make any profit on certain offerings? Or maybe your business regularly loses money on one or more service? What then? Fish or cut bait?
Sometimes the decision to continue on with or abandon a losing proposition is an easy one. Other times, not so much. If you’re caught in that dilemma, below are some situations to consider as you face these decisions…
First, let me observe that most often when a business has low/no profit offerings, the “default” action is often to continue “fishing,” often due to inertia. Though this is not good and inertia should never be the reason to keep fishing, I will affirm doing so is sometimes justified.
Carrying on with a new endeavor or one that a business has not yet fully committed to doing well and profitably, is in my experience often a good or at least reasonable reason to keep fishing. As with doing anything new, it usually takes some time and experience to get going, including in efficiency and profitability terms. That’s usually not the best time to cut bait.
Another key situation where continuing on makes sense is when there’s an obvious opportunity to fundamentally improve and more profitably re-price an offering. If for instance by significantly changing an offering for the better it can be sold to more customers at more profitable prices, that’s not a situation to give up on either.
When you’re reeling ‘em in one after another, fishing is a blast. But fishing isn’t fun when no fish are biting, it’s raining, and there’s no need to be out on the lake.
Likewise, if a business has an extended history of making little or no profit on an offering, at some point the best decision is to discontinue it, stop the losses, and refocus on more promising opportunities. This is especially true in situations where it is not necessary for the business to continue a losing offering to maintain demand for other more profitable offerings.
Another major reason to cut bait on a low/no-profit offering is when it requires lots of costly capital assets that could be sold and reinvested to support other offerings that produce more profit. Though businesses, in my experience, don’t act this way nearly often enough, major financial advances can sometimes be made by doing so – and the better, more nimble business realize this and use it to their competitive advantage! This is especially true in capital-intensive businesses, including construction-oriented ones we serve.
Grin and Bear It
The most difficult – and often frustrating – situations are when a business must price certain offerings at little/no profit to keep customers coming in… to preserve their opportunity to sell customers other more profitable offerings. These offerings are called “loss leaders.”
Though I’m not a big proponent of loss leader pricing or strategy, I recognize in a lot of industries there are certain offerings (sometimes temporarily corresponding with cyclical/economic dips) that can’t be sold for much profit because there’s too much price competition in those offerings. Yet… the business can’t abandon those offerings because they are “must haves” for customers.
TV deals on Black Friday are a classic example.
So, in these situations, sometimes the best a business can do is accept that’s the competitive reality (hopefully on a limited or temporary basis) and do their best to promote their more profitable offerings.
Think Critically, Not Personally
and Make the Right Business Decision
All strategies noted above have their time and place. Of them though, it’s been my observation that the “cut bait” strategy is the most under-utilized and under-appreciated in small business… because personal, and sometimes prideful, considerations get in the way of making critical decisions for the good of the business. And, yes, I’ve been there myself!
Though reasons will always vary, I suspect businesses often get stuck in unprofitable endeavors because they come to view “cutting bait” as tantamount to admitting personal failure. While in reality, unprofitability is often the free market’s way of impersonally warning all who will listen: “Too many competitors and too little profit here, move on!” Aka “cut bait.”
So, don’t be afraid to retrench when it’s the right business choice. Just as good poker players frequently fold on bad hands, so must successful businesses. Getting out of something that won’t work is neither defeat nor admitting defeat. Rather, it is often the first and necessary step to securing victory in the next, better and more profitable business opportunity.
We Can Help
If your business is facing difficult fish or cut bait decisions and you’d like some help evaluating your best decisions, I encourage you to contact us here.
Long live small business! Long live small business owners!
Jim Smith, CFP, Founder, PERFORMIDABLE, LLC