Early in the life of any business, the company is often evolving very quickly. New processes and procedures are being developed. Mistakes are being made and corrected. And strategic plans are being developed. However, one of the factors that often can be misunderstood at this stage is what is the business actually selling.
In my career as a business banker, I have investigated many businesses and spoken with many business owners. Although it doesn’t happen often, occasionally one comes across a business owner that thinks that he is selling one thing, when what he really selling is something else. For example, a company might be selling electronic equipment. That’s what they ship out. That’s what they invoice. And those sales are what shows up on their financial statements.
But is that what they are really selling?
Why do their customers buy from them and not someone else?
Most often, in my experience, the company in question is not the low-cost leader in the industry. Often, they are in a competitive industry with multiple companies selling the exact same products that they are selling. What often differentiates one company from the next is a level of service (they can quickly repair or replace any defects, or they are always able to deliver on time) as well as a level of comfort the customer has built over time with the company and the people who work in it.
In other words, what the company is selling isn’t actually electronic parts; that’s just how they are monetizing what they are selling. What they are actually selling is their service department (for repairs) or their ability to source the product or some other aspect of the process of getting the product to the end user, rather than the product itself.
Another example that I come across often are restaurants. A surprising number of people want to start them. And yet even among restauranteurs, there is a mis-understanding of what they are selling. In my experience, many of them think they are selling good food and drinks. Again, that’s what shows up under the sales line item on the financial statements. However, what isn’t often clear to those involved is why some restaurants succeed and others fail. Or why some succeed for a time, and then fail. But it comes down to what restaurants actually sell. It isn’t food. A person can get food anyplace. What brings people to one Mexican restaurant and not a different Mexican restaurant (both of which are selling roughly the same things for similar prices) is atmosphere. If you change the atmosphere, you change how the restaurant is doing. And it can be as simple as a waiter, the person who is greeting the customers, a specific bartender, or even the decorations and how the restaurant is laid out. For a restauranteur, understanding these factors and why his/her business is flourishing is the key to staying in business.
And so, it is for every business. Understanding what it is that you are actually selling is really indispensable to have a flourishing company. It shows you the things that you should be focusing time, effort, and money on to maintain and grow your business. It is of limited long-term value to shave 5% off of your production costs, while at the same time neglecting the service part of your business, if it is the servicing of your products that is the primary factor driving customers to buy from you. By understating what you are truly selling, you can understand your value proposition to clients. This will allow you to focus on more effectively improving the quality of your product offering, allowing you to more effectively target potential clients and ultimately make your company more successful.
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