Entrepreneurial Strategies: High Margins + Known Models

19157232.jpg

Last summer a local entrepreneur contacted me. He had been reading my blog for years, not realizing we lived in the same town. We had coffee and talked business and he told me his latest business was a furniture store. While I don't remember the exact conversation, I do remember that it went something like this.

Me: Furniture? Why furniture? That doesn't sound too exciting.

Him: Do you know what the margins are on furniture?

Me: Yes, they are pretty good. But still…

Him: Good? They are ridiculous. I can sell way below retail and still make a nice profit.

Me: Awesome. But do you know anything about the business?

Him: I've talked to some guys that do the same thing in other cities.

It was an eye opener for me because I tend to fall into this trap of always wanting to do some new cool thing for a venture. I forget that there is good money to be made in areas that have known business models and high margins.

Since then, the previously mentioned entrepreneur has learned that mattresses in particular are easy and profitable to sell, and has focused in on those. I've always wondered how there could be so many mattress stores around. Now it makes sense.

This startup strategy is more common that you might think for two reasons. First, in some industries, costs fall quickly and production gains go primarily to the seller, not the end consumer. Secondly, the businesses have limited geographic scope, so there is ample opportunity to open one up in a new and growing area. By starting something with high margins, you leave room for errors in cost estimation and pricing, which means a mistake on one of those won't kill your business. Also, by embracing a known business model you can learn from the mistakes of others and predict your revenues must more accurately than you can when launching something brand new.

Coffee houses are another popular business that has high margins and a known business model. Even high quality coffee is just pennies a cup. Add a little sugar and flavored syrup and sell it for $2 and you have a nice profit margin.

What do you look for in a high margin business?
1. Something that can take advantage of production gains. Many items used to be labor intensive but are now performed by machines, or are outsourced.
2. The materials of production are cheap. Coffee is mostly water. Mattresses are mostly metal coils and some padding. Sunglasses and toys are mostly plastic.
3. Easy sell. Don't try to sell some strange new thing. Sell something people are already comfortable buying.

Entrepreneurs often look for things like huge market potential, first mover advantage, network effects, etc. But don't ignore the success potential of business ideas that are simple to run and make a lot of money. It is a great first step on the ladder of entrepreneurship.

More Popular Stories:






Subscribe

Comments

  1. Razib Ahmed's Gravatar Comment by Razib Ahmed on April 10th, 2006 at 6:25 pm

    Nice and well written article. You are right about Coffee houses being profitable. In Bangladsh, thousand people earn their livelihood by just selling teas in the street. They even do not have any shop and always on the run with a flask.

  2. Peter Begley's Gravatar Comment by Peter Begley on April 11th, 2006 at 1:58 am

    Thank you for the reminder about taking the proven path and building a strong business from certainty and historical success. I tend to be a dreamer and often prioritize playing out my new business ideas in my head over something less sexy such as a furniture store.

    At the same time, I think entrepreneurs should consider purpose (as it pertains to bettering society as well as a function of pure profit potential) as prominently in their new venture planning. For instance, instead of simply deciding launch a furniture store or a coffee shop because they have a proven model (with high margins), why not determine first their positive impact on society? If a coffee shop has no positive impact on society yet is highly profitable, should the entrepreneur still pursue the idea? (I tend to think coffee shops, of a locally-owned and Fair Trade variety, have a lot of positive social value, but that’s beside the point.)

    More than simply emphasizing having a positive impact on society, pursuing business opportunities that have a positive societal purpose beyond profit are typically very fulfilling. And fulfillment usually leads to greater dedication and thus success.

    I’m making broad generalizations, but you get my gist. I think you posted about business purpose recently, so I apologize if this is a bit redundant.

  3. Rob's Gravatar Comment by Rob on April 11th, 2006 at 7:33 am

    This post has been surprising. I put lots of thought into so many posts, and then a 5 minute post that basically states the obvious makes it to the front page of reddit. Weird

  4. Kevin's Gravatar Comment by Kevin on April 11th, 2006 at 12:03 pm

    I agree with your assessment. I put this thinking forward when we were developing ideas for TBE.

    You can be successful doing anything, but I think there can be a science to giving you the best chance for success. Picking a business that the community needs but isn’t fun is a good start.

  5. shankar's Gravatar Comment by shankar on February 10th, 2009 at 1:30 am

    i want to know wat happens to the society where one group of people start making super profits and demand does not come down and they spend money like crazy
    1.please tell me is there any book to read to know on this
    2.is it ethical for some people to make super profits

Leave a Reply